Raise The Minimum Wage?

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LAST night, I watched the premier episode of “30 Days” starring Morgan Spurlock of Super Size Me fame. In 30 Days, Morgan and his girlfriend attempt to spend 30 days living lifestyles completely different from their own. In the premier episode, the well-off New Yorkers who have no financial troubles take a road trip to Columbus, Ohio, and try to live for 30 days on minimum wage jobs. From their low-budget jobs must come all their bills, rent, food, and medical expenses.

Despite Morgan working two different minimum wage jobs and Alex working full-time, the couple finish the month over $1,000 in debt primarily due to medical bills. All of their furniture came from a charity, they had one bus pass shared between the two of them, obviously didn’t have a car, and had rented an apartment in The Bottoms – which is one of the worst parts of town.

And then, not an hour ago, I returned from Wal-Mart after buying a bunch of groceries. The amount I spent – $58.26 – was nothing special. But today was the first time I can recall that $58.26 of groceries was still a small enough load of plastic baggies that I could carry them all in with just one hand.

It got me thinking about the appalling rise in food prices in recent years. You don’t have to look hard to find something that has skyrocketed in price in just the past five years. Ground beef has doubled. Gasoline has doubled in four years. Corn is way up, sugar is way up, and fresh fruits are way up, as well. The “dollar menu” at most fast food restaurants is now the “value menu”, and most items are in the $1.29-$1.69 range.

I remember, as a senior in high school, stopping by Wendy’s for a double stack after class each day, because a double stack was $1. That was 2005.

Just last week, I went to Wendy’s and saw that the double stack has increased to $2.79.

Prices have increased by a minimum of thirty percent across the board in the last four years alone, possibly by fifty percent. The official government statistics – the CPI, known as the consumer price index – do not record this inflation, since the Federal Reserve changed the items measured in CPI back in the 1980’s to exclude both food and fuel. So, while official inflation remains low, unofficial inflation is anything but low.

Which brings me to the premise of the article. The Federal minimum wage has not been raised since 2008, despite continuing price increases across the board. Is raising the minimum wage a good legislative option in order to ensure people can get by?

The Verdict?

Yes and no.

Raising the minimum wage from its current $7.25 an hour to a hypothetical $10 an hour will work wonders in raising the immediate living standard of millions of working poor all across America who have seen their incomes pinched by inflation in recent years. It results in an immediate gross wage increase from $14,500 a year to $20,000 – or about a 30% increase. It would exactly offset the price increases in food, fuel, and other commodities that we’ve experienced in the past four years.

But would it actually lift millions out of poverty? I don’t think so.

As Milton Friedman once said, inflation is always and everywhere a monetary problem. There is only one way bad monetary policy causes inflation – and it’s when the Federal Reserve expands the money supply by printing too much money. The inflation can result in one of two ways: cost-push inflation or demand-pull inflation.

Cost-push inflation happens when rising prices force suppliers and merchants to increase prices for their products and services – hence, the cost is being pushed onto consumers. Demand-pull inflation on the other hand is when too much money chases too little product – the price increases. You can see this when a new electronic toy comes out and it’s in short supply – the price increases rapidly, as some people are willing to pay anything to get that brand-new PS3, XBOX, or iPad.

Ben Bernanke’s policy of “quantitative easing” has been a form of cost-push inflation. As the money supply increases, banks and lenders become increasingly profligate with throwing their money around, fueling economic growth (at least in theory).

Raising the minimum wage on the other hand will be a form of demand-pull inflation. By raising the minimum wage by 30% and increasing income by a similar amount, there is now that much more demand for product. Prices will thus rise correspondingly – although not by the full 30% due to the poor constituting a rather small proportion of the economy’s aggregate demand – and thus eat into that 30% gain that the working poor might have made. Their real gains will be smaller consequently – I’ll throw out a bone and say the real gain is in the 10-15% range.

Ten, Maybe Fifteen Percent, If…

That is, if the working poor manage to hold onto their jobs. Like it or not, a lot of businesses pay their workers minimum wage because they have no choice. This is especially true in small restaurants and retail outlets, many of which are already facing stiff competition and razor-thin profit margins. It’s important to remember that 75% of small businesses fail within the first year of getting started, often because their costs exceed their revenues.

The cost of an employee, to an employer, is a lot more than just making payroll. If an employer now has to pay his or her worker $20,000 instead of $14,500, the employer’s costs rise dramatically. They pay a heck of a lot more than the $14,500 they pay their worker – they pay the government extra Social Security and payroll taxes, they pay extra workman’s compensation insurance, they pay extra city and local taxes and fees – and under Obamacare, they now have to find a way to find health insurance for their employees or face a substantial tax penalty. (That last one is to come in painstaking detail soon, as I finish working on Part Four of The Economic Case Against Barack Obama).

From a business standpoint, if the business is faced with rising costs, the choice is obvious – cut those costs. That is most commonly done by laying off workers or cutting hours. This would run in direct contravention to the intended legislative goals behind raising the minimum wage to $10 an hour – now, that minimum wage worker is completely unemployed.

Does that minimum wage increase sound so hot anymore? I don’t think so. We can debate endlessly the increase in executive pay, the opulent lifestyles of the one percent, how the working poor can’t catch a break in this country, and so on – but the fact of the matter is, the recent rise in poverty is heavily attributable to the rise of food prices. And that, folks, is a problem that we face with the Fed and Ben Bernanke.

If prices had remained stable since 2008, then fewer people would have their incomes pinched in the first place – thus obviating the need to raise the minimum wage at all.

To sum up, I feel like it could be done – but it would be laughably ineffective at solving the poverty issue. It would only kill jobs and stoke unwanted inflation, while not solving the underlying problems.

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One Response to Raise The Minimum Wage?

  1. Pingback: Anyone else excited about Senator Elizabeth Warren's inquiry into a 22$ minimum wage? - Page 5 - City-Data Forum

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