Commentary by James Shott
analysis by the Congressional Budget Office (CBO), a nonpartisan arm of
Congress, shows that both sides in the debate over whether to raise the
federal minimum wage from $7.25 an hour to $9.00, $10.10, or even $15
an hour have relevant points to make.
Advocates believe that the
wage hike would lift nearly a million people out of poverty, increase
productivity, reduce turnover and give those receiving the raise more
money to spend, and that would translate to businesses recording higher
sales, and an overall improvement in economic activity.
minimum wage, the CBO says, means 900,000 fewer people in poverty, and
job losses will comprise only 0.3 percent of jobs affected by the wage
The hike would boost wages for most low-wage workers, as
about 16.5 million workers who make less than $10.10 an hour would see
higher earnings once the higher minimum is fully implemented, which
Democrats in the House and Senate have been calling for. And then, those
making slightly more than the new minimum wage may feel they need a
raise too, and employers would be virtually compelled to give them one
in what the CBO calls a "ripple effect."
Let’s review: Advocates
believe we should raise the minimum wage because the more low-wage
workers make, the more they'll have to spend, and the better that will
be for businesses selling products and services. People move out of
poverty and spend more and consequently businesses prosper from greater
sales. Our economic problems magically dissolve. Does it get any better
Unfortunately for the advocates, good decision-making
requires looking at all the factors, not just the ones that support a
Opponents point out that higher wages lead
to higher prices, and lost jobs, and wages need to be related to the
work involved and its value to the company, not artificially determined
by Washington bureaucrats.
An essential factor that needs to be
considered is what happens inside businesses when their labor costs
increase? They must make adjustments in other expense areas, increase
productivity or increase prices to maintain profitability and stay in
The other side of the CBO job loss estimate is that
while only 0.3 percent of minimum wage workers will lose their jobs with
the proposed wage hike to $10.10 an hour, and that sounds like a small
effect, the number of actual people comprising that 0.3 percent is
500,000. So 900,000 will be lifted out of poverty, but more than half
that number will lose their jobs. Thus, the picture painted by the CBO
is somewhat less rosy than the advocates believe.
A study for the
National Center for Policy Analysis by Richard B. McKenzie, explains
that there are other forms of compensation to consider, nonmonetary
benefits that may be as much as 30 percent over and above wages of all
workers, a substantial percentage of the total compensation employees
receive. Faced with higher labor costs, employers may make adjustments
to these nonmonetary benefits to balance things. These benefits include
relaxed work demands, workplace atmosphere, schedule flexibility, job
security, and hours of work. Employers may also have to cut jobs, curb
summer hiring, opt not to replace workers who leave; lower their
profitability and/or raise prices to customers.
Despite what you
may hear, read or think, most employers want the best employees they
can get; the most productive, best trained, and most devoted workers
they can find. They are willing to pay them to keep competitors from
luring them away, however, there are financial limits to what businesses
can pay without making other changes.
They may reduce jobs or
cut worker hours, increase demands on existing employees and impose a
stricter work atmosphere to increase productivity, replace workers with
machines, or look for cheaper materials from overseas where labor costs
are lower, affecting American suppliers.
The US economy is
suffering, as evidenced by, among other indicators, the labor force
participation rate, which shows that only 63.2 percent of Americans age
16 or older are participating in the labor force, the rate having fallen
over the last several years to 1977 levels.
We need an
atmosphere that encourages businesses to create jobs, not artificially
raise the wages of the least skilled, least experienced people in the
labor force, particularly when doing so will cost 500,000 jobs, and
further depress the participation rate.
Among the many stunning
failures of the Obama administration is its proclivity to pander to
small constituencies to gain political support, all the while ignoring
the broader problems facing the nation.
When an administration
chooses to implement narrowly focused policies conceived for political
gain, you get what the Obama administration has produced: an almost
non-existent recovery from the recent recession, millions of Americans
who can’t find a job, millions more who are too discouraged to keep
looking and have dropped out of the labor force, and still millions more
Americans on food stamps and other forms of welfare.
administration and Congressional Democrats have shown conclusively that
the serious problems of the nation are far less important to them than
winning the next election.
Cross-posted from Observations