Minimum Wage: The Whole Picture
Conservatives in Congress, and one imagines the White House as well, continue to fear the Minimum Wage Increase as if it were the harbinger from Hell.
Now, Republicans have already made it clear that they favor businesses over the people, under the flawed “trickle-down” paradigm that says if you shower the top of society with money, enough will eventually make its way down to the lower classes that they’ll get more money and then spend it to power the economy. I’ve argued before that showering the same money on the lower classes would cause the money to flow upwards far faster and with greater impact on the economy, making more business sense. But Republicans seem far less interested in what makes sense for the national economy, and far more interested in serving the immediate desires of the business community, which is a very different thing.
Their long-standing objection is that a minimum wage hike would hurt small businesses. Now, the term “small businesses,” when used by Republican politicians, should make a lot of flags go up. It is used by right-wingers as an excuse to defend big businesses, the huge corporations and industries that really stand to have their interests damaged. It’s a natural political maneuver; after all, one cannot garner much sympathy by saying that something will make a dent in the huge profits of giant corporations. No one would give a damn. So the small businessman is trotted out to say how he’ll be devastated by whatever new proposal is being opposed. Or he’ll be shoved in front of the cameras to talk about how this new tax cut for the rich will let him keep his business afloat, which would otherwise fall into bankruptcy.
It is a mistake to believe that small businesses are somehow the only ones paying minimum wage. I have a feeling that corporate giants have far more minimum-wage workers on their payrolls than all small businesses combined. And let’s face it, small businesses do not have nearly as much political clout as the megacorps. I doubt that Republicans are so consistently worked up about people who won’t make that much difference in the next election.
But let’s take the view that size doesn’t matter; let’s take a look at the situation as a whole. The question being asked is, will the minimum wage hike hurt businesses? My own take on this is that the premise of the question is flawed.
Why? Because the question is being asked as if the only relevant time frame is the moment that businesses will have to hike wages. That’ll cost a lot more, and that’s where the hurt will come. However, that’s only a fraction of the story, and ignores the whole reality. In order to see the whole picture, one has to begin right after the last minimum wage hike, and look at what has been happening since then.
Now, this time period is often ignored because it is seen as unchanging. The federal minimum wage has been frozen over the past decade or so, and as a result, that period is considered as having a null effect on businesses.
The key missing element is inflation. Conservatives love to use inflation to play with the numbers. The common ploy is to simply ignore inflation–easy enough to do, as it is a slow process and most people don’t really notice it. For example, in defending tax cuts for the rich and the trickle-down philosophy, Rush Limbaugh argued that despite tax cuts under Reagan, federal revenue doubled in the 80’s. That “doubling,” however, was chiefly due to inflation, not brilliant economic policy. Factor inflation into the equation, and the results are far less impressive. (The rest of that lie is covered here.)
The minimum wage is no different. Conservatives focus only on the immediate effects of a minimum wage hike, and they completely ignore the fact that from the moment after the wage hike starts, inflation starts cutting down that wage, giving businesses a slow but constant form of economic relief.
We hear all about how businesses will have to fork over more money now. We hear nothing about how businesses have had to fork over less and less and less over the past decade. It is as if businesses never enjoy that constant windfall.
It is even more ironic when one considers the plain fact that inflation is simply another way of expressing the idea that businesses are raising their prices. Businesses that pay the minimum wage raise prices but do not share the increased revenue with minimum-wage workers.
That is, they don’t until such a thing is mandated by the government. In the form of a minimum wage hike. In the end, it evens out. Which is why minimum wage hikes never really hurt businesses–unless you want to take the view that businesses are hurt because they can’t cut the wages of their workers to even further below the poverty line.
One thing that never makes sense about the minimum wage is that it is not keyed to inflation. At the very least, it should be. I believe that the minimum wage should be set to a level where a single person working 60 hours a week could feed, clothe, and house a family of four, and have the option of setting aside an additional small amount in savings–and then that wage level be permanently tied to the inflation rate, with gross adjustments every year. Maybe every ten years or so, the wage could be reviewed in case other factors challenge the standard of living, and adjustments made for that.
This policy would not only be civil, humane, and fair, but it would also do away with those horrible, immediate wage hikes that Republicans fear and loathe so terribly much. Because of how they just devastate small businesses.
On moral grounds, I have to agree that minimum wage increases are the only fair way to keep workers at that wage from sinking into poverty, but as a matter of economic policy, I find it difficult to support the idea wholeheartedly.
Minimum wage increases are, after all, one of the things that cause businesses to raise their prices, so in the long term it merely contributes to the economic effect it is intended to offset. (Tethering the minimum wage to the inflation rate, as you suggested above, would certainly make the increase in wealth less temporary, but I’m not aware of any such proposal by anyone in Congress at this point.)
Also, I’m not sure that this is really what we want mimimum wage to afford:
…the minimum wage should be set to a level where a single person working 60 hours a week could feed, clothe, and house a family of four, and have the option of setting aside an additional small amount in savings…
That’s actually quite a bit of money you’re talking about there. I’m not sure that many people would even think to ask much more of life than the ability to provide for their family and save a little bit of money. But do we really want an economy where McJobs fulfill most of the aspirations of the working class?
The way I see it, 40 hours a week at the minimum wage should be enough to support for one person to support him or herself and maybe a spouse, but by the time children start to enter the equation, that worker really needs to put some serious effort into getting out of the minimum wage bracket. To do otherwise, I think, would run the risk of creating a society where a fairly significant number of people see no reason to strive for more than the minimum wage.
I’d like to first say that I am a new viewer of this site having just discovered it a few days ago. I really like what I’ve seen/read so far and find the majority of the opinions/views expressed to be in line with my own. I too am a foreigner living in Japan who works at a university (outside of Tokyo) and who has recently (in the past two years) developed an interest in birds so I feel a strange sense of coincidental camaraderie with the author.
It is not my intention to “pick a fight” with Sako but I think we need to ask ourselves “What is the ultimate goal of economic policy?” when we consider issues such as minimum wage. I know it’s not that simple but we should be able to identify some moral principles that we can agree upon and from that point work to ensure that policies established by governments that are meant to represent “the people” coexist with those morals.
There are plenty of options for a business, small or large, when it is faced with increased expenses as a result of pay increases besides simply increasing prices. Expenditures on advertising and marketing, operational costs such as utilities and consumables, and, forgive me for even thinking it, executive pay scales, can all be reevaluated. The nature of power in institutions like these however, is unfortunately such that the weakest entity that is most easily exploited gets the short end of the stick. It’s not that all businesses are evil (although I think some are), just that without regulative policies based on moral standards, people have an all to often frighteningly natural tendency to be selfish.
I know I’m probably being too idealistic and abstract but…
While I don’t have any concrete suggestions as to how many people a 40 hour a week job should be able to support at what type of lifestyle, I think expecting everyone who has a spouse and a child, or children, to move beyond a minimum wage job is unrealistic and that remaining in this situation is not necessarily related to being content with mediocrity. I’ve personally met many people who work 40+ hours a week in jobs that are both physically and mentally challenging and there are plenty of hard and conscientious workers like these who struggle financially simply because the society that they live in has chosen to “value” their labor at a level that ought be to considered substandard and unacceptable.
If our policies don’t agree with our morals which should be given priority?
Kokoro
Thank you for the thoughtful response, Kokoro.
If I hadn’t been in quite as much of a rush this morning, I would have expanded my comment to include some of the things you touched on in yours, but the main point I wanted to get across is that I think raising the minimum wage is a rather short-sighted policy choice. It may be good for the workers who earn minimum wage, but is it really a good choice for the nation as a whole? I remain skeptical.
In addition to the inflationary effect of a mandatory increase in wages, we should also consider its effects on our competitiveness in an increasingly global labor market and on our ability to sell American-made goods in foreign markets, both of which are factors that should be taken into consideration when making economic policy decisions.
You mentioned executive compensation as one of the things that could be reevaluated as a way to offset some of the effect of a minimum wage increase, which I think is an interesting idea. Executive compensation in recent years has clearly lost whatever semblance of reason it may have had in the past. Rather than artificially propping up the people at the bottom of the pay scale, why not address the problem by reining in on those at the top? I would be very much in favor, for example, of a law that did away with artificial minimums and instead limited the amount any company could pay its highest-paid employee to some multiple of what it pays its lowest-paid employee.
For the purpose of this example, let’s say that Congress introduced a law that forbids companies from paying any employee more than 100 times what it pays its lowest-earning employee. If a company decides to pay its janitor $7.25 an hour (which is what I understand the Fair Minimum Wage Act of 2007 proposes as the new minimum), that janitor would expect to make about $14,500 over the course of a year. Under this new law, the CEO’s compensation for that same year would not be allowed to exceed $1,450,000 (which is pretty paltry by the standards of most CEOs these days). If that same company decides that it wants to pay the CEO more than that, it would then be obligated to adjust the janitor’s pay accordingly.
Now this is a vastly oversimplified example, certainly, but what I am getting at is that I think there are probably better ways of addressing this issue than simply by raising the minimum amount all employees must be paid. A truly elegant solution would be self-regulating and would not require periodic intervention on the part of Congress. The minimum wage increase being considered right now fails to meet either of those criteria.
Sako:
It is positively and absolutely wrong that increases in minimum wage lead to higher prices. Wrong, Wrong, Wrong.
Markets dictate price. Regardless as to production or service cost, a business can only charge what the market will bear in supply and demand terms. The price of $5 for a Big Mac, its not because the guy who made it makes $5 an hour, but because Burger King sells a similar product for $5. The margins may very, but process modeling can be used to shrink cost and increase productivity without chipping away at workers wages.
If the business owner is making $2 off that hamburger, an increase in wages will shave a small percentage of that profit and give it to the worker. That worker will then go out and spend his increase in purchasing power. Even if the margin is so thin that it causes and increase in price, the resulting demand increase will not generate aggregate inflation because productivity increases have been so high.
In America, productivity has increased 42% in the last ten years. In a fair system, in a system where bargaining power between employer and employee were more balanced, some of that 42% would go to the employee. That’s only fair and it keeps the economy going by generating demand.
America is a society based on only one principle: free contract. IN such a society only one thing matters: bargaining power. Everything that goes on in American society is about a peson or a group trying to increase its bargaining power so as to increase their share of the spoils: be it national politics, advertisements in media, or personal grooming habits – everyone is trying to increase their bargaining power – simple as that.
Since Bush has been in office, the medium family wage has decreased by 5% while the top .01% has gone up 500%. Given the increase in productivity, the drop in median family income versus the increase in the very top end of society simply indicates where the bargaining power has been these last few years.
The resistence to a minimum wage increase is simply bargaining taking place at the legislative level. But such one sided success in the last 7 years leads to massive concentration of wealth at the very top, which creates patently unstable societies subject to epic collapse.
Such concentrations of wealth have brough collapse to societies in the past and brought on dark ages: Ancient Egypts middle kingdom, the Roman Empire, Pre-Islamic Mecca, Byzantium, Medieval Japan, Hapsburgh Spain, Bourbon France, Romanov Russia and Cooledge America. The last sample triggered the the great depression, the rise of Hitler, World War II, the holocaust, and in as Winston Churchill stated in his “Finest Hour” speech, nearly brought on a new dark age.
Increasing the minimum wage is wage is just a small step for a society trying to back away from another impending and epic collapse.
Freedom that is not rooted in fairness is a collamity descending into “might makes right” and the most brutal and thugishness of existences – for all people. Modern concept of liberty is ensconced in and born out of the English Common laws sense of fairness first, liberty second – that is to say liberty prevails, but only where it doesn’t undermine the principle of justice: this is its inovation – before that freedom simply meant might makes right.
At some point, micro economics becomes a macro concern and that macro concern is Fairness and Justice.