Minimum Wage, a flawed way to fight poverty

February 26, 2014

UnemploymentBy Nancy Thorner & Bonnie O’Neil – 

The editorial board of the New York Times had it right 27 years ago when it wrote, “The Right Minimum Wage:  $0.00.” There’s a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the legal minimum price of labor will result in an increase in unemployment and it will be the least skilled workers, those most in need of work, who will be the first to lose jobs and the last to be hired. That would be the tragic unintended consequences if government forces the new law upon businesses.

The increasingly liberal New York Times editorial “The Case for a Higher Minimum Wage” (February 9) stated: “Concerning the estimated 27.8 million low-wage workers, the 2014 Times Editorial Board is all for the Democrat proposal of lifting the hourly minimum from $7.25 today to $10.10 by 2016, even questioning the modest rise in benefits to only $10.10.”

A senior citizen friend recently brought to our attention a Wall Street Journal Letter to the Editor submitted by Mr. Robert Scott. It too conveyed the same line of thinking as the Times Editorial board stated decades ago: “If the minimum wage is raised to $10 dollars an hour all workers now earning that amount will ask for an increase as well, because their productivity is worth more than the minimum wage workers. So costs will rise for every worker.”

According to the friend, during the 30’s before the enactment of minimum wage laws, prices remained relatively constant. It was possible to plan ahead knowing that the cost of living would remain stable from one year to the next. There was a consistency and thus comfort for people as they realized expenses would not rise. This was not so when a minimum wage was enacted.

It was 1938 when Congress created the minimum wage during FDR’s “New Deal” under the “Fair Labor Standards Act of 1938.  The act banned oppressive child labor and set the minimum hourly wage at 25 cents and the maximum workweek at 44 hours (25 cents equals $4.13 in 2014 dollars). Have workers really been better off?

President Lyndon B. Johnson, in fighting his War on Poverty, changed the way people were paid with his emphasis on income equality. As Johnson said in his State of the Union speech on Jan. 8, 1964: “It’s time to acknowledge that to win the War on Poverty, we must wage a battle against income inequality.”

The same friend remembers that before Johnson, individuals who did good and productive work were given a raise. Individuals competed to be the best. What President Johnson said is that “all raises should be across the board.  In other words, if one person is given a raise ALL PEOPLE AT THAT LEVEL MUST RECEIVE THE RAISE prompting a huge cost for the factory. So today there are rallies (such as the one demanding a higher minimum raise) because others are then hopeful of reaping a similar increase in pay if the hike is granted.

To counter those on the left who argue that raising the minimum wage to $10.10 an hours would not cause increased unemployment, consider the rate of unemployment in those European countries where there is no minimum wage. In countries with a minimum wage, the median unemployment is 11.1%. In countries without one, it’s just 5.2%.  View the two charts on Minimum Wage for a better understanding of this fact:

An Issue Brief published by The Heritage Foundation on January 21, 2014 informs how most minimum wage jobs lead to better-paying opportunities. Within a year, two-thirds of minimum-wage workers make more than the minimum, either earning a promotion at their job or accepting a higher paying one.

Yet another Issue Brief published by the Heritage Foundation on January 30, 2013 lays out the facts about Minimum Wage. Basic studies indicate raising the minimum wage does not reduce poverty, but instead harms the very people they are meant to help.

Would minimum wage workers really be better off with a hike increase if Democrats and President Obama get their way? As salaries rise across the board, the increased salary cost is tagged on to the product being produced, resulting in the product costing more, which then eats up the extra money individuals have in their pockets to spend when purchasing goods. Fewer sales equate to fewer jobs opportunities as well as a loss of jobs. More interesting consequences.

Minimum wage jobs are often “entry” jobs in which the employee learns basic skills and work ethics. There are costs the employer must absorb through that training process, as experienced employees’ time must be used to help train and inevitable mistakes by the trainee can be costly to the employer. Those entry jobs can be part time and given to teenagers, college students, those in which English is their second language, and some who simply need a place to start their work careers and gain work experience before reaching up to another level. Raising the minimum wage could put those jobs in a pay category that would attract experienced workers and thus limit the opportunities of people needing those entrance positions. Thus, we see another unintended consequence and realize the importance of thoroughly examining the issue.

In order to increase buying power, one must increase productivity, but that calls for another article.

The idea of using a minimum wage to overcome poverty is old, and while intended to be honorable — in practice it is fundamentally flawed. It is time to put this hoary debate behind us, and find a better way to improve the lives of people who work very hard for very little. The idea of using a minimum wage to overcome poverty is old, and while honorable — it is also fundamentally flawed.

Can we all agree that the practice of Conscious Capitalism, investing in people, while building a business is a worthwhile pursuit in which owners and workers at every level prevail and are ultimately winners.

Wednesday, February 26, 2014 at 11:30 AM | Permalink

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