The Maximum Hype about Minimum Wage

There’s a debate raging about the minimum wage. And, more often than not, it’s an internal debate people are having inside their own brains.

On the one hemisphere, it’s a great idea. The minimum wage hasn’t been increased in a decade and, although inflation has been low, it’s not zero, and the prices of necessities, medicine, and housing – to say nothing about groceries – have generally gone up faster than other prices. This puts low-wage earners in a bind. By guaranteeing a higher wage for them, we can reduce the number of people who work full time and still need government assistance.

On the other hemisphere, raising the minimum wage is a bad idea. It’ll crowd out teens and other low-skill workers from getting jobs because there will be fewer jobs to go around. And one prevailing wage across a 3.8 million-square-mile country is ridiculous. Maybe you’ll barely scrape by in Boston on the proposed $15 per hour, but that pay goes a lot further in San Antonio, Texas. Plus, the River Walk is lovely and the basketball team is, well, at least not any worse than Bostonians are used to. Besides, just because the federal government hasn’t mandated an increase to the minimum wage recently doesn’t mean that the wage of low-income workers hasn’t gone up. This has long been a state prerogative: Weigh the advantages of attracting companies against those of attracting workers.

It’s a complex issue, so let’s delve into it.

If you make $15 per hour you won’t be able to afford much along San Antonio’s River Walk – but you’ll be able to afford something. Credit: SanAntonio.gov

The bill on the floor

On January 28, Rep. Bobby Scott (D-Va.) introduced the Raise the Wage Act of 2021. It immediately became a partisan lightning rod. Almost 200 Democrats lined up to co-sponsor while Republicans remained united in opposition. It raises the federal minimum wage from the current $7.25 per hour to $15 over time.  The immediate increase would only be to $9.50 – already the prevailing rate in much of the country. In other words, low-income workers in more than half the states wouldn’t be affected at all.

Not until four years after enactment would the minimum wage ratchet up to $15. Currently, only the District of Columbia requires local businesses to pay that much to its least skilled workers, although California, Connecticut, Massachusetts, and Washington state come close.

By the way, Scott’s bill is not new law. It amends the Fair Labor Standards Act of 1938 or, as it was originally drafted, the Fair Labor Standards Act of 1932. It took the New Dealers six years to get it up the Hill. When Franklin Roosevelt finally signed it into law, it ensconced the 40-hour workweek, got 15-year-olds out of mines during school hours, and set a minimum hourly wage of 25 cents.

Making it more confusing

The minimum wage isn’t always so minimum. Many states have subminimum wages which apply to teens, tipped workers, and some disabled people. The youth wage – applicable only to those younger than 20 – is set by the federal government at $4.25 and only applies to the first 90 calendar days of employment. Tipped wages range by state from the federally established $2.13 up to parity with non-tipped employees’ pay. Wages for those disabled people who work repetitive jobs in workshop settings, though, is another point of controversy. While these jobs were initially set aside to encourage workforce participation among the disabled and to give them the opportunity to experience the dignity of a paycheck, the results of the program – which pays $3.34 per hour – have been mixed. While many have benefited – personally and economically – from working at “Section 14c” rates, The Raise the Wage Act would phase this program out. Simultaneously, it would eliminate the distinction between regular wages, youth wages, and tipped wages, setting a universal minimum of $15.

In any event, the effect of raising the wage is totally unknown and anyone who tells you differently is probably parroting one set of partisan talking points or the other.

Improved living standards for low-skilled workers might enable them to better afford household expenses. This, one theory goes, would be spent back in the community where they live, generating revenue to other businesses with the result that these stores, restaurants, and service providers might not feel the burden of raising their own workers’ pay to the same $15. This virtuous circle is then supposed to perpetuate itself by improving employee morale, thus reducing turnover and training costs – paying back the bosses for the added hourly expense.

And yet, that assumes growth where none has yet been demonstrated. The theory might be sound, but the data is still lacking.

“Opponents to increasing the minimum wage argue small businesses would be adversely affected by such a drastic increase in the minimum wage,” Dallas lawyer Victor N. Corpuz wrote in a National Law Review article. “Just as small businesses begin to bounce back from the worldwide Covid-19 pandemic, an increase in the federal minimum wage would significantly increase small businesses’ operating costs and make margins tighter.”

If this really is a zero-sum or nearly zero-sum game, raising the minimum wage would reduce the number of open positions. A business owner with only $30 per hour to spend on labor can afford to employ three people at $10 but only two at $15.

Further, Corpuz strongly underscores one point we made earlier: that about different states having different economies, and a uniform minimum wage might not be good policy.

“To have the same minimum wage would be impractical in California and Oklahoma, as the average value of a home, according to Zillow.com, is $635,055 in California but only $143,173 in Oklahoma,” he writes.

He also notes opinions that this would increase childcare costs, since the $11.65 per hour average wage for childcare workers is quite a bit below the $15 threshold. He doesn’t mention this next part specifically, but the same can be said for people who care for the elderly, the homebound, and the convalescent.

One point that others raise is the upward pressure this puts on skilled labor prices. If a fry cook is worth $15, how much is the individual you call to fix the fryer when it breaks? If it can’t be fixed, how much do you pay the pilot who flew the air cargo flight containing the replacement fryer?

Check, please

If we keep raising everyone’s pay, that would eventually lead to a bout of substantial inflation. But, as we’ve discussed here with some frequency, that hasn’t happened yet and economists are unsure where that trigger point is.

So, what does the business community have to say? It’s true that a lot of high-profile businesses are moving their headquarters out of overpriced California, but not a whole lot of KFCs have shut down there.

The National Restaurant Association has been lobbying hard against the Raise the Wage Act and yet its constituents aren’t solidly in line. CEOs from McDonald’s, Denny’s, Domino’s Pizza, The Cheesecake Factory, and other major brands are just shrugging their shoulders at it.

With all this uncertainty about the unintended consequences of federally mandated wage increases, it’s no wonder so many people are talking to themselves. But as you consider how new federal mandates could affect your retirement funds, why not talk out loud with a trusted financial professional?