Raising the minimum wage to relieve poverty and do a little income redistribution seems like a good idea to many. There are calls for $15 hour minimum wage. This will do a lot of economic damage and get the opposite of what is hoped for. $15 per hour minimum wage will do economic harm in four areas:
First, $15 an hour will create a glut of new job seekers.
Higher wages will draw idle labor into the labor market. Retirees, stay at home mothers and better off college students may stay out of a $7.25 per hour labor market. At $15 an hour, more will be attracted to compete for the jobs. They will also be driven for part time work to pay for the inflation caused by the $15 per hour minimum wage on food, clothing and other necessities. They will bump out many of the lower income workers who were supposed to be helped.
Retirees have an advantage in that they can work less hours and have Medicare. Health insurance will not be an issue to an employer.
The “off the books” market will swell. $15 hour will draw more illegals into the country who will work for a lot less. Desperate businesses trying to survive will hire them. So will businesses competing with those businesses. Illegal immigration will get a lot worse. Illegal employment pays no taxes.
Second, It will cause job losses.
The more something costs; the less will be bought. This is an old law of economics. It doesn’t have to happen, but almost always does. If labor costs skyrocket to $15 hour (over 100% increase), then:
Less workers will be hired and many will be laid off.
Machines will replace workers.
If a business is competing with lower cost foreign labor, the higher costs could put them out of business or force them to move the business overseas.
If a business is struggling to survive, a steep increase in the minimum wage would simply put them out of business with jobs lost.
Third, there will be an inflation effect that is mostly regressive
Half the workers in the U.S. don’t make much more than $15 hour. A skilled worker like an auto mechanic or bookkeeper who makes $15-20 hr will demand a huge compensating increase. Why spend time and expense to go to school to learn a skill when it will only get a few dollars per hour more? Workers who spent decades learning on the job will not be happy being paid the same as an unskilled untrained new arrival. Imagine the inflation as pay increases for this ripple up the pay ladder.
The gains in income will be nibbled away by the higher prices from all the higher wages on the income ladder. Much of this will be on necessities and thus regressive inflation, that is, it will hit lower incomes the hardest like:
Food will cost more at the grocery store and elsewhere. After a mere 14% rise in minimum wage in San Francisco, Chippotle raised its prices 14%. What would happen with a 100%+ increase from $7.25 hr to $15 hr nationwide?
Apartment rents will be bid up or landlords would just raise them if they can get it.
Higher incomes could push lower income workers up over the cutoff points for Medicaid, Obamacare subsidies and food stamps.
Workers could be pushed up into higher federal and state income tax brackets.
The higher costs will be tough on people on fixed incomes. This will add to Social Security cost of living adjustments and accelerate inflation. It will also drain the Social Security trust fund faster.
For every $1 increase in the minimum wage, an employer has to pay $1.07 due to Medicare and Social Security taxes. An $8 increase in wages per hour will cost businesses $4.48 in added taxes per 8 hour shift and $22.40 per five day workweek in taxes alone. This adds to cost of labor.
Fourth, the “one size fits all” minimum wage isn’t realistic.
There are big regional variations in cost of living. California and New York are quite different from Florida and Texas.
A trainee may produce little or nothing in the beginning or may not finish the training. $15 hour is a tough price to pay for new hires. This can slow down hiring or stop it in lower cost of living states.
There are shift differentials for night work.
There are easy jobs like watching over something while the employee can read books, watch TV or use a tablet or cell phone. These fringe benefits can’t fit into a minimum wage number.
Employees are paid a benefit package that includes mainly salary, healthcare and vacation. Employers can and will have to make up for a $15 hr salary by cutting other benefits like healthcare or vacation.
Few realize that raising the minimum wage is not increasing spending to boost the economy. It is merely transferring wealth and income from the middle class to the lower and lowest classes. SOMEONE HAS TO PAY FOR IT with higher prices.
In the mid 1970’s oil prices were quadrupled. This triggered annual inflation rates of 10-13%, Unemployment went to 10-13%. We had two mini recessions in the late 70’s and a massive recession in 1981. A huge cost boost like raising the minimum wage to $15 will have a similar effect. If we fail to learn the lessons of the 70’s we will repeat it.
Our federal government is not in the financial health that would be needed to pay out sharply higher unemployment. In the early 80’s oil prices collapsed and we slowly pulled out of the recession. A similar drop frkom $15 in minimum wages would be needed to revive employment and the economy.
We’ve got to utilize better ways to boost the economy like a financial transaction sales tax on stocks and bonds to pay for infrastructure repair employment, teaching jobs and other public works to create more jobs well above minimum wage that can’t be sent overseas.
Studies cited backing minimum wage increases are on small increases in minimum wage that are heavily influenced by the growth rate of the economy. They are invalid for a huge 100%+ increase in the minimum wage. Gasoline prices have gone up slowly over decades, but the huge increase in 1973 caused serious economic illness.
A recent article adds to this sad fact of economic life. Click here
In Summary: $15 per hour is dreaming you can defy the economic laws of gravity
Doubling the cost of labor won’t lead to layoffs, automation, marginal businesses closing and businesses moving overseas to lower labor countries. This won’t cause skyrocketing unemployment.
Double the cost of minimum wage labor and you won’t get all skilled labor bumping up their wages for their right to earn much more than the minimum wage. This won’t cause serious inflation.
All of this won’t cause a recession or depression.