Raising the Minimum Wage

Nancy Pelosi, Minority Leader of the House, had something interesting to say yesterday about, well, everything. She’s cleverly masking her words as sounding conservative. Well, everything except this bit about the Minimum Wage:

Time remaining until 100 hours: Raise the minimum wage to $7.25 an hour, maybe in one step.

The minimum wage was last raised in ’98, and it did nothing to stop the recession. In the 6 years since the recession start, the economy is growing, robust, and unemployment levels are at a low 4.8%. All done without a raise to the minimum wage. In fact, it can be argued that the raise to $5.15 hurt the economy and helped bring about the recession. A minimum wage raise to $7.25 an hour is a dangerous leap– it assumes that real value, by inflation, has jumped $2.10– essentially that inflation has been rising at a level of 4% a year! And that’s assuming that Pelosi doesn’t want to throw in a little “extra somethin‘” for the poor.

Now, I did a composite calculation of the Consumer Price Index from 1998 to August 2006 (assuming that the average CPI for 2006 is the same as the 12-month report from Aug 2005 to Aug 2006) and discovered that the average CPI increase between 1998 and 2006 was 2.68%, and that at no time was the inflation index ever over 4%.

Why would Rep. Pelosi do that? Well, for starters, the minimum wage is an artificial construct. But what is really reflected in that 4% increase from the 1998 number? At this point, everyone who’s got a wage-slave job should know.

Every year, you should get a 4% raise. This raise does two things: keeps your wages the same or more than that of inflation, and rewards you for hard work and experience you’ve gained in your job over the year’s time. What Nancy Pelosi wants to do is raise the minimum wage– and give raises to people who earn the minimum wage. Now, this is insulting, because it assumes the ordinary employer hasn’t been giving the minimum wage slave a raise greater than inflation. What this does is hurt the very people Pelosi wants to “help”.

Suppose you’re Bob, and you work the fry machine at the local McYummies. You have a H.S. education, you like your recreational drugs, X-box, and your studio apartment is totally righteous. Your salary has afforded you all of these riches. Now, when you started in 1998, your salary was $5.15. Now that you’ve been a loyal McYummier and a hard worker, you’ve been rewarded with a 4% increase in salary every year. Today you earn $7.30/hour, and you lord it over the other staff by wearing designer tennies. Pelosi passes the new minimum wage. And the guy you are training to work the fry machine is getting paid $7.25 — a nickel shy of your hourly wage that took you 8 years to earn.

Sounds fair, right? The question now comes that “$5.15 is not really a living wage”. Well, folks, neither is $7.25. Assuming you’re not ill and you don’t work overtime, you can expect $15,080 in a yearly salary, or roughly $1258 dollars a month. It’s worlds better than the $10712 you would have earned at $5.15, but the question needs asking– who really gets paid $5.15 an hour? The standard laborer? Union employee? The truth of the matter is that it’s people who are new to the workforce. Not single mothers. Not your average family father and mother of 4. It’s new people, and once their experience quotient rises, so will their salary, and so will their experience and desirability to other, better paying positions.

In reality, an employer has to offer a position with a salary demanded of his peers. If I offered Bob the job of Fry Machine Technician at $2.18/hour, and my competitors were offering the job at $5.00/hour, I’d never be able to hire Bob, or at least someone with Bob’s qualifications. Even then, I’d have to spend money in training. If I could hire an experienced Fry Machine Technician and not waste the money in training, it would be worth offering an even hire salary to make sure he came to work for me. By putting a minimum wage at any level, it assumes that there is a basic skill set for employees and that at $5.15 or $7.25, you are getting someone with basic necessary skills for your job. What a 4% quarterly wage increase from 1998 gives you is a raise above the minimum standards as opposed to a inflation negation. What the Democrats are then saying is that basic-skill employees in 2006 have a better skill set than those in 1998, a skill set which is the equivalent of 8 years experience in a field.

Let me put it another way. A teacher is hired in 1998. Her starting salary is $20,000, a minimum set forth by the National Arbitrary Teacher Wage Foundation (NATWF). She has a union-negotiated salary increase of 4% a year. In 2006, her salary is $28332. Now, suppose that in 2006, the NATWF sets new hire salaries at $28300. Effectively, what that arbitrary wage states, is that someone with zero experience in 2006 is the same as someone who’s been in the system for 8 years. Now, if they offered about $25000 a year to new hires, this would reflect that the inflation-adjusted base salary has changed since 1998, and it also reflects that someone with 8 years experience now earns $3000/year more than new hires. It’s not much, but it’s a real increase against an inflation-adjusted salary. If the new hires were paid $20,000 in 2006, then that would mean the mean salary has lost 2.68 % of its real value over 8 years, or that the market is so flush with teachers that starting salaries can be deflated due to ample applicant supply.

So, don’t be fooled. A robust economy puts a demand on qualified employees. As demand increases, so does base salary. However, a government-mandate on a wage minimum does not do anything except make employers pay more for basic, unqualified labor. Economically, it makes little sense.

If the minimum wage is increased, all it hurts is a small business owner. You’re forcing the owner to pay new hires significantly more than you were, and it changes your whole business dynamic. Suppose you’re a business owner and you hire 4 part-time high school students to help with inventory, sales, whatever. They all get paid the minimum wage. Now, along comes the new “minimum” which changes the wage from $5.15 to $7.25. The baseline change in salary alone, assuming each PT employee puts in 30 hours a week, is $13,100. That comes out of operating costs and can put a store’s profitability at risk. Suppose $13,000 put the business at an “unprofitable” status, but another $6,500 could be made up in sales by price increases. The easiest way to get there is not to price yourself out of competitiveness, but to let employees go. Cutting loose 2 employees and making the other two work twice as hard gets to that magic figure, and now 2 people are out a job and the other two are working twice as hard for a marginal increase in wages. Notice their wage did not increase to $10.30 for the doubled efforts on their parts.

So, the minimum wage increase can, and probably will, cause a rise in unemployment, and increase in worker unhappiness, and an increase in price inflation as owners attempt to diffuse the direct input of the minimum wage. What’s worse, larger stores with greater profit margins, like Wal-Mart, will still be able to diffuse wage increases through high-volume sales, whereas their small-market competitor (Mom & Pop, Inc.), now has another cost to battle in order to stay competitive with Wal-Mart.

It’s a horrible idea, folks.


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My name is Doc. Welcome to my blog. If you're visiting from another blog, add me to your blogroll (and I'll happily reciprocate). I have a Ph.D. in Chemistry and live in Wisconsin. If you have any questions, feel free to email me. My email is docattheautopsy at gmail. (No linking to deflate the incredible spam monsters).



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