Does Wage Increase Really Help?

                 Will Higher Minimum Wages Help?

McDonalds-picketEarners are learning the hard truth.  The War wages on!

The debate over raising the minimum wage has been a hot topic after President Obama explained in his 2014 State of the Union Address that he intends to raise the minimum wage from $7.25 to $10.10 per hour, an increase of over 40 percent. While the President and his supporters claim that this increase would greatly benefit the economy and result in no loss of jobs, the opposition claims that this would be detrimental to minimum wage employees, resulting in 500,000 fewer jobs. In the following article, we’re outlining the pros and cons of raising the minimum wage.

Lets start with a look at Seattle –

Low wage workers in Seattle who spent months agitating for a city-wide $15-per-hour minimum wage were quite successful in their quest. But many have suddenly found that the new rate has had unexpected consequences.

Some workers across the city are left telling bosses to give them fewer hours at the higher wage because a full week’s earnings now puts them past the threshold for some welfare payments such as food stamps and assistance with rent.

Of course, one of the things that supporters of the higher wage said was that they wanted to help lift min. wage workers out of poverty and welfare.

Only last week, for instance, Los Angeles Mayor Eric Garcetti claimed that a $15 min. wage in his city would lift 600,000 out of poverty. Self-avowed socialist Sen. Bernie Sanders (I-VT), a VT Senator and a candidate for the Democrat nomination in 2016, also recently claimed that a $15 min. wage would “lift millions” of Americans out of poverty, off welfare, and into the buying public.

But now some workers in Seattle are finding that the higher wage is forcing them off the welfare programs they would rather stay enrolled in and, instead of celebrating their higher income, they are imposing fewer work hours on themselves in order to stay on assistance.

Seattle’s KIRO-TV recently spoke to a nursing non profit that admitted that some workers are trying to cut hours and earn less to avoid losing assistance. In another case, a local radio station has been talking about the story.

“If they cut down their hours to stay on those subsidies because the $15 per hour minimum wage didn’t actually help get them out of poverty, all you’ve done is put a burden on the business and given false hope to a lot of people,” said KIRO-FM’s Jason Rantz said this week.

There have been other unforeseen consequences to the higher wage. Some restaurants are tacking on a 15 percent surcharge onto customer’s bills in order to avoid firing workers.

Other stores, restaurants, and small businesses are simply closing down because they can’t afford the wage hike. By March of this year, for instance, restaurant closings increased at a much higher than average rate in Seattle.

Many restaurants noted that the new wage put labor costs at nearly 50 percent of operating costs, and that made profit margins disappear.

Lets look at some pros and cons –

Pros –

  • Economic Stimulus: Raising the minimum wage means minimum wage workers have more money to expend which means more money ripples throughout the economy as minimum wage employees are able to spend more.
  • More opportunity for jobs: If these minimum wage employees are spending more, then businesses are earning more and need to hire more employees to keep up with the increased sales from the minimum wage employees who are buying more.
  • Reduced Expense for Social Programs: Employees surviving at minimum wage are also often the same people who must rely on additional support of government run social programs to support themselves and their families on such a small amount of income. Raising minimum wage means some of these people would be able to better support themselves without leaning as heavily on social programs and this would ultimately mean lower taxes or a reallocation of those funds to support other needs.  Note: Seattle above.. will it really raise people up?
  • Decreased Turnover Rate: Employees who are making a higher minimum wage feel more comfortable and satisfied in their minimum wage jobs meaning they are less likely to quit. This means there would be a lower turnover rate, which results in fewer expenses to hire and train new employees.
  • Inflation: The federal minimum wage needs to be raised in order to account for inflation, which raises every year and the minimum wage has only been risen three times in the past three decades.

Cons –

  • Price increase: Employers might raise prices of their product in order to generate enough income to support their more highly paid minimum wage employees, which could ultimately create a ripple effect for other shops and industries, resulting in a slightly higher cost of living, resulting in another push to raise minimum wage again.
  • Layoffs: If an employer has a tight compensation budget and the minimum wage is raised, it means they can no longer compensate the same number of employees at a higher rate and must make layoffs to remain within budget. So, while some employees may be making slightly more money, others will be left unemployed.
  • Fewer Hirings: If business must pay their minimum wage employees more, they cannot afford to hire as many employees. According to a Federal Reserve Bank of Chicago study, “10 percent increase in the minimum wage lowers low skill employment by 2 to 4 percent and total restaurant employment by 1 to 3 percent.” Or instead of hiring fewer employees, the company may start outsourcing jobs to employees in countries that are willing to work for much less than $10.10 per hour, resulting in fewer jobs for Americans.
  • Competition Will Intensify: If minimum wage increases, overly qualified individuals will be vying for minimum wage positions, pushing younger, inexperienced workers out of the running and robbing them of their opportunity to gain experience and knowledge to build a resume for themselves and enter the workforce.
  • Applied Inconsistently: Many states have their own set minimum wages, which are currently above $7.25 per hour already. As of January 1, 2014, 21 states (and D.C.) have minimum wages above $7.15 per hour (Washington being the highest at $9.32 per hour), so the amount the national minimum wage is set at varies in significance from state to state.

Many do believe that minimum wage laws achieve these goals. They do ensure that workers on the low end of the pay scale are not underpaid because of their gender or race. They also do ensure that workers are given a fair wage. However, their effect on society as a whole and on those who are not currently employed is questionable.

Some people who are opposed to the idea of minimum wage believe that it is not accomplishing the goals it was designed to meet. In several instances, employment has decreased more than the increase in wages and thereby overall earnings are still reduced. Businesses are sometimes forced to hire fewer employees because they must pay minimum wage. Thus, fewer people have a job. Studies also show that very few low-wage workers actually come from families in poverty. Thus, minimum wage is more often imposed on the sixteen-year-old worker with his first job than on people who would otherwise be unemployed.

Other opponents of minimum wage believe that it can cause price inflation as businesses must raise their prices to accommodate the higher wages. They also believe it discourages further education of the poor. The United States currently has laws in place to ensure a minimum wage. Whether or not these laws should remain in place is a matter of debate. There are benefits and downfalls to minimum wage laws and nothing is cut and dry.

I personal have heard from many people on both sides of this coin. They send me all kinds of charts saying that this country pays more. When I do research on those country’s, I find that their cost of living is higher than the US.

By the standards of other rich nations, the U.S. minimum wage, at $7.25 an hour, can look pretty measly. Australia’s minimum for full-time adult employees works out to almost $15, these days. France’s is around $12. For almost a year now, American fast food workers have been going on strike to demand that kind of pay.

But in some senses, those high wages abroad aren’t quite as high as they sound. The reason: cost of living. Melbourne, where about a fifth of all Australians live, is the fourth most expensive city in the world according to The Economist’s Intelligence Unit—about 36 percent pricier than New York. Making rent and putting food on the table in Paris, meanwhile, is about 28 percent costlier than in NYC. When it comes to everyday living in these countries, money doesn’t stretch as far as in the states.

Thankfully for us, economists have come up with a concept that lets us adjust exchange rates to account for the differences local prices. It’s called “purchasing power parity,” or PPP. When applied to minimum wages around the world, it tends to even out the differences, a bit. As shown in the chart below, based on 2012 data from the Organization for Economic Cooperation and Development, Australia’s minimum wage is actually closer to $10 once purchasing power is taken into account. France’s also drops to around $10. Both are still higher than America’s, but not quite as eye-popping.

World chartSo America’s minimum wage workers might not have it quite so awful compared to their counterparts overseas as straightforward exchange rates suggest. That said, there are important factors that PPP doesn’t capture in this case—like the cost of healthcare, for instance.  PPP measures prices from an economy-wide perspective, but it doesn’t take into consideration who’s paying for what. So while a Canadian or French McDonald’s worker gets socialized medicine, an American worker either has to devote part of their paycheck for the company plan, get private insurance, or go without (in some cases, Medicaid might be available, and starting in 2014, more adults will be covered in states that have expanded it under Obamacare, but you get the picture).* PPP won’t account for that. A similar story would apply to higher education.

What are your thoughts?

Thanks for taking the time to comment.

Debi

Research done on a number of sites.

 

 

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