I've been hearing a lot of talk about raising it to $10/hour...
Minimum wage laws are one of those things that I'm torn about. Ordinarily, I take a very staunch position against government interference with free market practices. Such interference is very rarely effective and can create more problems than it solves. Is the free market perfect? Of course not. But in a society that supposedly values individual freedom above all else, a free market is the only type of economy that reflects that sentiment. (Note: a lot of people confuse our current system of “crony capitalism” as “free market”. No, they're not the same thing. Don't even try it. That's like saying every rectangle is a square just because every square is a rectangle.)
Yes, it is true that, on occasion, government interference and regulation can help improve certain societal or economic problems. However, it's often nothing more than the public sector removing capital from the private sector so that the public sector can, in turn, regulate the private sector (a practice that, due to the inefficiency of government action, is often unnecessary, wasteful, and ineffectual). A perfect example of this is “The Affordable Care Act”; the costs of which, according to the Washington Post, have amounted to something like 350 million dollars for the entire project (the buggy website, call centers, etc.). Let's keep in mind that the money is public, taken from the private sector that may have used that capital to expand the economy, or could have been used by the public sector to improve existing infrastructure. At any rate, according to Forbes.com, the CBO has admitted that by 2023, a projected 30 million Americans will still remain uninsured and that between 7 and 40 million may lose their employer-based plans over that time period. Furthermore, the private insurance market is responding to the newly enforced standards by seeking to raise premiums as high as 20% or more. And from what I've read, deductibles are going through the roof (whether you're on a private sector plan or enrolled in ObamaCare). Is this the work of “evil robber-baron CEOs”? Not really. It's a market reaction to cost. It's math. Unlike the government, private insurance companies are simply not in the business of losing money – it's all accounting. If they were in the business of losing money, we would inevitably be dealing with a crisis similar to what we experienced with the near collapse of our banking system. Could you imagine what would happen if one or more major insurance companies went under? Complete chaos would ensue.
What did all of that have to do with minimum wage? Absolutely nothing! I just wanted to illustrate a point: how impotent, ineffectual, and occasionally adverse government action can be, even if the intentions are good and pure. Minimum wage laws have similar effect. However, once again, it is something that I am torn on. Yes, at some level I believe there should exist a minimum wage law to protect low-skilled workers. However, I think that it's dangerous to arbitrarily raise the number every few years. All this talk I've been hearing about raising it to $10 per hour (and I've heard others rallying for even higher 'living wages', as high as $15, $20, even $30 per hour)....
First of all, minimum wage laws have a tendency to favor large corporations and burden small business. This is easily recognized by the following. Let's say that the federal minimum wage is currently $7.25 per hour. Now, let's raise that number to $10/hour. Such small numbers couldn't possibly harm small business, right? Well, let's do the math. That is an increase of $2.75 per hour per employee. Assuming that the employee works 40 hours per week, that is a payroll increase of $110 per week. Undoubtedly, that is fantastic news for any employee. But that also amounts to a payroll increase of $5,720 per year for only one employee. Let's take, hypothetically, a small business of 5 employees. This amounts to a payroll increase of $28,600 for the company. And considering that also means a higher amount of employer contributions to social security, that could be inexorably bad for a small business. That sort of increase would be a drop in the bucket for a huge corporation such as Nike, Walmart or Microsoft – y'know, the sort of corporations that progressives despise. But it could spell 'd-o-o-m' for a small business that's already on the fence of closing its doors for good. Take a small business that is slightly larger – 51 minimum wage employees. Now, that would be an annual payroll cost increase just shy of $292,000, this not including higher social security contributions as well as the fact that they are now forced to purchase more expensive group health insurance coverage which are now at higher premiums. Not good at all. The natural response to save the small company would be to downsize the number of employees or to raise the price of its goods and services. The former is obviously bad for the laid-off employee(s); the latter is bad for consumers (and effectively negates their newly raised living wage).
The effect on unemployment – Now for another hypothetical situation. Let's take a small company that has 4 employees at $8/hour (already above the minimum wage). This company is considering expanding to a 5th employee (which is a good sign). A minimum wage increase to $10 would mean that the company's payroll would increase to the same as if it hired a 5th employee at $8/hour. So that company may reconsider the hiring of a 5th employee . That is the best case scenario in such a situation and the unemployment rate remains unchanged. For a different hypothetical situation, let's take a small company that is already on the edge of shutting down anyway. This company also has 4 full-time employees at $8/hour. Let's say the company is already losing money (which isn't unusual in today's economic environment). A minimum wage increase to $10/hour would be an annual payroll increase of $16,640 company-wide. If that happens to be enough to put the company under, now we're talking about an increase in unemployment of exactly 4 individuals (5 or more, if you include the business owner(s). That is the worst case scenario for small business! But you can bet your paycheck that it wouldn't put down Walmart....
I once had a conversation about this very subject with a very close, dear friend of mine whom I love immensely. She takes a humanitarian approach to the idea of minimum wage and I appreciate this approach. It is, absolutely, a subject with humanitarian consequences. A minimum wage worker has bills to pay, just like a highly paid worker: rent, car insurance, federally-required health insurance (or the graduated penalty), groceries, school supplies, taxes, and the like. This is extremely difficult at a part time job at minimum wage. However, when presented with the specter of increased unemployment rates, her response was simple: a progressive minimum wage rate. She pulled an arbitrary number of $1,000,000 of net profit as a bench mark to protect small business; any company that generates less profit would have a lower minimum wage rate, any company that generates more would have a higher minimum wage rate. This idea would undoubtedly alleviate the problem of minimum wage favoring larger companies. However, this idea also presents the exact same problem as progressive tax rates. Let us consider what I call “the middle wrung”. What is the difference between a company that made $999,999.99 in net profit and a company that made $1,000,000.01 in profits? The obvious answer is 2 cents.
But under such a system, the difference is massive in payroll costs. This reminds me of the difference between Canadian Football and American Football (bear with me here). In essence, Canadian Football is (almost) the exact same sport as American Football. One of the primary differences is that, in the NFL, a field goal is always worth 3 points. However, in the CFL, field goals are worth more points if they are of a longer kick. In other words, a 40 yard CFL field goal is worth more points than a 10 yard CFL field goal. What the CFL has is basically a progressive field goal system. The result is that it is not uncommon for a CFL team to intentionally lose the necessary yardage to kick a longer field goal and thus gain more points; whereas an NFL team would intentionally gain yardage to make the kick easier. What does this have to do with a progressive minimum wage rate, you ask? Well, such a progressive rate would encourage the company that made 1 cent over a million dollars to intentionally stifle it's growth so as to pay lower payroll costs. On net of the entire economy, this would result in limiting the growth of the entire economy; thus meaning fewer jobs being created while the population rate escalates. If economic growth is stifled while population increases, this is bad news for the labor market.
Furthermore, if an idea is logical, it should be logical all the time; not some of the time or only up to a certain point. If an idea isn't logical all the time and under any condition, then it is simply born out of erroneous logic. If the idea of a “living wage” is logical, we should clearly be able to arbitrarily raise it to any arbitrary number. Why not $100 per hour? Everyone would love to earn $100 per hour and everyone would be able to pay their rent! That would be $208,000 per year for working at McDonald's! But I don't think I need to explain why that would not make sense: unemployment would be rampant. Companies would go under; not only because of increased payroll costs but because of an inability to keep the number of employees to actually maintain production. Companies that manage to bear the brunt of payroll costs would be forced to raise their prices, thus harming the consumers who managed to keep their jobs. It would destroy the economy in an irreparable manner. America would collapse.
So here's my point: I acknowledge the humanitarian aspect of a minimum wage. I realize that a company will pay you exactly the least amount that it can get away with keeping you as an employee. However, minimum wage rates should NOT be raised arbitrarily to an arbitrary number. It would be better to incrementally raise the rates (IE, rather than directly raising it to $10/hour; the rates should be raised a little a time. From $7.25 to $7.50.. a couple of years later, $7.75. A couple of years later, $8.00. And so on...). It is not a good idea to create waves in the market by sharply raising payroll costs. It will result in lay offs. It will result in slower hiring. It would be beneficial for existing employees, but would also make it more difficult for the currently unemployed to find work. Considering that the most harmed of companies, small businesses, actually employ most of the American workforce, these two facts combined will result in a higher rate of unemployment (which will increase the rate that we deplete our Social Security reserve – fewer people paying into the system and more people receiving unemployment).
So we should think twice before praising this idea. A small increase in minimum wage would, undoubtedly, have negative effects on the market but the effect would be negligible compared to the benefits gained by low-skilled workers. However, a sharp increase in minimum wage will have negative effects on the labor market. Just please keep this in mind when your favorite politicians use this strategy to garner your vote.
SOURCES -
http://www.washingtonpost.com/blogs/fact-checker/wp/2013/10/24/how-much-did-healthcare-gov-cost/
http://www.forbes.com/sites/peterferrara/2013/04/07/look-out-below-the-obamacare-chaos-is-coming/
http://www.nytimes.com/2013/01/06/business/despite-new-health-law-some-see-sharp-rise-in-premiums.html?_r=0
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