The minimum wage trap

One of the most dangerous policies to our economic health is the push to raise the minimum wage to $15 per hour, what they call a living wage. $15 per hour is certainly not a living wage in San Francisco and many other big cities but it will absolutely destroy jobs, reduce opportunities, take away choices and raise costs in struggling rural, midsize and large cities throughout the U.S. It will also make the U.S. less competitive with the rest of the World encouraging companies to move production to lower cost areas raising the trade deficit. The poor and middle class (especially senior citizens and the disabled) on fixed incomes will be greatly harmed because they will not benefit from the higher wage, but they will be greatly penalized by the higher costs. Is it wise to raise the minimum wage throughout the country when youth, minority, the less educated and inner city residents have high unemployment rates?

 Here are Walmart's and Amazon's net profit margins for the last several years. They are extremely low, almost always below 4% of sales. It is obvious that the higher you force their costs, through taxes, wages, health care and other regulations the more they are either forced to raise prices or close marginal stores and lay off people to try to survive. They will also automate more. It is important to recognize that a full time minimum wage worker at $15 per hour will actually cost around $20 per hour when you take into account Social Security taxes, Medicare taxes, unemployment taxes, workman’s compensation insurance and mandatory health insurance. This does not include mandatory paid leave, 401K or other benefits.

The minimum wage never would feed a family of three or four. The 1950’s and 1960’s were very good economically in the U.S. and the minimum wage went up to $1.40 per hour in 1967 or around $2,800 per year. The median family income was around $8,000.  The median family income in 1967 was $7,200

Here is a great article about progressives, eugenics and the minimum wage. The progressives in the late 1800's and early 1900's pushed higher minimum wages to price out undesirables. The theory was if you forced wages high enough undesirables wouldn't reproduce. There was no social safety net at the time to protect those who were unable to get a job.

One of the reasons given to increase the minimum wage is to reduce income inequality. It will actually increase inequality by putting more people out of work. The Washington, DC area (Where they produce almost nothing but laws and regulations) has done very well the last seven years while median family income through most of the rest of the country has been stagnant at best.  Most of the wealthiest counties in the United States are around DC.

If we would like to reduce inequality we should leave more money in the private sector’s hands to spread throughout the economy. The solution Obama, Hillary and Bernie propose most often to speed up the economy is to take more money from the rest of the country and giving it to DC, thereby increasing the inequality.

Another statement that is continually made is that the rich are getting richer. That is not always true. The true statement is that the richest 1% today are richer than the richest 1% were ten years ago. Thank goodness that is true or the economy wouldn't be growing. The majority of the original Forbes 400 from 1987 aren't on the list anymore, which means many have dropped off and have been replaced by other people and families who have moved up. Thank goodness in capitalist economies that so many have the chance to move up the economic ladder. We should celebrate successful people and businesses instead of chastising them. Businesses cease to exist and others take the list as the richest.

The quickest way to reduce wealth and income inequality is to have stock prices, real estate prices and businesses collapse. It will certainly cause the rich to be much poorer but it will also greatly harm the poor and middle class. Is the reduction in inequality worth it?

In summary, raising the minimum wage to high unsustainable levels will help some but will cause hardships through higher inflation to all of us. It sounds good but will inevitably lead to more dependency on the government when opportunities for entry level laws are lost. This will lead to more inequality not less. Cost-push inflation is very destructive.