Increasing minimum wage helps the poor, right?

It is a perfectly natural assumption – increasing minimum wage will help the poor.  Force businesses to pay their lower-skilled laborers more money and those workers will spend more, thereby helping the economy.  Right?  Well, not exactly.  While the self-proclaimed “compassionate” love to feel righteous (while standing on the shoulders of others), one needs to consider the implications of their actions.  Raising the minimum wage may give “the compassionate” a warm and fuzzy feeling, but the truth is government-meddling hurts those people that politicians proclaim to help.

If you take a look at the current situation, we already have an unemployment rate of 6.6% – if you look only at BLS numbers.  In reality, the rate etches a couple percentage points higher if you calculate based on a more realistic view of the labor market.  Roughly, over 10% of our population is collecting government-issued unemployment checks, and our response is to add more economic restraint to hiring these people?

The left leaning Economic Policy Institute claims raising the minimum wage would “lift about 5 million Americans out of poverty and that the US economy would grow by $22 billion thus creating 85,000 new jobs.” This claim was backed by one Huffington Post author, who wrote “the people on minimum wage cannot save their money therefore they would have to spend it and put it back into the economy which in turn would create new jobs.”

How simple life must be for this author.

Putting the arrant fallacy of the “inability to save” aside, basic logic dictates that for every government action, there is a requisite commercial reaction.  When the price of labor increases for a business, the business reacts by passing on that cost to the consumer.  Very few business executives willingly take a hit to their own pocket books because of the decisions of Washington D.C.

Profit to a business is like gasoline to a car.  Without profits, a business fails (along with their entire staff).  Everything is done for profit, and we need to not only understand this, but accept it.  And thus, it would seem to reason that if the government increases the labor cost to a business, the business will recuperate those costs with higher prices for their goods and services – or worse, cutting benefits or hours.

Understand that businesses will ultimately shove the costs associated with government mandates onto the consumer. In affect, this is a hidden tax included with “do good” politicians. Politicians will gladly play the role of savior in order to get a vote and remain in their cushy D.C. offices while making everyone feel like a victim.

The person who actually gets hurt by this activity is the guy at the bottom of the ladder who, at the whim of a politician, now has the next rung of the ladder raised up on him. Naturally, the reaction of many who are at the bottom will vote for bigger government and more benefits without looking at the implications or how these policies effect them. When people are made to believe they are a victim, they assume that they deserve more.  In truth, if everyone would take more responsibility for their actions (which I am starting to understand that no one does anymore), everyone would be a lot happier and a little more satisfied with the choices they have made.

Look at who is lobbying for minimum wage: Politicians and Labor unions. Politicians back it because it secures votes from unskilled laborers.  Labor unions back it simply because it reduces the competition in the labor market. For example, if we look at the Davis-Bacon Act, this was a law put in place because non-union blacks from Alabama were traveling to Long Island, New York and outbidding the union workers for jobs. With pressure from the local community, Representative Robert L. Bacon (R-N.Y.) pleaded to Congress to adopt a requirement for paying the local prevailing wages on public works projects for laborers and mechanics. It applies to “contractors and subcontractors performing on federally funded or assisted contracts in excess of $2,000 for the construction, alteration, or repair (including painting and decorating) of public buildings or public works”.  In other words, a way to eliminate the union’s competition.

Further, the minimum wage increases the barrier to entry for low skilled, inexperienced workers. For instance, take a young man still in high school. His parents encourage him to get a job to learn some responsibility. He applies at his local McDonalds but the minimum wage is set at $15 an hour. The manager knows the young man has no experience and has a lot of learning to do.  What benefit to the business does hiring an inexperienced worker at $15/hour provide?  Worse, regulations prevent the McDonalds store manager from negotiating a wage lower than the minimum – even if both parties agree to it.  Milton Friedman explained it very clearly:

It takes a cold day in June before I agree with virtually anyone in Congress, but I did hear something sensible come out of Congressman Paul Ryan’s mouth during an interview with MSNBC: “Raising the minimum wage is just bad economics.. It costs jobs for people…We want people to climb the ladder and begin at entry level jobs, not have people stay at entry level jobs.”

Another fine point: government-mandated overpayment for low-skilled labor workers disincentivizes self-improvement.  If Johnny Smith makes $15/hour flipping burgers, why strive to become the next store manager?  The stress may not be worth the extra few dollars a week.

Instead of increasing the burden on businesses, our political “leaders” should instead encourage people at the bottom to work hard and strive to improve their lives.  Money does not make people happier about their job situation – I know this from personal experience. I was making close to $40 an hour not including benefits in Chicago as a laborer.  I was not happy doing it and my wife and I decided to focus on our education.  Ultimately, we left Chicago to fulfill our dreams.

Do minimum wage hikes spur unemployment?

President Barack Obama will announce in tonight’s State of the Union speech an increase in the minimum wage for federal workers on new contracts to $10.10, up from the current level of $7.25.  Putting the constitutionality of such a plan aside for a moment, what effect will an increase in the minimum wage have on American corporations?

Newton’s third law states for every action, there is an equal and opposite reaction.  Meaning, when a burden is placed upon a business, the business reacts to appropriately adjust to the added burden in an effort to maintain standard operating procedure relative to the past.

Economists from around the world have studied how companies respond to minimum wage increases.  Several studies, like this one from the London School of Economics, found a link between higher minimum wages and unemployment.  But other studies have produced a much more complex relationship at play.

Although it can happen, companies rarely roll over and accept lower profits due to the increase in minimum wage.  The laws of economics almost always dictate some kind of response to higher wages for primarily low-skilled workers.  How do companies respond to higher wage requirements?

Some businesses are forced to lay off workers or hike their prices.  Others cut back on hours for their current staff.  Many businesses will slash benefits instead of cutting jobs.

“The last time the minimum wage went up in two steps, we tried to not raise our menu prices, but the cost of food went up a lot,” lamented Blane Beschta, owner of a small diner in Cedar Rapids, Iowa.  “People are going to say that $3 for a cup of coffee is crazy, but that’s what it’s going to take if we need to raise wages to what is being proposed”.

One piece of research suggests that for every 10% increase in the minimum wage, prices increase about 4%, hardly the mark of smart policy.

New research indicates that higher minimum wages actually reduce employee turnover, which boosts productivity and reduces the costs related to training new employees and staff.  Even so, how do minimum wage hikes effect a business’ willingness to hire new employees?  The jury is still out, and the numbers are wildly unconvincing in either direction.

One thing is certain: many businesses do react to new wage requirements for workers.  We can only hope that a nearly $3 hike in wages for low-skilled labor jobs on federal government contracts does not increase the costs of already expensive and wasteful federal programs.


Ron Paul to battle Bernanke … for last time

“End the Fed” author and Texas Representative Ron Paul will once again face Federal Reserve Chairman Ben Bernanke in front of the House Financial Services committee, but it’ll probably be for the last time.

It’ll be hard to think up anything brand new other than reiterating my concerns over the last 30 years,” he told The Hill magazine.  But none-the-less, Paul will likely once again renew his concerns over the Federal Reserve’s involvement and influence over monetary policy in the United States.