Small Matters: Higher minimum wage makes no economic sense

Posted: January 09, 2012

Many states have announced an increase in their minimum wage because their legislation requires an adjustment to the Consumer Price Index inflation measure. State wages must be above the national minimum of $7.25 per hour.

Some political jurisdictions take it further. San Francisco has a minimum of more than $10 per hour, and the state of Washington is above $9 on average. Supporters hail this as a victory for "fairness" and a benefit for poor people. This, it is alleged, will provide more income to support spending.

If it works that well, why not make the minimum $50 per hour? This would provide someone working 2,000 hours a year an income of $100,000, eliminating poverty and stimulating the economy. Why mess with these 25-cent increases?

As an antipoverty program, raising the minimum wage is like killing insects with a shotgun - not very well-targeted.

About 60 percent of the officially poor don't work, so the only thing raising the minimum wage does for them is to make it harder to get a job if they pursue one. Workers must bring at least as much value to the firm as they are paid, or the firm fails, and raising the minimum wage raises that hurdle.

I used to pick fruit to make money when I was in high school, but now machines do it. I became too expensive. It is estimated that less than 15 percent of the total increase in wages resulting from an increase in the minimum wage will go to people below the poverty line. Less than a third of those receiving the minimum wage are families below the poverty line. So, most of the people benefiting from the minimum wage are not the intended targets of an "antipoverty" campaign.

As a jobs program, raising the minimum wage is a real loser. In the first quarter of 2009, the economy tanked. The economy still lost ground in the second quarter, averaging a decline in gross domestic product (GDP) of 4 percent. Among jobs for teenagers, 250,000 positions were lost.

In July 2009, Congress raised the minimum wage 10.6 percent. Then the economy turned around, growing about 2 percent in the third quarter and better than 5 percent in the fourth. The recession officially ended in June 2009.

Nonetheless, 580,000 teen jobs were lost in the second half of 2009 - even though the economy was surging. Why? When you raise the price of anything, people take less of it, including labor. The unemployment rate for teens remains unacceptably high.

But is there still more income to spend, even if nearly 600,000 jobs were lost? Not at all. Common sense says that every dollar a minimum-wage worker received came out of somebody else's pocket, either small-business owners or their customers. No free lunch - the money for a higher minimum wage does not come from thin air.

Consider a pizza parlor selling 100 pies a day for 360 days at $10 each. Total revenue is $360,000. It employs 10 minimum-wage workers earning $7 per hour, working 2,000 hours a year, making labor costs $140,000. Rent, utilities, equipment, depreciation, insurance, supplies, licenses, and food costs come to $170,000 per year, leaving a profit of $50,000 for the owner and his or her family.

Raising the minimum wage $1 would raise labor costs $20,000 (paying more for the same amount of labor) and reduce profit to $30,000. The owner must either move into a smaller house or raise prices, which reduces the demand for pizza, resulting in the loss of one worker.

The full increase in the wage cost of an increase in the minimum wage comes out of the pockets of customers, the owner's family, and the one person that loses a job. There is no net gain in income to increase spending in the community. Add to this the cost of required sick leave, or health care and taxes, and you will see that consumers pay for everything, one way or another.

A better solution? Let people work for any wage they choose to take, get work experience, improve their skills, be a part of the workforce, and use the Earned Income Tax Credit to raise their overall income to whatever the government wants to set as a minimum (much as it works today).

A good worker can always search for a better-paying job, and one will be offered if the worker brings enough value to the firm. That is how labor markets work.


Bill Dunkelberg is a professor of economics at Temple University and a nationally recognized expert in small business. Contact him at dunk@temple.edu. Read more of his columns at www.philly.com/dunkelberg

 

comments powered by Disqus
|
|
|
|
|