How Minimum Wage Laws Influence Our Economy

Minimum wage laws have been in the news quite a bit lately.  There have been protests and walk outs.  The rhetoric has flown from all directions.  Politicians have weighed in on the discussion.  With elections on the horizon, any hot button presents an opportunity to say something.

So what is it all about?  I'll take the emotion of the equation in this page and give you some facts.  As we've written in other pages, standing on the edge of the coin allows you to see see all sides of an argument.

There has been noise from the northeast about a minimum wage increase that would surpass $20.00 per hour.  This idea was floated by Elizabeth Warren, a senator from Massachusetts.  A $15.00 per hour minimum wage law for fast food employees has also been bantered about.

I'll give you a little economics lesson that may seem overly simplistic, but if you really look at it, you'll see the actual problem with economic policy in America.  You just need to expand on the idea to meet the size of national business.

A Small Case Study On Minimum Wage Laws

I grew up in a family owned business.  My Dad started it from scratch and worked many hours per day, every day to get it rolling.  He retired after 35 years in the same location.  Over that time he hired many workers.  Part of them were high school or college kids.  I was one of them.  We all started at the minimum wage law level.

Those who worked hard and treated customers with respect could figure on fairly regular wage increases.  There were some other positions that required more skill.  Naturally, those guys were paid at a higher level.  They had taken the time to learn some advanced procedures.  Coincidentally, most of them started at the bottom, before they learned those higher skills.  At the federal minimum wage law figure.

This small business, like all small business ventures even today, was inundated every week with requests for donations from various causes.  Nearly all were very worthwhile.  But every time a small business owner donates a twenty or fifty dollar gift or donation, it comes out of any profit.  People who have never owned a business, have no idea how much small business America donates every week.

Please keep this example in mind as we go through this page.  It will prove very relevant in the end.

Differing Author Opinions

Many who favor a minimum wage law increase cite social justice as the reason.  They cite an inability to "raise a family" on the pay at entry level positions.  Paul Krugman is an author who has come out in favor of changing minimum wage laws to require higher pay.  Mr Krugman is a student of the John Maynard Keynes theory of central bank control of money supply.

It is odd that he has come out sort of favoring a raise in that federal minimum wage law.  Maybe he changed his mind?  His reasoning now is that over half of all minimum wage positions are found in sales or food services.  Mr. Krugman suggests that if those workers were paid more, they could spend more.  Thereby stimulating the economy.  Remember that point as well.  It will also come together in the end.

"About 1.8 million Americans aged 16 to 24 worked for minimum wage in 2012, and many more young Americans coveted those jobs. Many young people start successful careers with minimum-wage jobs without expecting that the job will become a lifetime career. Doug McMillon, who will take over as Walmart CEO next February, started out as a teen unloading trucks at a Walmart distribution center."  Diana Furchtgott-Roth

But back in 1998 he wrote, ""So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment."  Teen unemployment is running very high in America.  Not as high as in Europe, but still too high.

And about a quarter of those holding minimum wage jobs are teenagers. That total goes over 50% when you include those under 25 years of age.  In other words, those just entering the work force with limited skills or experience.

David Neumark and William Wascher wrote a new book titled, " Minimum Wages."  They poured over the mountain of research compiled over the past two decades.  Their conclusion is that minimum wage laws hamper employment opportunities for the least skilled workers and in the end reduces their earning power.

Putting It All Together

Here is where it all comes into focus.  The American economy was built by a proven  system of free market capitalism that focused on manufacturing things.  Our country was the one that built what was was needed.  Companies created jobs that required advanced skills.  Those advanced skills translated into  higher wages. 

Entrepreneurs built big and small business ventures.  And paid their workers based on the job performance. Now our economy is consumer driven.  That is why Mr. Krugman mentions paying lower skilled workers more money.  He doesn't suggest they attain higher skills to move up to higher paying jobs.  Rather he advises mandatory government intervention to force business owners to pay more money for jobs requiring lower skills.  All so these workers can spend more. 

My dad paid first time employees according to the federal minimum wage law.  If that level is raised, it affects everyone in that chain.  That same person who still has the same job skills now gets a higher wage.  But that business still needs to make a profit to survive.  How does an owner reward those workers who do step up and add to their education and skill sets?  His bottom line has been altered by a government with no concept of economics or business.

Our economy is stifled because of government intervention.  Everyone focuses on the (Un)Affordable Care Act.  That is certainly another tax on business.  But it is just the latest burden.  Much as people walking into a small shop to ask for yet another donation do not have a clue what affects a bottom line, the federal government is equally in the dark.

Walmart and McDonalds are the favorite whipping boys right now.  But the fact is that most of the jobs in those companies were never intended to support a family.  They are part time and are designed to be held as second jobs or as first time positions for young people with little or no job experience.  Those jobs have helped thousands of young people pay for college.  And as anyone with any business sense knows, wages are only part of the employment responsibilities in any company or even a small shop.

A Solution

Instead of punishing the existing business owners, why not assist the private sector in creating more advanced jobs again.  Then there will be a place for those workers who start at minimum wage positions to move up as they gain experience.  And the next generation of young people can step in to the very roles built for them.  Jobs that pay minimum wage because they require minimum skills.

It isn't about emotion or fairness.  It is about business viability.  Peter Schiff, author of "How An Economy Grows And Why It Crashes", recently reported that it would cost Walmart about 80% of their profits to pay everyone they employ at least $15 per hour.  Or they would have to raise costs.  What too many people do not understand is mark up.  Stores like Walmart operate on lower margins because people want lower prices at the checkout line. 

It isn't up to the existing companies to overpay for low-skill labor.  This flawed logic is similar to the argument to pour more money into colleges to "make it more affordable."  It is incorrect from a business standpoint.  It would serve students more to streamline degree requirements.  Eliminate the extra classes that just milk tuition money from them.  Student loan defaults could be greatly reduced by simply creating career focused programs that get students into their chosen field in two or three years instead of four or five.

Then they don't need that McDonalds job.  It will open up for someone else.  That someone else has the same chance to improve and move up as well.  And the upward cycle continues. 

Minimum wage laws are much like government sponsored entitlement programs.  They have good intentions, but the reality is they keep people from moving up.  Much like a crab box.  Fishermen don't need to put a lid on a crab box.  If one tries to crawl out, the others drag it back down into the box.

A History Lesson

If the federal government really understood economics and business, they would get out of the way and let the private sector grow which would solve this stagnate economy.  We only need to look to Europe to see what happens when the majority of people work in government created jobs under the thumb of unsustainable union contracts.  Jobs go away from the top first.  Then they go away from the younger people.

We learn from history.  Adolph Hitler was laughed off the stage when he first began to speak.  But a lousy economy that produced very high youth unemployment distracted people from the real solutions and instead led to class division and calls to "redistribute the wealth."  And a tyrant found his audience.

A minimum wage that is out of line with supply and demand and prevailing wage structures will add to unemployment, will further drive down overall pay rates and will close companies.  Deflation is very much in play in many areas.  Adding fuel to that fire is misguided and dangerous.

The federal government needs an economics lesson.  Pandering to the emotions of an entitlement generation is a proven way to win elections.  But it doesn't fix problems. 

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Just below is a quote from "Don't Sweat The Small Stuff" by Richard Carlson.  The chapter title is "Open Your Heart To Compassion." 

"Every day we are given hundreds of opportunities to practice compassion in action.  We can learn to be less reactive and live with more patience.

We can smile when others are serious.  We can drive our cars more carefully, pick up litter on the streets, recycle, and reduce our consumption.

We can resolve conflicts rather than create them, and we can become less judgemental and more inclusive.  When someone is aggressive, we can teach them to be more peaceful.  Instead of waiting for an example, we can be the example.

The more compassion that enters your heart, the happier and more peaceful you will become.  By knowing that you are doing your part to create a better world-whatever form that takes-you will fill any void that exists in your life, and you will begin to find the peace you are looking for."

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