Straight Talk On Minimum Wage

Raising the minimum wage has now become a hot topic.  Democrats/liberals say that supporting a household of four on the minimum wage leaves that household making an income that is under the poverty level.  And raising the minimum wage will not negatively affect employment. Republicans say that raising the minimum wage will throw unskilled workers out of the workforce and insure that the most needy will not be able to find work. Both statements are partially true but the reality is a bit more complex.  First, the law of supply and demand is about as certain as the law of gravity.  If a component of production, distribution, or sale of a good costs more, the producer will use less of it.  Therefore if an employer uses labor for which he is paying minimum wage and the wage rate is increased by the government, the employer will employ less of the new minimum wage workers, choosing to substitute automation or increased use of higher, more productive labor.  However if, especially in boom times when labor is in short supply and most employers are paying above the stated minimum wage for “minimum wage” work, raising the minimum wage will have little effect on employers–unless the wage rate is raised above the “market clearing” price.  Second, the percentage of wage earners at the minimum wage who are the primary breadwinner for their households is in the low single digits. These people are for the most part aided by other income enhancing programs by the government.  Minimum wage has historically been the entrance into the market by the young and unskilled.  It has never been assumed that those people would remain at minimum wage and not move up the ladder.

Today the Obama administration would like to raise the minimum wage from $7.25 to $10.10.  There are currently about 16M people making between $7.25 and $10.10.  The Congressional Budget Office, a non-partisan organization, has stated that to the best of their forecasting about 500,000 people (plus or minus) will lose their jobs because of that rise in the minimum wage to $10.10.

The bottom line is this then:  Raising the minimum wage transfers money from the very poor to the little-less-poor.  For those who remain employed and were earning less than $10.10, their income will increase by whatever amount they were under $10.10. Wonderful!  However, that half million or so who were earning less than $10.10 and are now out of a job–their income goes to $0. Not wonderful!   We are transferring income from the poorest to the slightly less poor.  And this is America.  We do not let people starve.  So, of course, we will fund the living expenses for those who are newly dis-employed by the increase in the minimum wage.  Your tax dollars at work.

Woody Smith