In two recent columns, John Burbank hypothesizes that increasing the minimum wage would cure many social and economic problems. He assumes that all minimum-wage earners will get a raise, and nothing else will happen. This would violate the laws of economics.
No entity, whether an individual, small business or large corporation, is willing to pay more for something than that something is worth, and that includes labor. Raising the legislated minimum wage significantly higher than the market value of an unskilled worker will result in a combination of things, including higher prices, layoffs and more automation. The Congressional Budget Office, which is widely respected across the political spectrum, predicted that raising the federal minimum wage to $10.10 per hour would give a raise to 900,000 workers, but that 500,000 workers would lose their jobs.
Many of those who would lose their jobs are incapable of producing enough value to justify the higher wage, so they would be shut out of the job market and the structure, satisfaction and social interaction that a job provides. This would be a tragedy for those people. The customers of many companies who pay low wages such as Wal-Mart and McDonald’s are poor, so they would bear the brunt of the higher prices resulting from higher wages.
Liberals say that higher minimum wage can be paid from “exorbitant profits” and reduction of executive compensation. The return on capital for McDonald’s and Wal-Mart is a paltry 6 percent and 5.5 percent, respectively. Confiscation of all key executive compensation and redistributing it to half of all employees would result in a 1-cent per hour raise at McDonald’s and a 3-cent per hour raise at Wal-Mart.
The commentary by Patrick Connor, “Stats debunk wage myths,” discussed the issue that many minimum wage earners are not from poor families. A much better way to target and help low-income families is the earned income tax credit (EITC), sometimes called the negative income tax. Last tax season I volunteered in the United Way program that prepares federal income tax returns for low-income families. No one was embarrassed to accept an EITC of several thousand dollars, which in many cases raised the family above the poverty level.
Virtually every liberal article on minimum wage points out that the current wage is significantly below the 1968 wage, adjusted for inflation. This is technically true, but misleading; 1968 was a spike year, with the minimum wage at $10.57 in 2013 dollars. There was a significant increase in the legislated federal minimum wage. The economy was booming with the unemployment rate about 3.5 percent, so it could tolerate the increase. However, the average federal minimum wage between 1963 and 1973 was $9.32 in $2013. There was no EITC in those years, so a family headed by a minimum-wage earner has about the same purchasing power today as it did then.
Mr. Burbank implies that all productivity improvements should be passed on to workers in the form of higher wages. Some industries, such as manufacturing, can improve productivity much more than others, such as education. A school teacher cannot teach more students without diluting the education for the other students. Workers in those industries, retired people, unemployed people and people on public assistance would not benefit. Productivity improvements should benefit all of us in the form of lower prices.
There are two things that could be done to solve most of the problems of Social Security. First, eliminate the cap on taxed earnings. This would convert Social Security taxes to neutral from regressive. Second, apply more relevant parameters to adjust the cost of living. Seniors deserve constant purchasing power, not artificial increases such as in 2009 when gas prices spiked then receded, resulting in a 6 percent increase in Social Security when inflation was about 2 percent.
I share Mr. Burbank’s passion for equal opportunity and social justice. However, raising the minimum wage is an ineffective mechanism for accomplishing this, and it would hurt many of the people it would be intended to help.
Jerry Fraser lives in Lynnwood.