Last year New York State completed a phased in increase in the minimum wage to $9.00 per hour. Now, Governor Cuomo is proposing that the state raise this to $10.50 per hour.
The minimum wage is one of those populist causes that politicians love to latch on to as a way to show they are helping out the poor and downtrodden. How, they intone, can a family live on just $9.00 an hour – just $360 a week for a full-time employee. How better to help these poor unfortunates than to legislatively decide what an employer must pay a worker.
While this envisioning exercise makes for good political press, it does not describe a true minimum wage worker, nor does is do anything to show how a proposed change will impact that worker, or the labor force in general. Face it, an increase in the minimum wage from $9.00 to $10.50 an hour will add only $12 a day to an individual’s pay packet – and in New York City, where that $12 is subject to some of the highest marginal income taxes in the country, the actual amount brought home will be only about $9.00.
Basic arithmetic shows that this populist argument is really nothing more than simple propaganda. In addition, higher minimum wages have tremendous economic consequences, particularly on those whom they are purported to help.
Stairway to Heaven – Why Higher Minimum Wage Regulations Harm Low Wage Workers
In his State of the Union Address, President Obama called on Congress to pass a higher minimum wage at the federal level. In addition, state governments across the country have regulated what companies can pay their workers through higher state minimum wages. Today, 29 states and the District of Columbia require businesses to pay employees at least $7.25 an hour. Politicians love to demagogue the idea that higher minimum wages will help lift millions of people out of poverty, but this idea is the kind that we like to call “fact-free.” On it’s face, the argument that marginally higher minimum wages will improve the lives of – well anybody – simply makes no sense. Consider a couple of points.
First, very few adult workers are actually paid the minimum wage. According to the most recent data from the Bureau of Labor Statistics, only 2.7 percent of adult workers earn the minimum wage – 97 percent of workers are paid more than the minimum. Of the roughly 3.3 million minimum wage workers in the United States, half are teenagers or college aged individuals, and almost two-thirds are part-time employees. In other words, virtually nobody supports a family on a minimum wage job.
Second, even a substantial increase in the minimum wage, would hardly impact an individual worker’s paycheck. This is true for two reasons. First, even if the Federal minimum wage were to be increased to $9.50 an hour, which is currently the highest minimum wage in the country (incidentally this is the minimum wage in the District of Columbia), the resulting change in take home pay would be equal to only $13.39 a day – hardly an amount that would bring a family of 4 out of poverty. The reason why the increase would be so small is that states and the Federal government apply income and social security taxes on all wage income, and these deductions would be reflected in a worker’s take home pay.
Third, leaving the math behind, the fact is that higher prices for almost anything – including labor – lead to reduced demand. Consider this the next time an elected official calls for a higher minimum wage, while at the same time promoting higher taxes on cigarettes as a way to reduce smoking. Both stories cannot be true – either higher prices reduce use (whether of cigarettes or workers) or they do not. Ever since the days of Adam Smith economists have known that higher prices reduce demand, and a minimum wage is – well simply a higher price.
Finally and most importantly, higher minimum wages harm those whom they are most intended to help – namely low wage employees. Businesses compete for workers, and outside of the minimum wage, the market clears when wages equal what employees are worth in terms of their ability to generate profits. This is why engineers are paid more than economists, and why doctors are paid more than butchers. Minimum wage employees simply are not productive enough to generate much in profits and that is why their wages are so low.
Consider the stereotypical minimum wage worker employed by a restaurant (actually about half of minimum wage workers are employed in food service). Currently they are paid $7.25 an hour, which to the employer is actually about $9.40 an hour after costs for social security, unemployment insurance and mandated health care are taken into account. Since on average, wages account for about one-third of the cost of sales in restaurants, in order to employ one minimum wage worker for a day would require that a restaurant sell about $235 worth of food. The average McDonalds (for example) sells about $2,150 worth of products a day, suggesting that they will hire about 9.1 FTE employees. Now, lets raise the minimum wage to the same level that it is in DC – which will equal $12.35 per hour for the employer. Higher minimum wages will not materially impact sales in the average McDonalds, so now that average worker will have to sell close to $309 worth of food to justify their salary. This means that our representative McDonalds can now employ just 6.9 workers, a reduction of 24 percent. And some of those workers could be replaced by technology thanks to a hamburger making machine that cooks your burger perfect everytime.
Of course, were the minimum wage to be increased, restaurants would try to pass some of the cost on to their customers (yet another problem with high minimum wage regulations), but remembering that higher prices reduce demand, this would only cost sales. In the end, there would be a reduction of employment, particularly of less productive minimum wage workers.
So rather than helping workers, the economy, and the poor, higher minimum wage laws harm workers, hurt the economy, and increase prices for the poor. Populism sure sounds good – until one takes a minute to think about it.
Do you have a ridiculous regulation you want us to discuss?