An Update on How the Minimum Wage Hurts Workers

It has been a while since I last blogged. A lot has happened recently that is worth commenting on. But, this post will focus on the correctness of my previous postings that the minimum wage hurts workers.

According to Andy Puzder, the CEO of CKE Restaurants – parent company of Carl’s Jr. and Hardee’s, in locations across the country where the minimum wage has been increased, his company’s franchisees are closing shops after their leases expire. “When the minimum wage increases, there are two things you can do,” he said. “One is you can reduce the amount of labor that you use or you can increase your prices.” Unfortunately, minimum wage increases do reduce jobs; as in the case above sometimes all jobs are eliminated.

But, Puzder is also correct about the causation between minimum wage increases and price increases. Many businesses in SeaTac, Washington, where the local minimum wage has recently been increased to $15, have imposed an 8.25 percent “Living Wage Surcharge” on goods and services to ease the increased cost of labor on business.

However, the bulk of the negative consequences of the $15 minimum wage in SeaTac have fallen on local workers. Those making the higher wage have reported losing their 401ks, paid holidays and paid vacations, free food, free parking, and overtime hours. In many cases, these benefits plus the lower state minimum wage added more value to workers’ earnings than the new $15 wage.

In the final analysis, the minimum wage does not enrich the working class or stimulate the economy like its proponents claim. Quite the opposite is true. The money involved to pay for the increased labor costs is not free. It comes from consumers in the form of higher prices and it comes from workers in the form of lost benefits and lost jobs.

President is Pushing Another Failed Policy

A couple of weeks ago, I received an email update from President Obama which discussed his signing of the Executive Order raising the minimum wage to $10.10 an hour for federal contract workers.  Within his remarks the President stated his belief that, “It’s the right thing to do”, raising the minimum wage for federal contract workers.

Naturally the President used the news of the Executive Order as a segue to lobby Congress to raise the federal minimum wage from $7.25 to $10.10 an hour for all American workers.  He claims raising the minimum wage “would move millions of Americans out of poverty”.  In fact, Obama indicated that, “Raising the minimum wage would grow the economy for everyone”.  The latter remark is based on his undying Keynesian dogma that more spending is the key to growing the economy.

There’s only one big problem with the President’s position on raising the minimum wage.  It’s called the Law of Demand.  According to this law of economics, with all other factors being equal, when the price of a good or service increases, demand for that good or service decreases and vice versa.

In the case of minimum wage laws, the service in question is the labor offered by workers.  Since minimum wage laws make the price of labor artificially higher the demand for labor decreases per the law of demand.  Consequently, some workers will receive pink slips and others will not be hired.  Higher unemployment will result.

In fact, a Congressional Budget Office report last week confirmed just that.  It indicated that Obama’s proposal to raise the minimum wage from $7.25/hour to $10.25/hour would result in the loss of possibly 1 million jobs.

And there are other reports issued by economists who know the laws of their science, which have found that minimum wage measures cause higher unemployment.  It’s also important to understand that that higher unemployment will result in greater income inequality between rich and poor.

At the end of the day, the President’s belief that raising the minimum wage will grow the economy is ridiculous.  In the first place, the law of demand tells us that less people will be working.  In the second place, the president is assuming that the money businesses earn which does not go to higher wages for their employees, somehow gets sucked down a black hole.  Does he not understand that that money could be channeled into productive enterprises like plant expansions, training for employees, and research and development?  All are enterprises which ultimately lead to job creation and higher pay for workers.  Even my 8^th grade economics students understand this.  They also understanding that raising the minimum wage is not the right thing to do.

It’s Time to Try Something New for a Change

Last week, on the 50^th anniversary of Lyndon Johnson’s so-called War on Poverty, President Barack Obama unveiled his latest initiative to combat economic deprivation in America.  The President’s latest scheme involves public and private funding to create jobs, enhance public safety, improve schools, and provide better housing in 20 communities across the country.  You know, it is the same old story.  If only the federal government would spend enough money we could eradicate poverty in our lifetime.  Unfortunately, for Obama, his latest initiative to fight poverty will have the same end result as LBJ’s War on Poverty – utter failure.

You see, in the 50 years since LBJ signed into law the most sweeping social welfare programs in the history of the U.S., Uncle Sam has spent about $16 trillion on public assistance schemes.  Yet, Americans living in poverty has only gone from 19 percent of the population in 1964 to about 15 percent today.  Put another way, it cost our economy $4 trillion for every percentage point decrease in the rate of poverty.  Given our already enormous national debt and the future calamity it will bring, isn’t there a more cost effective way to help the poor escape poverty?  We cannot afford to spend more money and that is clearly not the answer anyway.

At the end of the day, the best way to fight poverty is with a job.  Thus, to help the poor all minimum wage laws should be repealed immediately.  The late, great, Murray Rothbard had it right when he labeled minimum wage laws “compulsory unemployment”.  Whenever government fixes prices either shortages or surpluses result.  Fixing wage rates above the market rate will only lessen demand for workers’ labor.  Thus, a surplus of workers’ labor (unemployment) will result.  This is Economics 101.

Low wages may not provide a decent standard of living, but for the 49 percent of African-American youth who are currently unemployed, the jobs they would have by virtue of repealing minimum wage laws would give them the opportunity to work hard, get work place experience, and build a resume.  All three could lead to higher paying jobs in the future.

But repeal of minimum wage laws alone isn’t enough.  Uncle Sam needs to repeal costly regulations on business which prevents the creation of new jobs.  In 2013, the federal government adopted $112 billion worth of new regulatory costs on job producers.  This amounted to 80,224 pages being added to the Federal Register.  Since Barack Obama became president in 2009 close to $500 billion in new regulations have been imposed.  And then there is the job killing scheme known as Obamacare.  At a time when the labor force participation rate is at the lowest level since 1978, should the federal government really be concerned about expensive energy efficiency standards for microwave ovens?

To be sure, more could be done to alleviate the scourge of poverty.  A gold backed dollar like existed in the late 1800s and which kept price inflation flat for more than 60 years should be reintroduced in America.  Abolition of the Federal Reserve System which is primarily responsible for the continuous boom and bust cycle in our economy and the destruction of the middle class should be enacted.

In the final analysis, for 50 years, Washington has thrown good money at the so-called War on Poverty.  The result has been failure to achieve the objective.  And this is why it’s time to try something new for a change.