Thinking About the Minimum Wage Outside the Box

In the past, I have written about the minimum wage, especially as it applied to a referendum in New Jersey in 2013 which the voters stupidly approved. Personally, I have nothing against a minimum wage per se, but in the case of New Jersey, they not only increased it starting in 2014, but then they linked future increases to the CPI. Then to make matters even worse, they made it part of the state constitution so that the ill-advised policy is not only codified, it is “constitutionalized.” Here is the problem in a nutshell with this theory: The minimum wage is increased in 2014 which causes an employer to do one of two things if they wish to stay in business- (1) decrease the man hours of their work force by either making employees part-time or not hiring at all,or (2) pass on the increased labor costs to customers. When the labor costs are passed on, this then causes the CPI to increase which then triggers another round of minimum wage increases. It is an unfortunate death spiral downward in terms of job growth and improving the business environment in any state. And New Jersey is not alone as several other states- red, blue and purple- are contemplating this same silly system.

Economists are great at twisting and contorting statistics to prove their points, so we will leave out the silly notions that increasing the minimum wage will somehow bridge the income inequality gap in America or increase the purchasing power of those at the lower economic rungs thus ushering in a new era of consumer confidence, hiring, and business/job expansion. Likewise, some conservative characterizations that increasing the minimum wage will scare away businesses from hiring and that there will be this mass exodus to other labor markets is a little overblown. The small business existing on the fringe is not going to pack up and move their operations to India or China. Instead, they will simply consolidate job duties, hire part time help, mechanize, and/or pass on costs to customers. A business exists not as a means of social welfare, but to maximize its profits.

One of the more ridiculous tactics trotted out repeatedly by the Left is the notion of the family trying to get by on a minimum wage salary. Assuming full time status at 40 hours a week and making the federal minimum wage (remember: many states have minimum wages considerably above $7.25/hour),that is a gross pay of $15,080 a year. If there was this plethora of “families” trying to get by on $15,080 a year, then that would defy every objective study out there. The fact is that the overwhelming majority of minimum wage earners have another wage earner in the household making an average of $40,000 a year. In fact, 63% of all minimum wage job holders have either a second or even third earner in the household. There are no doubt there are some sad stories which the media digs up, but they are not your prototypical minimum wage earner. Furthermore, many minimum wage jobs are tipped positions. One study showed that when tips are factored in for this group, their average hourly rate almost doubles to about $14 an hour. And finally, most minimum wage earners- despite that dollar amount- are age 16-19 which are individuals just entering the work force. That is whom the minimum wage is intended, not for anyone trying to raise a family. Unfortunately, of that subset that do live on minimum wage (a small subset at that) trying to raise a family, they are the same people who have the lowest job skills. Raising the minimum wage to $10 an hour would actually hurt these people the most since they are, quite frankly, not worth the wage. It should also be noted that a large majority of minimum wage earners actually receive a raise within 3-12 months.

Regardless, increasing the minimum wage would not boost the economy and the reasons are simple. The American workforce contains about 144.4 million full and part time workers. Of that total, a mere 4.7% (or, 6.8 million) of the workforce makes minimum wage according to the Bureau of Labor Statistics. There is simply not a large enough pool of people receiving the benefit of the increased wage to make a discernible impact on the overall economy. Conversely, because the pool is so small, increasing the minimum wage will cost businesses an estimated $8.2 billion a year in labor costs. This may sound like a large amount but it is a drop in the bucket in a $17 trillion economy.

And so we come to a conundrum. Educating the electorate on these facts will fall largely on deaf ears. Objective facts cannot overcome the visceral image of the “poor, struggling” mother on the television set. If you attack the examples trotted out by the Left, then you are seen as cruel and uncaring. This may explain why New Jersey overwhelmingly approved the wage hike and why states as disparate California and Missouri and Idaho and Massachusetts are considering increases in 2015. It is also why a recent Pew Research poll found that 73% of respondents approve of an increase in the federal minimum wage. If polling is any indication, voters in states that will have minimum wage increase questions on their ballots will pass these referendums.

That being said, educational efforts may be better at the state level, but not at the federal level. Therefore, a compromise of some type at the federal level may help diffuse the rhetoric against Republicans and remove a Democratic talking point heading into the midterm elections and refocus the discussion on Obamacare. One of the sad realities of the sluggish economic recovery under Obama which, statistically is one of the weakest recovery from a recession in history, is the movement from full time workers to part time workers. Part of this trend was occurring prior to Obama taking office, but many of his policies- particularly Obamacare- have forced the hand of employers into this strategy. When the government releases their monthly unemployment figures, everyone concentrates on two statistics- the unemployment rate and the number of jobs created. They overlook the third statistic reported there- the average work week. That number has been in a slow and steady decline indicating this move to part time workers. Today, the average work week stands at 34.4 hours. Again, technology and mechanization has played a role, but employer strategies in response to Obama’s policies have also played a role.

Obama wants the minimum wage increased to $10.10 an hour, although one has to wonder why the dangling ten cents makes a difference. His recent announcement regarding federal contractual employees is window dressing at best. He is addressing a small subset of a subset of the workforce. Realizing that the current minimum wage should be increased somewhat, perhaps we can create a compromise that steers employers towards full time employees. Therefore, increasing the federal minimum wage to $8.25 per hour for full time employees and $10 for part time employees helps mitigate that previously cited $8.2 billion annual hit to employers. In a $17 trillion economy, the practical effects would be negligible- less than 1% of GDP. Full time would be defined as 30 hours or more; part time 29 hours or less. Under the current system, assuming the part timer averages 26 hours a week, they receive (before taxes) a $9,802 annual salary. Under this proposed compromise, their new yearly salary would be $13,520- a 37.9% increase. Assuming an average work week of 35 hours for the full time worker, their current yearly salary is $13,195. Under the proposed compromise, it would increase to $15,015, or a 14% increase.

In exchange for this bifurcated system, adjustments to the federal minimum wage would be legislatively prohibited for five years during which time its effects would be studied and analyzed and, if there is a need to adjust it upwards again come 5 years, then so be it. Furthermore, and very importantly, any discussion of indexing minimum wage increases now or in the future to increases in the CPI would be taken off the table. As mentioned earlier, this idea creates too much inflationary pressure on wages and ultimately goods and it would simply wipe out the alleged increased purchasing power of those likely to benefit from a minimum wage increase.

From the political standpoint, this proposal helps diffuse the discussion regarding the minimum wage. Although it appears to be too compromising of Obama’s demands, in the practical sense the $10 minimum wage for part time employees would be a drop in the bucket and great public relations. From a business standpoint, it steers employers towards full time workers. If one full time worker can do the work of two part time workers, would you rather hire one full timer at $330 a week, or two part timers at a total of $480 a week? It helps mitigate the costs to employers. It increases the yearly wages of both groups. And it removes Obama’s talking points, refocuses the midterm political discussion on Obamacare- a losing proposition for Democrats,- and illustrates that Republicans DO have ideas and ideas that are “outside the box.”