The Minimum Wage Debate- part 1

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A recent opinion article published on CNN’s website, written by Gov. Peter Shumlin and Gov. Dan Malloy, expresses their support for a minimum wage increase. While the argument may be made that an increase in the minimum wage would be beneficial to those minimum wage earning employees (or the economy, in general), there are some unintended consequences that need to be considered. In the article, there were 3 reasons cites as to why these two gentlemen support a minimum wage increase. In this 3-part series, I will address each point that they make in their article.

Their first point is:

One, it (raising the minimum wage) makes good economic sense. The federal minimum wage is currently $7.25 an hour. Adjusted for inflation, that’s lower than it was in 1968. Raising the minimum wage to $10.10 an hour nationally will provide 28 million Americans with more money to spend and to invest, increasing economic activity and growth. In fact, recent studies conclude that raising the minimum wage makes workers more productive and therefore helps businesses retain profitability — a conclusion affirmed by Gap Inc.’s recent decision to raise the minimum wage for its employees to $10.10 an hour.

First, what do they mean by “good economic sense”? If the measure of good economic sense is how one group of people is affected, to the exclusion of all other groups, then one might have to agree with their assessment. Unfortunately, that is hardly ever the case. What is good for one group may not be good for another. In the full sense of the economy, raising the minimum wage is not “good economic sense” everyone involved.

Second, raising the minimum wage means that employers will be required to raise their overall payroll expense, which must come from some source that the business owner must identify. Most businesses do not have a stash of money that is un-used and ready for disposal. Most businesses, especially those who operate with low wage employees, have limited capital at their disposal. The capacity to pay this arbitrary increase in payroll expense must come from sources like increased prices, savings, or even from the reduction of other expenses, like payroll itself. For example, in order to increase the wages of 10 minimum wage employees, it may mean having to let one of those employees go to make up for the increased expense. Furthermore, an increase in the minimum wage may even be the difference in hiring an additional worker. A prudent business owner will make the necessary adjustments to reduce the impact of the arbitrary increase in expense on the bottom line. The same principle can be found in your own personal life. You bring home a certain amount of income each month. You also spend a certain amount in expenses each month. From month to month, you know how much you can spend as you compare it with the amount of income that you bring in. Let’s say as part of your monthly expenses, you find out that your electricity bill will double, because the electric company arbitrarily raises the cost of KwHs. This obviously makes the difference between your income and expenses smaller. And this causes you to react to the arbitrary change. You can either reduce your other expenses, spending less on entertainment, reducing your grocery spending or any other expenses that you can control. Or you can increase your income, finding another job or even a second job to make up for the increase in the electricity bill. Obviously, you can control your cost much faster and easier than you can find an extra job. You can start to see the pickle business owners are in when they are forced to arbitrarily increase their expenses.




Third, they make the statement that the increase in the minimum wage will increase the employees ability to spend and invest, increasing economic activity and growth. Again, this is to exclude all of the other players in the economy that are affected negatively by this arbitrary increase wage expense to businesses. Certainly, these employees will have more money at their disposal, but there are others that will never have the opportunity to earn a wage, either by being let go by the business (to make up for the increase in payroll expense) or by never being hired in the first place. Additionally, the lost earnings of the business due to the arbitrary increase in payroll expense limits businesses ability to expand and grow their businesses, removing the potential opportunities for other parties connected to these businesses (employees, customers, suppliers, etc.) to benefit. Unfortunately, these politicians never consider the effect on the other side of the coin. Politicians generally know that their voters only consider what the current workers are benefiting from with more income, but they never consider the impact on people who are never hired in the first place, jobs that never have the opportunity to be seen as lost, because they are prevented to be created. As with most politically charged economic issues, these one-sided considerations cause politicians to make bad economic decisions that affect our economy adversely. This idea is very prevalent in and outside of politics, and even by some well-intentioned people. I have written about this very principle in my article Invisible Unemployment.

So, the unintended consequences that are involved in the raising of minimum wages are now easier to see: lost jobs and stunted economic growth. This may sound like a pro-business, anti-worker article when in fact, it is actually both pro-business and pro-worker at the same time. In the amazingly efficient realm of capitalism (when it is allowed to be efficient), jobs are a “by-product” of business. Providing jobs is not the sole reason for businesses to operate. Businesses operate to supply the demand needs of a certain segment of consumers. And while I say that jobs are a by-product of business, that is not to say that they are unnecessary or even a waste (and some would define by-product). They are a necessary function of business, but just not the primary reason for businesses to exist. When politicians make economic decisions with the mindset that providing jobs is the primary function of business (while, they may never actually say it, but act in such a way to make you believe it), or that they arbitrarily

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Note: You can read the original article written by by Gov. Peter Shumlin and Gov. Dan Malloy at http://www.cnn.com/2014/03/05/opinion/shumlin-governors-minimum-wage/.

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Comments

  1. John says

    I agree that there is some good things and negative things related tom minimum wages. It seems most minimum wage earners get stuck in the wage bracket with little ability to get out.

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