The Minimum Wage Debate
by Jason Dean
The federal minimum wage recently went up from $5.15 an hour to $5.80 an hour. That’s still too low a wage for most people to live on, as is the $7.25 it will be boosted to by 2009. It’s unfortunate that anyone has to earn less than $13,000 a year ($5.80 * 40 * 52 = $12,064), but does the federal minimum wage help, or does it just make matters worse?
I have been engaging in a friendly debate with Patrick of Cash Money Life (A Personal Finance Blog with a Salute to the Military). He supports the new minimum wage, while I do not. It’s not that I don’t want people to get raises — I do! In fact, I used to be a supporter of the minimum wage increase. Here is a letter to the editor I wrote in early 2006:
In 1968 the minimum wage was just $1.60 per hour and few businesses had a problem paying such a paltry wage. But if that $1.60 were indexed to inflation, the minimum wage would now be $9.12 per hour, according to the nonpartisan Bureau of Labor Statistics (BLS).
In 1997 the minimum wage was raised to $5.15, where it has remained for the past nine years. In the 25 years since 1981, the minimum wage has only been raised four times. Comparatively, it was raised at least 11 times in the prior 20 years beginning in 1961. In fact, the $5.15 minimum wage has lost nearly 20% of its buying power since 1997, representing a “real wage” of just $4.17 according to the BLS.
Opponents of the minimum wage say that an increase would lead companies to offshore even more jobs, or that it would be crippling for small businesses. In reality, most minimum wage jobs cannot possibly be offshored, since they are in the service sector. We cannot outsource our janitors, maids, and food service workers any more easily than we can download a sweater on the internet. As for small businesses, a two-year exemption from any minimum wage increase could be extended to all businesses with ten or fewer employees.
In short time, enhancing the discretionary spending capabilities of America’s working poor would do nothing but benefit all businesses, as these families would pump any wage increases back into the economy. Even Wal-Mart, long the beneficiary of a failing economy that pulled people down from the middle class and into its core demographic, now supports a minimum wage increase. At last, even everyday low prices are not low enough for the everyday low wages of so many million Americans.
Many citizens are unaware that the minimum wage is as low as it is. To them, it is unconscionable that a mother could work 40 hours a week and take home less than $200 after taxes. We do have a welfare system in this country, and it isn’t going away anytime soon. With that in mind, how can we ask a parent on welfare to take a pay cut to enter the workforce?
So clearly, I understand the arguments in favor of a higher minimum wage. But in the time since I wrote that letter, I’ve come to better understand the arguments against it. It’s not mean-spiritedness against low-wage earners, but an appreciation for the laws of economics. It basically boils down to this: If there is an unemployed person who is willing to take a job for $5 an hour, and there is a business owner who has a job for which he can only afford to pay $5 an hour, why should the government make it illegal for them to come to their own terms of employment?
Minimum wage proponents certainly have their hearts in the right place. But they have to consider that the money for the raises given to minimum-wage workers is not created out of thin air — it has to come out of a company’s revenues. Sure, Wal-Mart might be able to cover an extra $0.65 an hour, but what about Square Deal’s Outlet, my parents’ store in impoverished Hudson, MI? It’s not as easy for them. And even in Wal-Mart’s case, the higher wages are going to result in one of two things: 1) Higher prices for its millions of low-income consumers, effectively negating the positive impact of a wage increase, or 2) Lower profits for the company — and thus lower returns for its millions of shareholders, who hold Wal-Mart stock in their IRAs and 401(k)s, or count on Wal-Mart dividends for retirement income. This is not as simple of an issue as taking from the rich and giving to the poor.
The final word is: Readers need to make sure they have the skill set that allows them to compete for higher wages, or better yet, to be wage payers instead of wage earners. In our globally interconnected economy, old notions of wage and price controls are flying by the wayside, and in their absence, we are experiencing unprecedented economic growth. This growth is not being distributed evenly, so it is each individual’s first responsibility to make sure that he/she takes advantage of the opportunities afforded to him/her in the New Economy. Government may have a role to play in helping those left behind, but first and foremost is personal responsibility.