On Labor - Increase the
Minimum Wage?
Sounds Fair -- Why Not?
By Patrick M. Pilachowski
Published in the Daily Record on March 7, 2005
The case for why not
Last week, the Maryland Senate passed a bill that would
increase the state’s minimum wage of $5.15 per hour
to at least $6.15. A version of the bill also is pending
in the General Assembly’s House of Delegates, with
a hearing scheduled in the Economic Matters Committee this
week.
At first blush, it is easy to favor this measure. After
all, no one can support a family earning $5.15 per hour.
Even a single individual can barely subsist above the poverty
level at these wages.
Assuming the employee stays at that level, that is. This
key point is at the crux of all arguments, pro and con,
to increasing the minimum-wage.
Proponents of a higher minimum wage seek out and produce
as anecdotal testifiers those minimum wage earners (or those
not far from that level) who are heads of household. Opponents
trot out statistics concerning the percentage of minimum
wage earners who are teenagers, or in their early 20s, and/or
who live with a parent.
Neither side, however, seems to dispute seriously the facts
that: (1) we are focusing here on the extreme end of a bell-shaped
curve and less than 1% of workers in Maryland receive the
minimum wage; and (2) those who receive it tend overwhelmingly
to be in “gateway” or entry level jobs that
should hold no reasonable expectation for long-term commitment.
Even the most nonskilled labor in Maryland has a reasonable
expectation of being able to “trade up” to jobs
paying over $6, $7, or $8 following a modest period of work
experience and job-searching.
Still, what about those relatively few who are in these
lowest-paying jobs?
The proponents’ argument is essentially one of economic
hardship to individuals making less than $6.15 per hour.
The opponents’ arguments are expressed in various
fashions discussed in more detail below, but they all essentially
distill down to the argument that it is an economic hardship
to those businesses that will be required to pay more.
No one realistically should expect businesses to receive
the sympathy vote in a comparison of hardships. However,
a complicating factor is that newly-imposed costs of doing
business tend to be shifted from businesses to customers
and/or the employees.
At hearings before Maryland’s Senate Finance Committee,
multiple business owners and Maryland Chamber of Commerce
representatives, including myself (whose firm members collectively
represent hundreds of employers), testified as to some possible
unforeseen consequences of the minimum wage proposal. We
hope to reduce the chances of unintended consequences flowing
from the proposed legislation.
Additional scrutiny and perspective on this issue is helpful.
Action and reaction
First, it should be recognized that the primary effect
of the proposed legislation is not necessarily to create
$6.15 jobs. They, of course, already exist. More precisely,
the only thing that is known to with certainty is that the
primary effect will be to eliminate wages at every level
in the range between $5.15 and $6.15. And there are plenty
of jobs currently at $5.50, at $5.75, at $6.00.
One’s initial instinct is to say, “What’s
the matter with eliminating these wage levels and raising
all these low-end wage earners to a new floor or base?”
But it is not as simplistic as that. The current public
policy is established federally by the Fair Labor Standards
Act, which sets a nationwide minimum of $5.15. Naturally,
that level is periodically adjusted upward, but is it wise
local policy to depart from federal policy and create un-level
playing fields among states?
Also, no change like the pending proposal occurs in a vacuum.
As in physics, every action triggers a reaction. Let’s
analyze the action and likely reactions here.
The action is an immediate wage increase of nearly 20%
at the lowest end of the pay scale (more precisely, about
19.4%).
The reactions are multiple. First, it is not only the under
$6.15 wage earners who are affected. There is also the “escalator”
effect, also referred to as “ripple” or “ratchet”
effect. That is, in many businesses, the market has valued
jobs now paying $6.15 as being above the entry level. Therefore,
new hires progress there after some initial period of training,
orientation and experience, such as six months or a year.
If the proposal becomes new law, the typically small businesses
who pay at these levels for entry-level positions will be
forced to maintain a sensible spread and avoid wage compression
by increasing the second tier jobs to about $7.15, for example,
and the old $7.15 jobs to $8.15, and so forth. Direct labor
costs therefore, increase across-the-board, not just at
the lowest end of the spectrum.
It is untenable to do otherwise. Consider an employer who
now tells a new hire or prospective employee, "Come
to work for me and do a good job, and in 6 months, you'll
be at $6.15". That employer cannot say (unless he wants
the prospect to look at him like he has two heads), "I'll
start you at $6.15 and, if you do a good job, in six months
you'll still be at $6.15".
Even though proponents attempt to discount this factor,
it is inescapable that businesses now paying less than $6.15
per hour would be forced to change.
Hard choices
Maybe this change affects all their hourly-paid employees,
maybe only those earning less than $6.15, and maybe some
percentage in between. Regardless, it is equally inescapable
that affected employers will react somehow in order to absorb
this increased cost of doing business.
How? It's easy to say they should increase prices. But
that is about the last thing a business owner wants to do.
Instead, he/she typically will first explore less drastic
alternatives. There are several options in this regard:
• eliminate the minimum-wage jobs and finds a way
to do without these tasks;
• eliminate the minimum-wage jobs, but reassign the
tasks to other employees;
• keep the same number of minimum-wage workers performing
the same tasks, but reduce indirect costs such as benefits
to equalize the value per unit of work.
To make the latter point less abstract, consider the math:
At the current minimum wage, for 40 hours of work, an employee
is paid $206. The employer also pays something for benefits.
To make the calculation easy, assume he pays a total of
$300 per week.
If Maryland law will require more the federal law requires,
i.e., to pay 40 hours at $6.15, the cost of direct wages
becomes $246.
However, the artificial device of passage of a state mandate
will not magically transform this unit of work into something
more valuable. Therefore, the employer who places a total
value on this one week unit of unskilled work at $300 is
left with only $54 for benefits, rather than $94. The old
level of benefits, such as health insurance, is substantially
at risk of being cut.
Dueling ‘myths’
In short, if a non-market force nudges an ongoing business
operation out of its current balance, the natural - and
expected - result is an adjustment to maintain the existing
equilibrium.
Therefore, the pending bill would force businesses to make
hard decisions, such as not to hire persons at the lowest
end of the wage spectrum, or to lay off existing persons
in those jobs, or to reduce their hours, or to reduce their
benefits, or to spread the cost across-the board by increasing
prices.
But, as is the case with other cost-of-doing-business increases,
price-raising is resisted. If, for example, the cost of
electricity or of gasoline increases, there is nothing businesses
can do to reduce those costs except to try and use less
electricity, or to drive less - in short, to conserve.
Labor cost increases, in our experience, are treated no
differently. A business owner's first reaction tends to
be to use less of the commodity that is costing more. When
this natural and foreseeable reaction occurs, ironically,
it will hurt the very people who most need the minimum-wage
jobs.
A few proponents at the hearings tried to dismiss the argument
about job losses, asserting that 500 or more economists
conclude that no net job losses were measured after other
federal minimum wage increases. Armed with these assertions,
proponents dismissively call job loss arguments “myths”.
But opponent witnesses, including an economist from the
Employment Policies Institute, a “think tank”
in Washington, D.C., asserted that over 700 economists conclude
there were such job losses.
Thus, there are dueling “myth” charges exchanged
by each side which does not like the other’s data.
(This brings to mind Theodore Roosevelt, who, after bemoaning
that economists were always asserting, “On the one
hand, this, but on the other hand that” ..., asked,
“Can’t anyone find me a one-armed economist?”)
In any event, even if one agrees with the proponents’
500 economists, what those figures don’t tell you
is that the absolute number of all jobs grew as did the
U.S. population - from about 250 to about 300 million in
the last few decades.
The opponents’ concerns are not abstract. For example,
New York State recently raised its minimum wage to $6. According
to the Buffalo News (Jan. 30), the fallout experienced from
this hiked minimum wage includes actual accounts of employers
eliminating jobs, cutting hours, re-assigning necessary
tasks to the existing workloads of others, having to ratchet
up all wages, and some national chains steering away from
opening new operations there.
Summary and conclusion
Even if it is only 1 percent, the fact remains that some
persons are in these lowest-paying jobs. The typical profiles
of minimum-wage earners are persons who are teenagers, 20-somethings,
or living with one or more parent.
Opponents of state-by-state departures from federal minimum-wage
laws are not dismissive of any age or other profile of workers.
But a more comprehensive overall perspective is that most
persons do not remain at minimum wages very long. The pending
issue really boils down to whether it is a preferable public
policy to increase these entry-level wages beyond the federal
benchmark for whatever that duration may be.
The certainty is that state departure from the federal
standard creates an increased cost of doing business in
Maryland. The potential unintended consequences could be
less job opportunities, less benefits for existing jobs,
a somewhat more unfavorable business climate in Maryland,
and/or higher prices charged by some businesses.
If this were purely a question of public policy, policymakers
would have to decide: What is the greater harm - entry level
job-holders not receiving $40 more per week, or placing
at risk an individual's job, benefits, as well as the business
climate and price factors mentioned above?
The reality, of course, is that the current debate is a
political exercise, not an academic one of economic policy-making.
In my humble and amateur opinion, a few factors on the
political landscape seemingly provide substantial momentum
for passage of an increased minimum wage in Maryland. First,
polls asking a litmus-test question to the effect of whether
one favors increasing the minimum-wage reportedly reveal
that 70% or more of the population answers in the affirmative.
Politicians do not get elected by ignoring polls.
Second, the Maryland Senate and House are overwhelmingly
Democratic, and they may wish to embarrass a Republican
governor into vetoing such a measure.
Third, analysis of the 14 states [and the District of Columbia]
that have increased the minimum wage beyond the federal
benchmark reveals that they are all in the Northeast and
the West Coast states of California, Oregon and Washington.
These are all so-called "blue states", a political
category into which Maryland clearly falls.
Nevertheless, the measure deserves thoughtful debate and
consideration of the factors discussed above rather than
the simple and easy knee-jerk reaction.
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