What’s more important, a minimum wage hike, or fixing the economy?

Commentary by James Shott

An 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.

A $10.10 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 hike.

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 than this?

Unfortunately for the advocates, good decision-making requires looking at all the factors, not just the ones that support a particular position.

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 business.

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.

The Obama 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