“The real tragedy of minimum wage laws is that they are supported by well-meaning groups who want to reduce poverty. But the people who are hurt the most by higher minimums are the most poverty stricken.” Milton Friedman, Nobel Prize Winner in Economics, 1973.
Hello Everyone, Happy Sunday.
Hope my live updates and fact checks on Instagram during Thursday’s Presidential Debate weren’t too hectic.
One thing said by Jobless Joe Biden struck and startled me more than the rest. That his and the Democrat Establishment’s proposal for a “living wage” of $15/hr minimum wage would lower poverty, increase incomes, increase job opportunities, and create more jobs.
Unfortunately for Jobless Joe and the proponents of the living wage, I wrote my senior thesis on the detrimental effects of minimum wage laws since the passage of the Fair Labor Standards Act. I stated I was going to publish it in full for people to read here at the Rogue Review, however, it is long, technical, and mainly not what most people want to read in a column. That being said, you can find it here if geeking and nerding out to economics is your thing, like it is mine. Moreover, all citations, sources, and data will be able to be found in that link and the thesis, as I do not intend on doing redundant work. All data and citations are from 2016, when I wrote the thesis.
Our topic of discussion for today is our attempt to, once and for all, dismantle and dissect the pervasive lie that is minimum wage laws are not detrimental and in fact, does help alleviate poverty. Not only to the very group our elected politicians proclaim to protect, but detrimental to the economy and the United States as a whole. Whether these politicians promulgate this pervasive lie, for well over eighty years, is out of ignorance, arrogance, or willful blindness, I do not claim to know. However, by the end of this column, you will be able to make that decision yourself.
The Fair Labor Standards act was passed in 1938 and established our federal minimum wage. Minimum wage is nice political jargon of the federal government’s price control on the wage floor for the price of labor. Minimum wage was first implemented and is still promoted today as a method of protecting low-skilled workers from the shackles and constraints of poverty. Low-skilled, i.e. young, inexperienced, disabled, undereducated, among other things. Ironically, each and every of the 22 times the price floor has been increased, it is this exact group of people most harmed in both the short and long run. Empirical economic studies since have found adverse effects upon low-skilled workers and a zero or negative effect on poverty.
This Act was one of the many parts of FDR’s New Deal for the American People during the Great Depression. It established a “living” minimum wage of $.25/hr. At the time, this wage increase would have only affected 300,000 jobs, that is only 300,000 jobs paid less than this wage.
Immediately, 50,000 of those jobs were lost in the United States, or 1/6th of the total affected. In the U.S. territory of Puerto Rico, 120,000 jobs were lost, which skyrocketed unemployment to nearly 50%. So much for a living wage for those people. But it gets worse.
Jobless Joe, the Radical Socialist Left, and other proponents of the current “Fight for Fifteen” effort make such false claims that the minimum wage will not increase the prices of everyday goods, will increase job opportunities for low skilled workers, and create more jobs. The decades of empirical economic data state differently.
For starters, the Federal Reserve Bank of Chicago has conducted studies that show that for every 10% increase in the minimum wage, goods and services saw an average increase of 4%, not including yearly inflation. This makes sense, when the market price of any input is artificially raised above the market equilibrium’s price (the price in a free market), actors and agents within that economy have to raise other prices to account for the increase in costs. Proponents of minimum wage conduct their studies ceteris parbius, or all things constant. This is fallacious because it assumes actors will not respond to the changed incentives and constraints—the chess piece fallacy. Thinking that individuals in an economy will roll over and not respond to changes, especially forced changes, is an asinine assumption. This isn’t rocket science.
Second, low-skilled and young workers have been found to have a negative elasticity when it comes to labor, which means the more expensive the price of labor becomes, the more these group’s unemployment rises. For every 10% increase in the federal minimum wage, these groups can expect to see an increase in unemployment by 2%. And, the last time the federal minimum wage was increased in the years 2006-2009, it was increased by 41% to $7.25. By the end of 2010, these groups saw an increase in unemployment by 13%, or 2.5 million lost jobs. I know, I know, there was a recession, but these employment numbers did not recover, like the employment numbers for higher-educated workers. And Congress’ own commission found that the low-skilled group’s unemployment numbers had a 5% increase more in damage than it should have. During this time, higher-educated workers only saw a 5% increase in unemployment and it fully recovered.
Third, these proponents also claim raising the minimum wage would increase economic activity and spur job creation. The Economic Policy Institute conducted a study in 2013 on legislation that was being considered which would have increased the federal minimum wage to $10.10. The study “found” it would create 85,000 jobs and increase Gross Domestic Product. To back their claims, they stated companies have enough revenue to absorb the shock costs and the increase in wages would increase real purchasing power for low-skilled workers which would feed back into the economy. Seems none of these people have ever owned a business.
Revenue is not what is typically used to make decisions regarding growth. Companies can have all the revenue in the world and still not yield profits. That means, if they were to want to take on more employees, they would have to incur more debt. Moreover, 99.7% of businesses have fewer than 500 employees and of those firms, 89.6% have fewer than 20 employees. Smaller firms do not have the financial capabilities nor the financial resources to absorb such shock costs.
To the dismay of the Economic Policy Institute, Congress’ own study on an increase to $10.10 found it would cause a nationwide job loss of 500,000 for low skilled workers. Labor, being negatively elastic, has always seen a reduction in its demand when the wage floor is increased. Furthermore, when the prices of inputs become too expensive, firms look for what are called substitute goods, this is evidenced by the last decade of us seeing many firms moving towards automation. Make people too expensive to hire, businesses will look to cut those costs and innovate with a way to substitute.
Dis-employment is a term not much talked about, however, it is important. Dis-employment occurs where firms look for substitution of the lower-skilled labor for higher-skilled workers. Raising the federal minimum wage, quite literally, prices some workers out of the competition.
The Fight for Fifteen is a misguided effort, though their cause may be valiant. Who doesn’t want to eliminate poverty, reduce its effects, and raise the standard of living for everyone?
However, a Heritage Foundation study found that such an increase would be catastrophic, leaving to a total net loss of nine million jobs, and not all of them in the low-skilled labor market. This increase would be more than 100%, thus we could expect to see a nationwide average increase of 40% in the prices of goods and services, not accounting for inflation. This erodes the value of the dollar, which in turn lowers real purchasing power. With nine million jobs lost and an erosion in real purchasing power, an increase of the minimum wage would lead more people into the shackles of poverty, not less.
Now, to put all of this into a perspective of reality with an example, take a small pizza parlor with 16 workers, each earning $7/hour (for round numbers), and working 40 hour weeks (2000 a year.) This comes out to $224,000 in labor costs. Labor is typically the most expensive input, so assuming it consumes 50% of overhead, total for the year is $448,000. The shop sells 100 pizzas a day, with an average price of $16, and operates for 360 days in a year. This brings revenue to $576,000, leaving the owner $128,000 to split between their salary and reinvestment into the parlor. Adding Going up to $15 an hour increases labor expenses to $480,000 in total. All things constant, adding the previous $224,000 of other overhead to the new labor expense brings gross expenses to $704,000, putting the parlor $128,000 in debt. To make up for losses and to keep all 16 employees, the average pizza would have to sell for $28, a $12 increase, resulting in a decrease in demand.
Proponents’ main and emotionally-backed argument revolves around the reduction we would see in the number of people chained to poverty for adults and families. However, almost 65% of adults living in poverty—do not even have jobs. They do not need a raise, they need a job. And raising the price floor would price even more people out of the labor market. It is also a myth that working-poor adults (ages 25+) are the majority of minimum wage workers, only 4.7% matched that description. More than 75% of the workers who would “benefit” from an increase in the federal minimum wage to $15 an hour are in non-poor families. That means they are usually the second or third earner in a household who is 300-400% above the poverty line.
What would actually lead to reductions in poverty is a multi-pronged approach, with raising the minimum wage clearly not being a part of the attack. Currently, the welfare system makes recipients ineligible for many of the benefits once they secure a job. The benefits they are able to keep are subject to high marginal tax rates. Odd. Seems policy proponents either do not know what they are doing or appreciate a large and ever-expanding welfare state.
For starters, one part of the approach would be to lower the corporate tax rate even further to 15%, which would align the United States with the vast majority of nations in the Organization for Economic Co-operation and Development. It would be better to lower it even further, and make our tax regime competitive which would draw more foreign direct investment and allow for industries which have been destroyed by high taxes and other economically ignorant policies to prosper once again.
Another part of the approach would be to eliminate the federal minimum wage entirely, leaving it to the states to decide. It is a hell of a lot more expensive to live in Orange County, California than Tempe, Arizona, or Twin Falls, Idaho. A one-size-fits-all remedy is not the proper approach. One thing that could be implemented is a federal block grant for wage subsidies allocated and properly apportioned to the states, who then determine their own goals and policies. Tie the subsidy to Social Security numbers, which would leave the power with the employee, not the employer. I am not a huge fan of subsidies, but I would rather we incentivize people to work, than not and stay on the government’s tab.
There are many other modes and methods which could be implemented, revised, and established in our journey to eradicating poverty and it can be a subject I continue to promote. However, raising the minimum wage is clearly not the road we want to ride down.