There is a topic that is back in the news here in NYC as well as some other localities. It’s a politically charged topic for many people, and that is probably because it’s a very emotionally charged topic. And I understand that. Also, in my economic assessment of this issue, I don’t want to take away from the humanistic side to this story, as this issue affects about 3 million Americans and their families.
The issue is the government mandated minimum wage, which is now $15/hr in NYC. Again, I don’t want to take away from the human side of this issue, and I am not a lawyer so I won’t attempt to address the constitutionality or legalities either.
From an economic perspective, what we want to do is weigh who really wins, and who really loses. When I really dug into the topic in May 2016, I was pretty surprised by the results that I found because the same liberal politicians and institutions who espouse a higher minimum wage actually comment that it doesn’t make any sense from an economics perspective. They admit that it is only for their own political motives do higher mandated minimum wages make sense.
So let’s start with the winner. The real winner here is any employee who manages to keep their job at the new, higher minimum wage. This will include not just the people who earned the prior minimum, but it will also include anyone who previously earned higher than the prior minimum but lower than the new minimum. All these people, if they keep their job, they’ll earn a higher wage. And their employer will win here too because he’ll have employees with higher morale.
That’s actually about all for the winners, and the first loser is the very same people who kept their job at the new, higher minimum wage. In an interview with the American Enterprise Institute, Nobel prize economist Milton Friedman said that minimum wage laws are discriminatory against the very people they are designed to help, and statistically that is typically African Americans and Hispanics. They disproportionately hold minimum wage jobs, and when the minimum is raised, many of them become unemployed because their employer either can’t afford to continue to employ them, or the labor they provide mathematically is not productive enough to justify the higher wage.
Those people who lost their job lose out, and like I said those who keep their job will lose also because if they keep their hours, they may likely move into a higher tax bracket. The other choice is that their hours will be reduced so that they earn the same total pay as prior to the wage increase, and at the same time they will be expected to take on more responsibilities. And by the way, the more ambitious the mandated minimum wage increase, the more this group loses out, which again is the people who need it most but they actually get hurt the most.
All other stakeholders actually lose out as well, and it’s not just the employer who is stuck with higher wages, higher payroll taxes, and fewer employees to cover the same work. That same employer will have a lower income to support his family as well, and the state, local, and federal governments will collect less income tax from him, because salaries and all the payroll taxes are written off as an expense. So he’ll have less on his bottom line, which might push him into a lower tax bracket and cause even lower tax revenue.
The local and state governments lose not just taxes, but the HRA office will be over burdened with additional people seeking unemployment, food stamps, section 8, and Medicaid. that may cause the HRA to hire more people. That also means that tax payers will be burdened with additional government benefits to pay for, and other necessary projects such as bridge repairs or paving roads may be delayed or cut completely.
The patrons of all those businesses may suffer with higher prices on the products they buy, which could also mean higher sales taxes if it is not groceries or clothes, and certainly they’ll have less money in their pockets to pay for all the stuff they need (not good if you believe Keynesian economics is the only path to prosperity). Not only will the prices rise, but the owner may actually seek less expensive means to produce the same productivity, such as automation, much like McDonald’s, Wendy’s, Burger King, and others have begun to implement. And that means that any remaining workers will further lose out.
Conversely, the same productivity for the higher cost means that businesses must first invest capital into higher wages across all sectors and at all skill levels. This will reduce the efficiency of that capital, and reduce the efficiency of the entire economy.
So I have a solution for all of this, and it comes in two parts. The second part is to get the government out of the way and let business owners and employees negotiate a satisfactory contract of employment that they both agree on. The first part, which will lead to the second, is to raise the minimum much higher than $15. Since it’s a random number anyway, why not raise it to $20, $30, even $50 an hour. That will really expose the fallacy of raising the minimum wage by government mandate, and in the end society will benefit much more by allowing business owners and job candidates to negotiate on their own.
That’s it for now, thanks for reading Volume 34 of Macro Market Wrap Up With The mad Genius. Until next time remember that there’s always a bull market somewhere in the world, and on the opposite side of every crisis there lies an opportunity.
#economics #fightfor15 #minimumwage #livablewage #politicsasusual