Minimum Wage

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Raising the minimum wage sounds good superficially, but harms the very poor it pretends to help. This can be easily shown by just two facts:

  1. The minimum wage more than doubled from 1983 to 2009, from $3.35 an hour to $7.25 an hour. The minimum wage has increased substantially over the last century, from $0.25 an hour in 1938 to $1.25 in 1963, $1.60 in 1968, $2.30 in 1976, $3.35 in 1981, $4.25 in 1991, $5.15 in 1997, and $7.25 in 2009.[1]
  2. The rich got richer during that time period and the poor got poorer. According to a report by the Economic Policy Institute evaluating the share of total wealth gain during that time, the richest 5% of Americans received 81.7% of all wealth gain from 1983-2009, while the poorest 60% of Americans actually got poorer and lost 7.5% of the wealth they had.[2]

If raising the minimum wage helped the poor, why have the poor gotten so much poorer at the same time that we doubled the minimum wage? Clearly raising the minimum wage is not the solution, but Democrats hypocritically use it to disingenuously gain votes by pretending to care about the poor.

Why Raising the Minimum Wage Hurts the Poor

Doesn't Guarantee a Higher Percentage of Wealth for the Poor

What many people don't realize is that raising the minimum wage does not mean a higher percentage of wealth will go to workers, because employers can simply increase their own pay as well. When the minimum wage is increased, the result is inflation, or cost of goods. Grocery store workers get paid more per hour so the cost of groceries goes up. Gas station workers get paid more so the cost of gas goes up. And CEOs of course pay themselves more to compensate. As a result, the Treasury prints more currency, more dollar bills, to meet the increased demand. Supply and demand. If there's more currency in circulation, the value of that currency will decline, with more dollar bills being printed they will be worth less. Thus the poor do not get more money, the value of money simply changes.

If Democrats really cared about the poor, they would seek to stop runaway CEO pay from historical norms with caps on executive pay at publicly traded companies in relation to company earnings, such as those I've proposed.

Destruction of Small Businesses

The main reason that people are poor is from not working or not working enough. The major expense for your typical company is payroll, so when the minimum wage is raised, what do you think a company will do to increase profits and reward shareholders? They will send jobs to states and countries with lower minimum wages, replace workers with machines, or convert full-time jobs to part-time ones. And that's if it's a big company which can afford to do those things. If it's a small business, which has for example only $100/hour to hire 10 workers at $10/hour each, if the minimum wage goes up to $15 an hour, now they can only hire 6 workers, not enough to run their business, in which case they go out of business.

“The reality is that families in poverty very rarely have a full-time worker in the family; in fact, only 7 percent of the time. The entire bottom 20 percent of income earners (which includes some people above the poverty line) averages only 0.42 earners per household. People are not in poverty because the minimum wage is too low, or because their hourly pay is too low even when they make above the minimum wage. People are in poverty because they are not working or not working enough. They need jobs, not an increase in the minimum wage.”
Jeffrey Dorfman, Forbes[3]

Correlation with Recessions

Minimum wage hikes have consistently preceded recessions because of their detrimental impact on U.S. jobs. Representative Jeb Hensarling warned the Democrat-run Congress on the floor of the House in January 2007 that they were about to spark a recession with passage of the 2007 Fair Minimum Wage Act.

“Mr. Speaker, in America, we can either have maximum opportunity or we can have minimum wages. We cannot have both. In the land of the free, in a Nation as great as ours, how can we deny people their maximum opportunity, their opportunity to secure the American Dream? Well, apparently, our Democrat colleagues can, because, for thousands, they will now replace the American Dream of boundless career opportunities instead with the nightmare of welfare dependence. Columnist George Will recently wrote that increasing the minimum wage is ‘’a bad idea whose time has come.’ And, unfortunately, Mr. Speaker, apparently that time has come.
What is the purpose? Notwithstanding the rhetoric that we hear today, the purpose of this law is really to protect skilled labor from the competition of unskilled labor. We understand the elections are over. The American people have spoken. But, apparently, now labor union bosses are collecting their chits. Now, what is the effect of this law? Indeed, I admit, some will have a mandated pay raise in America. Those will be the lucky ones. Many more will have their hours cut, Mr. Speaker. Many will have their benefits cut due to this law, and many will lose their jobs. And again, thousands, thousands will be denied that opportunity to climb on that first rung of the economic ladder in America and, instead, be condemned to a life of poverty. This should not happen in America.

Mr. Speaker, I recently spoke to a number of people who create jobs and hope and opportunity in America, good solid citizens from the Fifth Congressional District of Texas. I heard from David Hinds, the owner of Van Tone Created Flavors of Terrell, Texas. His company employs over 25 people in this community in my district. But he says, if we pass this increase in the minimum wage, he is going to have to lay off three, maybe four of his employees and automate his plant to use less labor.
I heard from Kevin and Jeaneane Lilly. Kevin was a guy who started out at McDonald’s years ago frying up the french fries. He now owns 10 McDonald’s restaurants. He says, if the Democrats act today to increase the minimum wage, they will be forced to lay off all of their part-time workers and use only full-time workers. I spoke to Larry Peterson, who has a small business called EmbroidMe in Dallas, Texas. He says, instead of hiring three to four people at the current minimum wage, he is going to have to do with one to two higher paid, more highly skilled people, denying those other two people their rung on the economic ladder.
Mr. Speaker, these are just a few stories from one congressional district in Texas, but these stories are going to be replicated all over America if we pass this law.”
Jeb Hensarling, 2007[4]

For other examples of how minimum wage hikes have led to recessions, see the 1967 minimum wage hike from $1.25 to $1.60 which was followed by the Recession of 1969-70, the Early 1980s Recession which occurred immediately after the 1978 wage hike from $2.30 to $3.25, and the 1990 minimum wage hike from $3.35 to $4.25 which coincided with the Early 1990s Recession.

Creation of a Global Income Disparity

Given a global free trade environment, companies are not just encouraged to send jobs where labor is cheapest, they are required to do so. If a company does not send jobs to low minimum wage countries like China to increase profits and keep their companies competitive then they run the risk their competitors will. In the process their company will go bankrupt. Their shareholders/investors will lose money. Their employees will lose their jobs. The global free trade environment forces companies to constantly seek newer ways to pay employees less to keep their companies competitive, whether by outsourcing (sending jobs overseas where labor is cheaper), automation (replacing workers with machines), hiring illegal immigrants, or converting full-time jobs to part-time to pay less on overtime and benefits.

The result is that Communist dictatorships like China and Venezuela profited for decades by using low minimum wages to attract foreign investment. China refuses to create a national minimum wage and uses censorship and oppression to stamp out public calls for higher wages, all so that it will reap global investment. Thus China has grown in wealth and power even as western democracies such as the U.S. and European countries have grown weaker, incurring recessions-China is essentially stealing U.S. jobs and money, parasiting off of us through use of a low minimum wage.

Furthermore, all of this creates a race to the bottom in terms of worker wages. Globally workers get less and less money, and a few elite CEOs of top companies make ever more money. The S&P 500 measures the success of the top 500 companies, whereas the DOW Jones Industrial Average measures the success of just 30 top companies. These megacorps have been breaking record after record for decades, even as worker pay has stagnated, precisely because they do so through destroying small businesses and reducing worker pay to increase company profits and CEO pay. To summarize, at a global level the rich get richer and the poor get poorer.

The only way for this vicious cycle to end is for Congress to step in to address outsourcing and stop trade with China and perhaps other low minimum wage countries as well. Automation can be confronted by providing tax breaks to companies who hire more U.S. workers in relation to company earnings. These and other solutions I have proposed as a way to increase hiring and really help the poor, with real solutions, not fake ones.

Sources

  1. History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938-2009.” U.S. Department of Labor.
  2. Mishel, L. (2011, September 15). “Huge Disparity in Share of Total Wealth Gain Since 1983.” Economic Policy Institute.
  3. Dorfman, J. (2014, February 22). “The Minimum Wage Debate Should Be About Poverty, Not Jobs.” Forbes.
  4. Hensarling, J. (2007, January 10). “Congressional Record, V. 153, Pt. 1 (p. 750).” U.S. Congress.