Minimum Wage Hurts The Poor

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Americans are very much in favor of raising the minimum wage. This fall, five states saw legislation to raise the minimum wage pass, in some cases by wide margins. However, American compassion can at times be misguided. Economist Robert Whaples, of Wake Forest University, found in a random polling of American economists, that 62% believed the minimum wage should remain unchanged, if not lowered or abolished altogether.

Nancy Pelosi has vowed to introduce legislation to raise the minimum wage from $5.15 to $7.25 per hour within her first 100 hours as Speaker of the House. It may seem that anything less than a vote for raising the minimum wage would be unfair to the millions of workers who struggle to make the rent each month. However, raising the minimum wage will almost certainly hurt the poorest members of society the most.

Raising the minimum wage means business must find new ways to cover higher employment costs. And the most common ways businesses cope with budget shortfall is by cutting jobs, reducing employee benefits, and raising costs for consumers – or use all of these measures combined.

The consensus among economists is that 1% to 2% of entry-level jobs are lost for every 10% increase in the minimum wage. So, a $7.25 minimum wage would result in the loss of 1.6 million positions.

But, economists today are less concerned about increases to the minimum wage causing unemployment – although unemployment remains a real threat – and are more concerned about the negative repercussions of other market forces. These market forces, similar to mass layoffs, have their own way of equalizing the pressure brought on by minimum wage requirements.

Studies suggest that poor families are more likely to lose their jobs or to have their hours cut back because of an increase in the minimum wage. The poor wind up paying in more ways than one. Although only a fraction of the poor benefit from a higher minimum wage, they, like every other consumer, are stuck paying higher prices for the goods they buy.

In order to understand the negative consequences of raising the minimum wage, consider an example of wage hikes on a much larger scale. If raising the minimum wage to $7.25 can help the poor, then it would be logical to assume that raising the minimum wage to $100 per hour would likewise help the rich. But, as you’ll see, it doesn’t.

Imagine you are a medical doctor earning a salary of $120,000 per year, approximately $57.69 per hour. Now, assume the new minimum wage for doctors was increased to $100 per hour. Due to the new wage hike, your new salary would now be $208,000. With wages that high, the naïve assumption is that your employer would soon be forced to cut jobs. But, a more likely scenario would be a slash in employee benefits. In other words, what you would earn in wages you would more than pay for in lost employee benefits.

Now, in order for the hospital to pay your higher wages, the hospital could raise the cost of its services. But because businesses are loath to raise prices, your employer, like many others would instead cut employee benefits. For instance, it would only pay you for the time you actually see patients. You would no longer get all 12 paid holidays. Nor would you get the generous 24 vacation days. You would lose your insurance benefits. You would lose any shift premiums or severance pay. You would lose any paid on-the-job training, conferences, professional development or continuing education.

If, after all those cuts, your cost of employment was still too high, the hospital would look for other ways to limit your pay. They might refuse to pay for your set-up and clean-up time. Time spent on chart dictation and billing justification might not be allowed to be included in your hours worked. After all that, if your employer still needed to reduce costs, it might require you to pay for your medical supplies and to rent your equipment.

In order to net your original salary of $120,000, you will likely be working more hours, taking less vacation, and paying out of pocket for your insurance and continuing education costs.

If your employers could not reduce your benefits enough to pay $100 an hour, then by law they would not be allowed to continue employing you. Although you want to continue working as a doctor, the market says your skills are only worth $57.69 per hour.

But, with the minimum wage set at $100 per hour, you won’t be hired as a doctor because your skills aren’t yet worth the minimum wage. You have not only lost your job as a doctor, but you have also lost out on the opportunity for professional development so that one day your skills will be worth $100 per hour.

However, this doesn’t mean you would be unemployed. Instead, you would likely be pushed downward into dead-end jobs which don’t have minimum wage requirements. Current minimum wage legislation exempts several jobs such as: farm laborers, switchboard operators, newspaper deliverers, employees of seasonal recreational establishments, babysitters, and drivers. These jobs offer little opportunity for upward mobility. Like the doctor, those who don’t possess skills currently worth the going minimum wage are locked out of jobs which provide the opportunity for advancement to higher job classes.

All of this seems absurd, but the truth is, raising the minimum wage forces employers to make cuts which leave employees worse off than before the wage increase. Often, workers value these fringe benefits more than the additional income. Firms offer health care benefits, professional development courses, and vacation benefits rather than salary because they can be paid on a before-tax basis and are less costly when coverage can be offered collectively. The loss comes when individual employees find they cannot replace such benefits without a much greater cost to themselves.

If raising the minimum wage for the rich doesn’t work, then why think it will foster better work opportunities for the poor? Voting for a minimum wage increase is no more compassionate than if someone were trying to set your minimum wage to $100 per hour, forcing you to lose your benefits or your job. There is no such thing as a free lunch.

Photo by Nicholas Kampouris on Unsplash

See also Minimum Wage Helps The Rich

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.