August 27, 2014
The Minimum Wage Debate
As a physician, I was taught the importance of carefully evaluating the plan of treatment. Though our intentions are good, those treatments often have unintended consequences. To provide the best care, we must constantly weigh the risks versus the benefits of any medicine or surgical procedure.
The same careful evaluation of political remedies is necessary because like in medicine, good intentions are not enough. Too often what seems to be a good solution may have disastrous consequences down the road. If only it were so simple that we could just mandate every employer pay his employees more money and presto, the problem of poverty would be solved! Little in life is that simple.
Raising the federal minimum wage (FMW) just sounds good. Who could possibly oppose those at the bottom of the pay scale getting a few extra dollars an hour? Anyone against it must just be uncaring! Yet a closer look at the unintended consequences reveals something very different.
Proponents of raising the FMW rightly point out that you cannot raise a family on $7.25/hour. They suggest that the FMW should be adequate to support a family of four or more. They suggest that millions of Americans are trapped in a minimum wage job for life. They claim that today’s FMW has 30 percent less purchasing power than it did 40 years ago, and that raising it will not harm the economy or small businesses. Instead, they suggest that raising the federal minimum wage (FMW) from the present $7.25 to $10.10/hr, a 40 percent increase, will boost the economy. But do the facts support these claims?
The minimum wage by itself cannot support a family of four; it is meant for a family of one. The FMW of $7.25/hour comes to $15,000/year. The federal poverty level for an individual is $11,500. FMW workers are eligible for food stamps, Medicaid, housing assistance, childcare, education loans, energy assistance, the Earned Income Tax Credit, and other benefits. These solutions are designed to meet the needs of families; the FMW is not.
The FMW is a temporary and transitional wage for entry-level workers without skills. 65 percent of FMW workers are students or part‐time workers; 55 percent are 16‐24 years of age; 2/3 receive a raise within their first year on the job and half of all workers at or below the FMW work primarily in restaurants and food services where tips and commissions supplement the hourly wage. Nobody aspires to earn minimum wage, and a worker that has learned to add value to a company is never trapped.
The claim that today’s FMW has only 30 percent the purchasing power of 40 years ago is very misleading. Checking this statement against data from the Department of Labor one finds that the inflation- adjusted value of the minimum wage changes almost yearly based on economic conditions. Since its inception in 1938, the average and median inflation-adjusted minimum wage was $7.09. That means the purchasing power of the minimum wage today ($7.25) is better than the average since 1938. Only in 1968 did the economic conditions make the $1.60 minimum wage worth $10.34 in 2012 dollars. During the Clinton Presidency, the average was only $6.94.
So what is the downside of mandating a 40 percent minimum wage increase? Two big issues: job losses and inflation.
According to the non-partisan Congressional Budget Office (CBO), raising the minimum wage will result in the loss of 500,000 jobs. Presently, there are about 1.5 million Americans working for FMW. That means that close to one-third of all those jobs will be lost by raising the wage to $10.10, and the wage earned by the unemployed is as it always was, zero. Lost minimum wage jobs will automate like Kroger’s self-checkout lines, kiosks at the airport, and robotic hamburger flippers. Once gone, these jobs never return.
Further, the process is inflationary. If you raise entry-level salaries from $7.25 to $10.10, the person making $10 is going to ask for $13; and the person making $13 is going to ask for $16, etc. In fact, most union contracts mandate that all wages be increased proportionately. My opponent suggests that we can just raise the cost of a burger a few cents, but that trivializes the impact. All salaries, goods and services will increase. What will look like a boost to the economy is really inflation.
Broad mandates like this do not work. A company like Wal-Mart might absorb the cost, but a struggling small business cannot. Add an increased FMW to the employer mandate of the Affordable Care Act and you have a recipe for disaster.
Finally, it’s difficult to take a proposal seriously when its proponent doesn’t practice what he preaches. Mr. Yarmuth receives millions of dollars every year in unearned income from his family restaurants. They do not pay a living wage or provide health insurance for their workers despite high profits. Hypocrisy is a poor foundation from which to argue for social change or economic fairness. Mr. Yarmuth is one of the wealthiest members of Congress and has more than doubled his net worth, while representing us. In nearly eight years he has taken care of himself while giving us increased poverty, decreased salaries, and a widening income gap between the rich and poor as the middle class disappears. Why? Because his policies are not fully thought through, stifling our economy and harming those they claim to help through their unintended consequences. We can get our economy growing again. Allow the markets to work the way they are supposed to, and allow small businesses, which employ most workers in this country, to succeed. The path to a living wage comes through education, training, hard work, and personal responsibility. Artificial solutions always come with a high price tag, and the price of raising the minimum wage is far too high for our most vulnerable communities. I would advise my patient not to take this medicine.