If the teen unemployment rate isn’t high enough for you, raise the minimum wage to $10 or $15 an hour. A year ago, the teen unemployment rate was over 25%. It has declined to 20% a year later, that is progress, but it is still unacceptably high. That means that I of every 5 our young citizens that want to work and become a productive member of our labor force is unable to get a job. This will not contribute to the development of the kind of workforce we need in the future. Kids get older on street corners, but not more employable. With close to half of our births out of wedlock (and too often with “child” mothers), integrating these young people into society is a real challenge. With little “parental” guidance or role models, employment is a very important part of that process, especially for these children.
The solution to this problem in particular and to the unemployment problem in general is a strong, healthy, growing economy. In 2000, we employed a record high 64.5% of the adult population, a 40 year record high 34% of NFIB’s 350,000 member firms reported hard to fill job openings and 23% reported their top business problem as finding qualified labor, only slightly less than cited taxes, the perennial winner. These are not “high tech” firms but enterprises that dominate the service sector (hospitality, restaurants, and also retail). Firms that used “unskilled” labor couldn’t find enough and compensation reflected it. Some employers were paying twice the minimum wage to hire service workers. That was made possible because demand was strong, so workers generated more revenue, and were worth it until the economy collapsed.
Myths about raising the minimum wage:
1. It helps a lot of poor people. Not so much. Most minimum wage workers are from above median income families.
2. Raising the minimum puts more money into the hands of spenders, creating more sales and jobs. Sorry, as the example below will illustrate, every dollar a minimum wage worker gets comes out of the pockets of customers and owners, mostly in the same market, who will have less to spend. Minimum wage workers likely patronize the same kinds of establishments they work for and pay for the higher minimum wage with higher prices along with other customers.
3. McDonalds et al make billions of dollars and can afford it. Incorrect. What’s the difference between 10,000 independent burger joints and McDonalds? Fundamentally, nothing. If each independent establishment made $100,000 in profit, it would be easy to see the impact of raising the minimum wage. Redistributionists would see 10,000 establishments aggregated financially into one, with profits of $1,000,000,000 and presume that this is somehow unreasonable and should be shared. But each of the establishments must stand on its own bottom, providing a reasonable return to the capital invested in it, whether by a single investor/owner or a corporation.
4. The employment effects are modest and worth it to get higher wages. Really? Ask the millions of unemployed teens about that. And, there is no gain in overall income (winners = losers in 2 above) and the re-distributional effects are questionable (there are rarely millionaires in the lines at fast food establishments). Raising the price of anything results in less being taken, and that applies to labor. More importantly, future job opportunities are reduced forever, as the “hurdle” that a new worker must get over to justify employment is permanently higher. The larger the increase in the minimum, the larger the adverse employment effects will be, especially over time as firms find ways to adjust and use less labor.
5. Wages are raised for just a small group of workers so it has little impact. True, only about 5% of those employed are earning the minimum wage. But, if the minimum wage is raised by $2.75 ($7.25 to $10), workers who have been earning above minimum wages, say $9 an hour, because they have demonstrated their value, will also have to see their wage rise by the same amount, to $11.75. Labor contracts use the official minimum wage as the base on which skill differentials are paid, so all covered workers would get a raise. The higher minimum wage will bubble through the wage structure and that cost will be paid by consumers.
A simple example will clarify all the above points. Consider a local restaurant employing 10 minimum wage workers for 50 weeks, 40 hours a week. That amounts to 20,000 employment hours. Obviously, each $1 increase in the minimum wage raises labor costs by $20,000 for the owner (ignoring taxes based on wages paid). An increase of $2.75 to $10 would raise labor costs by $55,000 and the $15 dollar minimum being pushed by the unions would raise costs by $155,000. Might as well go for $25 an hour, an annual salary of $50,000, lots of spending (although nobody is making any more stuff, just getting paid more for what they do), make it illegal to raise prices and the world will be great! Really??
To put this cost in perspective, a third of NFIB’s 350,000 member firms have less than $350,000 in sales (not profits!), 20% have under $200,000 in sales. Sixty percent have fewer than 10 employees, 75% fewer than 15. Census reports that 90% of all firms with at least 1 employee have fewer than 20. With labor costs running typically between 70% and 80% of sales, the increase in the minimum wage will have a devastating impact on profits, which in 2/3rds of the firms (proprietorships and partnerships) are the owners’ incomes.
Competition is intensive among small businesses so there is no “cushion” to absorb such cost increases. They will be passed on in the form of higher prices. Some minimum wage supporters have argued that the firms will just become more efficient and absorb the cost. This presumes that the owners knew how they could make more money, but decided not to?? What the higher minimum wage will do, going forward, is to provide an incentive to find ways to reduce the need for workers (Momentum Machines – a San Francisco-based robotics company has unveiled the ‘Smart Restaurants’ machine which is capable of making ~360 ‘customized’ gourmet burgers per hour without the aid of a human). That’s bad news for our workforce development. If higher prices reduce sales (as economics predicts), there will be an immediate reduction in the need for workers beyond the need to cut expenses and maintain profitability.
Raising the minimum wage prohibits many unskilled workers from reaching an agreement with an employer to sell their services and enjoy the benefits of employment, including “on the job” training. The Supreme Court stated: “The right of a person to sell his labor upon such terms as he deems proper is, in its essence, the same as the right of the purchaser of labor to prescribe the conditions upon which he will accept such labor from the person offering to sell. … In all such particulars the employer and the employee have equality of right, and any legislation that disturbs that equality is an arbitrary interference with the liberty of contract which no government can legally justify in a free land.” [Adair v. United States, Justice Harlan]. It would seem our politicians have lost sight of this Constitutional right.
Owners can’t pay workers more than the value they bring to the firm, raising the minimum wage requires owners to pay more for the same work. Many workers will get more pay without producing more output, relatively few of these will be “welfare targets”, most will be workers who would not qualify for any government assistance. This is another “tax” imposed on consumers by a progressive government, more interested in votes than in the real impacts of its policies to get those votes.