Welcome to Dependistan: Wingless canards from a lame duck who is flailing to goose the economy

Il Duce - Obama SOTU 2014by Bruce Tanis

During the State of the Union, President Obama pledged to increase the minimum wage by 39% to $10 an hour. This was just another day at the office for a president whom Venezuelan Marxist dictator Cesar Chavez proudly called “left of me and left of Fidel Castro.”

First of all, setting the minimum wage level is an economic decision for the individual states to decide, not the Federal Government. Each state has different microeconomic needs and labor environments. Any attempt by the President to set a national minimum wage runs counter to the way our republic was designed to run–and it takes power from the individual states, consolidating it in Washington, away from the voters. It is anti-Federalist to centralize power in such a way, and our founders were against it in favor of distributed power in the hands of the people and states.

But raising the minimum wage has other, even worse consequences in this jobless, flatline economy that Obama has now single-handedly created and extended with his policies and tax increases.

BigGovDependencyAs an anti-poverty program, raising the minimum wage is at best poorly targeted. 60% of those classified as officially poor don’t work, so raising the minimum wage for them only makes it harder for them to get a job, if of course they ever decide they want one. Workers must bring at least as much value to a company as they are paid or the company will fail and all the jobs there will be lost (and there will be no cushy, GM bailouts available for our 6 million small employers that employ fully half the private sector workforce–those folks are on their own). Raising the minimum wage raises the hurdles a worker must jump to justify his being hired. At a higher price, employers make do instead of hiring, causing extended unemployment.

It is estimated that less than 15% of the total increase in wages resulting from an increase in the minimum wage will go to people below the poverty line and less than a third of those receiving the minimum wage are families below the poverty line. Most minimum wage workers are from above median income families. So, most of the people benefiting from the minimum wage are not the intended targets of any “anti-poverty” aspect of raising the minimum wage. The canard that a minimum wage hike is an “anti-poverty” opportunity is straight from the teleprompter and purely for the cameras — a warm fuzzy idea tossed to those who don’t understand even the basic consequences of a wage hike.

As a job creation program, raising the minimum wage is a full-on disaster. Congress raised the minimum wage 10.6% in July, 2009 (do you know of anyone else getting a raise then?). In the ensuring 6 months after the last wage hike, nearly 600,000 teen jobs disappeared, even with nearly 4% growth in the economy, this compared to a loss of 250,000 jobs in the first half of the year as GDP growth declined by 4% Why? When you raise the price of anything, people take less of it, including labor. The unemployment rate for teens now remains disastrously high as a direct result of that misguided policy. Workers of all ages that are relatively unskilled are adversely impacted by a policy of higher minimum wages. The evidence of this is already in the numbers if one merely looks.

Another lame argument in favor of the minimum wage is that it stimulates spending by consumers; that it introduces new income and spending into the market. But ask yourself if there was any more income to spend in 2009 when nearly 600,000 teen jobs were lost? If there are less jobs, how can there be more spending? It’s common sense that wage hikes are a zero sum game. Every dollar a minimum wage worker receives must have come out of somebody else’s pocket, either small business owners or their customers–zero sum=zero spending increase. The money for a higher minimum wage does not come from thin air. This is pure baloney that it stimulates spending.

welfare stateConsider a pizza parlor that sells 100 pizzas per day for 360 days at $10 each. Total revenue is $360,000. It employs 10 minimum wage workers earning $7 per hour, working 2000 hours a year, so labor costs $140,000. Assume rent, utilities, equipment, depreciation, insurance, supplies, licenses, and food costs come to $170,000 per year, leaving a profit of $50,000 for the owner and his/her family. Raising the minimum wage $1 would raise labor costs by $20,000, causing the owners to pay more for the exact same amount of labor and reducing profits to $30,000. The owner must either move into a smaller house or raise prices, which reduces the demand for pizza, resulting in the loss of a worker or two. So, the full increase in the wage cost of an increase in the minimum wage comes out of the pockets of customers or the owner’s family, and the one or two people who lose a job. There was no net gain in income to increase spending in the community served as every dollar the minimum wage workers received came out of someone else’s pocket in the community. On top of all this, tax revenues go down and unemployment goes up, because now the owners are below the taxable income level and two workers are off the tax rolls and onto the unemployment rolls.

Supporters of raising the minimum wage cite poorly-done studies by agenda driven “research” groups paid by government grants from politicians whose goal was always to show that raising the minimum doesn’t harm employment. This defines common sense and is not supported by good academic research. The Law of Demand always works: the higher the price of anything, the less that will be taken, and that includes labor.

minimum wage hikeFirms cannot pay a worker more than the actual value that the worker brings to a company. Raising the minimum wage then, denies more low skilled workers the opportunity to get a job and receive “on the job” training. The impact of raising the minimum wage in 2009 on teen employment makes it very clear that this is especially harmful for young teen workers looking for their first opportunity to have a job. Raising the cost of labor raises the incentive for employers to find ways to use less labor.

Watch for companies like McDonalds and Wendy’s to create robotic burger flippers and for fast food restaurants to turn into self-service automats with one tenth the employees needed and less jobs for unskilled workers. This creates worse employment opportunities too. Most minimum wage earners are not in poverty, yet their employment opportunities are impaired as badly as those who are.

This is but one of the poorly designed policies that are created by politicians who have little or no understanding of how business works but who understand how voting works. They promise higher legislated wages or other benefits to constituents who don’t understand the true economic impact. All of this is merely an attempt to bribe people for their votes. In the meantime it destroys the economy from the inside and creates more unemployment.

When the minimum wage hike fails to get the desired results, rather than cut their losses, we will watch stupid politicians add gasoline to the fire, as they have always done, by demanding higher and higher minimum wages. And ignorant voters will continue to vote for these destroyers of wealth and opportunity.

Bruce Tanis thumbnail imageAbout the Author
Bruce Tanis is an economist, financial expert, world traveler, and George F. Baker Scholar who works in finance in Manhattan.