Raising The Federal Minimum Wage Might Actually Hurt, Not Help Laborers

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Photo: conservativedailynews.com

Recently at AlterNet, Marshall Auerback published an article that discussed a bill introduced by Senator Tom Harkin of Iowa. The Rebuild America Act would, among other things, raise the federal minimum wage from $7.25 an hour to $9.80 an hour which is an increase of about 35%. This bill would also automatically index federal minimum wage to inflation so that it increases along with inflation.

Increasing the minimum wage may sound good but if we think about the issue economically, we might conclude that raising minimum wage really does not do anything but raise the cost of labor artificially, costs that employers pass on to consumers by raising prices, which leaves laborers paying more for the things they need, canceling out or even overshadowing the effects of their wage increase. Let’s take look at this with a simple example:

Let’s say John runs an apple stand. Well John has two part-time workers who work for $7.25 an hour each, 20 hours a week. So they cost John $290.00 a week in labor costs. This cost is added to the $150 John pays for 600 apples each week and he sells the apples for $0.75 which works out to $450.00 a week in gross revenue. When you take the $150 plus the $290 in expenses, Johnny is left with a small $10 dollar profit (and we didn’t even discuss taxes).

Now if the minimum wage is raised to $9.25 an hour then his labor cost would increase to $370 and the increase in minimum wage will increase the cost of the apples as the apple growers will have to increase the pay of their workers by 35% as well so the apples now cost $202.50 and John’s new costs are $572.50, so in order to gain the same $10 dollar profit the cost of the apples being sold at the stand will have to rise from $0.75 to $0.96 an apple. So the cost of living rises along with a mandatory increase in wages. This is why economists say minimum wage laws cause price inflation.

The best way to imagine what an artificial increase in minimum wage would do for the economy is to think of the tide rising and what it does to boats. Yes your boat is rising with the tide and is now floating higher thanks to the rise in water. But if you compare it to a larger ship it is the same relative height as it was before at a normal tide. The only difference is the water has risen. This is what happens with minimum wage increases: the amount of money workers earn increases but so does the cost of goods and services that those same workers buy, so they are at the same standard of living (or worse) as they were when they earned the lower wage. Their nominal wage has increased, but their actual purchasing power hasn’t improved.

And in addition, the costs employers pay for raw materials has also increased as well and some of the materials or costs have risen even higher than the minimum wage thanks to the costs associated with producing the products and services used. This leaves the employer with the choice of losing money or cutting the labor force. Which one do you think the employer is going to choose? Remember at the end of the day an employer has to feed his family too and if it’s a choice between laying off workers or shutting down his business, labor is going to lose every time. This is why economists say minimum wage laws cause unemployment.

So with that said, even though minimum wage proponents like Senator Harkin have good intentions, if we think about the policy economically, we can see that it might actually hurt laborers by raising their costs of living and even increasing the chances that they might get laid off because of increased expenses that put pressure on employers.

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  1. Will Eaton This would be a fascinating wake up call, there's just one problem. There have been massive studies done to see if these claims are true. They aren't. It's actually been demonstrated that when the minimum wage is increased appropriately and intelligently most states who raise the minimum wage above the federal level don't see any rise in unemployment, but most do see less people living in poverty levels. Federal minimum wage increases specifically seem to have the least effect on unemployment numbers. It's a very complex issue that has a number of factors that can influence these results. This is the same old conservative/republican talking point. It's always how minimum wage needs to be kept incredibly low and that either there will be less employment as a result or business will be forced to raise prices in these areas negating the effect. It's a common trick by conservatives. You take very basic logic and apply it to a very complex situation. Over simplifying complex situations is what they do best. It's very effective because as humans we have a natural bias towards anything that we can read, and the bias continues if it's something easy to understand. As such their talking points can be very effective. It's why a majority of Americans actually believed in those fictional death panels. In 1980 the average CEO made $42 for every $1 an employee made, in 2011 the average CEO makes $380 for every $1 an employee makes. Meanwhile employee wages when adjusted for inflation haven't increased since 1970. The top 20% control 84% of our nations wealth, leaving the remaining 80% of us to fight over the remaining 16%. Each year these numbers continue to get worse. The middle class is shrinking and poverty levels are again on the rise. Republicans still attack any attempt to slow or stop this incredible inequality by calling it "wealth redistribution" or "class warfare". Almost ironic when decades of Republican policies have actually redistributed the wealth in this country to the super rich and in doing so committed the very definition of class warfare. But even when you can find a literal mountain of information on this subject, all the Republicans do is start their right wing talking point machine going... and before you know it, the rich are being punished and treated unfairly. Poor people are lazy and simply didn't try hard enough. Just repeat the same lies enough and they gain traction. It works for taxes, the military, science... you name it. It doesn't matter what the subject is, if you can oversimplify it for the masses you gain public support regardless of how outrageous and misinformed these views inevitably are. What I think would've made a much more compelling article might be if you explained how exactly we could raise the wages people receive. Rather than saying maybe we shouldn't do anything, why not say I think raising the minimum wage won't be productive and I have an alternative solution. Before you shut the door on what is one of the few very small ways government can actually help people earn a living wage and move those people up in social economic status, figure out what would be a better compromise. Obviously unfettered capitalism doesn't work as the wealthy not only hoard their money but have actually been eating away at the 16% left to those of us on the bottom. Raising the minimum wage though slightly effective is obviously not the best solution. So what is a productive and reasonable solution to the problem?
  2. Kevin Konczal Not only will it hurt employees but business. What if you are trying to start a company and can't afford to pay someone $9.00 an hour for a $6.00 an hour job? The position goes unfilled...or the owner does the work. So, instead of someone working, they sit on unemployment dole...if you don't like a $5 or $6 an hour job - don't take it...but don't stop someone who needs a part-time job to pay for helath insurance or gas because the gov't is telling business how much to pay people.
  3. Thomas G. Brown I am impressed by the many great view points articulated in these comments. Many explain the problems with government setting prices which is what the minimum wage is if you really think about it, What if the government decided to set a top price for gasoline? Well, we have an example in the 1970's to see what would happen. The supply would remain the same and there would be shortages. This is why a free unfettered market is the best type of economy for the individual.
  4. DollySue Armstrong What!! No Middle Class is ACTUALLY Hurting our ECONOMY... raise the dough.
  5. Rocky Chau Nope. Increasing the money supply causing inflation hurts the laborers and consumers. A raise in minimum wage is a way of keeping up with the cost of living.
  6. Lisa Cox Tanielian If the market truly dictated wages I would in favor of letting the market decide wages. But that's not the case. The Fed controls the market with interest rate increases when unemployment is low to halt the rise in wages when times are good. So minimum wage needs to be adjusted accordingly to ensure the bottom does not fall deeper into poverty. If we truly want a market based approach, then get the Fed out of the picture so wages at the bottom increase during good times, just as they did for the top end.
  7. Chris Miller Let me get this straight. We're discussing this as a legitimate scenario here? Johnny appleseed is perfectly happy at the moment employing two people to sell 600 apples a week so he can take home a measly ten dollars? But the extra $2.55 an hour is going to break him, so he has to raise his prices which in turn puts his goods out of reach of the employees? Talk about you tin foil hat smokescreen. What I find ironic, is that the Alternet article this one links to makes some fair points and does a nice job of shooting this posts simplistic idea in the butt.
  8. Mike Morrato Minimum wage certainly deters the concept of letting the market decide prevailing wages. Using McDonalds and Burger King as an example, if McD's was hiring a fry cook at $6.50/hour but Burger King was willing to pay $8.00/hour, it's no contest I'm going to work at Burger King assuming all other things are equal. In turn, McD's is going to have lower morale, higher turnover and fewer applicants to choose from because they pay so bad which in the end would likely force them to up their pay range. This of course ignores the fact that nobody is going to make any level of living at $8/hour but that's a different discussion. The cost of living in this country is mildly ridiculous (this coming from someone making more than $100k/year). The cost of employing someone is equally ridiculous as well. However part of the problem is gross corporate greed. I don't mean profits = bad. I mean profits that aren't 10% y/y better than last year is a failure = bad. That's just silly. And 10% y/y is small change compared to what is expected from some companies.
  9. Nanson Hwa Minimum wage is just that. The compensation for an employee to do one hour's work for the least amount required by law. Minimum wage increases due to inflation and in relation to standards of subsistence with no or very little savings.
  10. WIll Yes, they cannot afford it. My father is a middle class business owner. If an employee is only worth $8 an hour, then a minimum wage of $9.25 would price that guy out of his job. These nonsensical laws affect the middle class more heavily than the "1 %". This article is a good insight, minimum wage laws are destructive
17 comments
Will Eaton
Will Eaton

This would be a fascinating wake up call, there's just one problem. There have been massive studies done to see if these claims are true. They aren't. It's actually been demonstrated that when the minimum wage is increased appropriately and intelligently most states who raise the minimum wage above the federal level don't see any rise in unemployment, but most do see less people living in poverty levels. Federal minimum wage increases specifically seem to have the least effect on unemployment numbers. It's a very complex issue that has a number of factors that can influence these results.

This is the same old conservative/republican talking point. It's always how minimum wage needs to be kept incredibly low and that either there will be less employment as a result or business will be forced to raise prices in these areas negating the effect. It's a common trick by conservatives. You take very basic logic and apply it to a very complex situation. Over simplifying complex situations is what they do best. It's very effective because as humans we have a natural bias towards anything that we can read, and the bias continues if it's something easy to understand. As such their talking points can be very effective. It's why a majority of Americans actually believed in those fictional death panels. In 1980 the average CEO made $42 for every $1 an employee made, in 2011 the average CEO makes $380 for every $1 an employee makes. Meanwhile employee wages when adjusted for inflation haven't increased since 1970. The top 20% control 84% of our nations wealth, leaving the remaining 80% of us to fight over the remaining 16%. Each year these numbers continue to get worse. The middle class is shrinking and poverty levels are again on the rise. Republicans still attack any attempt to slow or stop this incredible inequality by calling it "wealth redistribution" or "class warfare". Almost ironic when decades of Republican policies have actually redistributed the wealth in this country to the super rich and in doing so committed the very definition of class warfare. But even when you can find a literal mountain of information on this subject, all the Republicans do is start their right wing talking point machine going... and before you know it, the rich are being punished and treated unfairly. Poor people are lazy and simply didn't try hard enough. Just repeat the same lies enough and they gain traction. It works for taxes, the military, science... you name it. It doesn't matter what the subject is, if you can oversimplify it for the masses you gain public support regardless of how outrageous and misinformed these views inevitably are.

What I think would've made a much more compelling article might be if you explained how exactly we could raise the wages people receive. Rather than saying maybe we shouldn't do anything, why not say I think raising the minimum wage won't be productive and I have an alternative solution. Before you shut the door on what is one of the few very small ways government can actually help people earn a living wage and move those people up in social economic status, figure out what would be a better compromise. Obviously unfettered capitalism doesn't work as the wealthy not only hoard their money but have actually been eating away at the 16% left to those of us on the bottom. Raising the minimum wage though slightly effective is obviously not the best solution. So what is a productive and reasonable solution to the problem?

Kevin Konczal
Kevin Konczal

Not only will it hurt employees but business. What if you are trying to start a company and can't afford to pay someone $9.00 an hour for a $6.00 an hour job? The position goes unfilled...or the owner does the work. So, instead of someone working, they sit on unemployment dole...if you don't like a $5 or $6 an hour job - don't take it...but don't stop someone who needs a part-time job to pay for helath insurance or gas because the gov't is telling business how much to pay people.

DollySue Armstrong
DollySue Armstrong

What!! No Middle Class is ACTUALLY Hurting our ECONOMY... raise the dough.

Rocky Chau
Rocky Chau

Nope. Increasing the money supply causing inflation hurts the laborers and consumers. A raise in minimum wage is a way of keeping up with the cost of living.

Lisa Cox Tanielian
Lisa Cox Tanielian

If the market truly dictated wages I would in favor of letting the market decide wages. But that's not the case. The Fed controls the market with interest rate increases when unemployment is low to halt the rise in wages when times are good. So minimum wage needs to be adjusted accordingly to ensure the bottom does not fall deeper into poverty. If we truly want a market based approach, then get the Fed out of the picture so wages at the bottom increase during good times, just as they did for the top end.

Chris Miller
Chris Miller

Let me get this straight. We're discussing this as a legitimate scenario here? Johnny appleseed is perfectly happy at the moment employing two people to sell 600 apples a week so he can take home a measly ten dollars? But the extra $2.55 an hour is going to break him, so he has to raise his prices which in turn puts his goods out of reach of the employees? Talk about you tin foil hat smokescreen. What I find ironic, is that the Alternet article this one links to makes some fair points and does a nice job of shooting this posts simplistic idea in the butt.

Mike Morrato
Mike Morrato

Minimum wage certainly deters the concept of letting the market decide prevailing wages. Using McDonalds and Burger King as an example, if McD's was hiring a fry cook at $6.50/hour but Burger King was willing to pay $8.00/hour, it's no contest I'm going to work at Burger King assuming all other things are equal. In turn, McD's is going to have lower morale, higher turnover and fewer applicants to choose from because they pay so bad which in the end would likely force them to up their pay range.

This of course ignores the fact that nobody is going to make any level of living at $8/hour but that's a different discussion. The cost of living in this country is mildly ridiculous (this coming from someone making more than $100k/year). The cost of employing someone is equally ridiculous as well. However part of the problem is gross corporate greed. I don't mean profits = bad. I mean profits that aren't 10% y/y better than last year is a failure = bad. That's just silly. And 10% y/y is small change compared to what is expected from some companies.

Nanson Hwa
Nanson Hwa

Minimum wage is just that. The compensation for an employee to do one hour's work for the least amount required by law. Minimum wage increases due to inflation and in relation to standards of subsistence with no or very little savings.

Kenneth J. Hicks
Kenneth J. Hicks

Most companies already pay well above minimum wage so they would not be affected. A living wage still would not be achieved at $12/hour let alone $8. Everything is skewed with material costs and financing priced to cause start-ups to fail.

Jeff Carlos
Jeff Carlos

Minimum wages are normally controlled/requeted by the unions. If you are in favor of unions, than the answer will always be yes. If you are a consumer and realize that a raise in the minimum wage affects the price of everything you pay for, then your answer may be no. It depends on the way you politically swing.

Manuel Ducret
Manuel Ducret

Of course it will since they will have to pay more taxes on their income.And the corporations don't want to let go of any money at all.

Steven Cooper
Steven Cooper

Raising minimum wage potentially deters employers from hiring more workers, middle class employement: which is an essential aspect of a healthy middle class and therefor democracy would suffer if minimum wage exceeded aprx. $12.00/hr.

Angelo Giuliano
Angelo Giuliano

Are we under the impression that they cant afford it? 20 million dollar bonus.. putting min wage at 8 bucks... which seems like it hurts the company more?

greg
greg

this has GOT to be the stupidest example one could manufacture. As long as it's not your brother, sister, son or daughter thats stuck with $7.25.....get real!

WIll
WIll

Yes, they cannot afford it. My father is a middle class business owner. If an employee is only worth $8 an hour, then a minimum wage of $9.25 would price that guy out of his job. These nonsensical laws affect the middle class more heavily than the "1 %". This article is a good insight, minimum wage laws are destructive