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Tolbert: The cost of raising the minimum wage

Posted: March 1, 2014 - 2:12pm
Jason Tolbert
Jason Tolbert

One policy initiative President Barack Obama highlighted in his State of the Union is to increase the federal minimum wage. A fellow Democrat, our own Sen. Mark Pryor, is not echoing Obama’s proposal but rather criticizing the size of the Obama initiative while supporting a smaller state increase.

Meanwhile, a new study confirms what economists have said for years — an increase will cost American jobs.

Obama is pushing for an almost 40 percent increase in the federal minimum wage from $7.25 per hour to $10.10 per hour. He has signed an executive order setting $10.10 as the minimum wage paid to all federal contractors.

“Our economy has been growing for four years. Our businesses have created eight and a half million new jobs. But while those at the top are doing better than ever, average wages have barely budged. Too many Americans are working harder than ever just to get by, let alone get ahead. And that’s been true since long before the recession hit,” said Obama in his weekly address this weekend pushing for Congress to support the increase.

“That’s why we’ve got to build an economy that works for everybody, not just a fortunate few. We’ve got to restore opportunity for all — the notion that no matter who you are or how you started out, with hard work and responsibility, you can get ahead in America.”

The policy sounds good and strikes a certain populist tone that plays well in blue collar states like Arkansas. At least, it plays better than most of the policy ideas coming out of the White House lately. The idea of increasing the pay of hard-working laborers is certainly attractive.

A non-partisan Congressional Budget Office study outlines how the new policy will lead to job cuts.

“Increasing the minimum wage would have two principal effects on low-wage workers. Most of them would receive higher pay that would increase their family’s income, and some of those families would see their income rise above the federal poverty threshold. But some jobs for low-wage workers would probably be eliminated, the income of most workers who become jobless would fall substantially, and the share of low-wage workers who were employed would probably fall slightly,” according to the CBO study.

The study explains that any overall increase in wages likely would more than offset job losses created by the policy. Economists point out that in a global economy, labor cost is a major consideration for locating jobs. If the cost of American labor goes up, then correspondingly, moving jobs offshore will increase.

Another consideration related to raising the minimum wage is the effect on the consumer. Free market principles dictate that the increased labor costs ultimately will be passed on to the consumer. The notion that evil corporations horde huge profits on the backs of the poor workers is largely a myth.

Obamacare is a prime example. Instead of health insurance companies absorbing all the costs of the new requirements while keeping their profits stable, they have passed on the added costs to the consumer in the form of higher premiums. The same pass-down costs would occur with an increase in the minimum wage.

Pryor’s middle-ground approach is to criticize the federal minimum wage increase as too much while signing on to an initiative to gradually increase the Arkansas state minimum wage to $8.50 an hour — eventually about a 25 percent increase over the current $6.25. The change would mainly affect small businesses operating solely within the state and not subject to the federal minimum-wage standard.

“We have a lot of hard-working folks here in Arkansas making minimum wage, and it’s time these families got a raise,” Pryor said in a press conference in Little Rock. “It’s just not acceptable that our state is one of four with a minimum wage set well below the federal level, even as tens of thousands of Arkansas families struggle to get by.”

The strategy appears obvious. Pryor can oppose a policy from the unpopular president while looking out for the common low-wage worker by supporting a state-level increase.

But the same problems with the federal increase apply in Arkansas, albeit on a smaller scale. Fewer jobs and increased costs of goods will take place within the Natural State regardless of whether the idea for the increase comes from Washington or Little Rock.

Jason Tolbert is an accountant and conservative political blogger. His blog — The Tolbert Report — is linked at ArkansasNews.com. His email is jason@TolbertReport.com.

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lachowsj
5768
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lachowsj 03/02/14 - 03:54 pm
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Minimum wage

The argument that a minimum wage would cost jobs and place an undue burden on employers is as old as the establishment of the first federal minimum wage in 1938. The same arguments have been made against child labor, the 8-hour work day, worker safety regulations and environmental requirements. For the most part, these arguments have not held water. And few would want to do away with these protections on the chance that doing so would prevent some jobs from going overseas.

It is true that higher labor costs would likely be passed on to consumers. But in most cases the effect on prices is not as much as one might think. For instance, the labor costs at McDonald's is about 17% of total operating costs. Let's say the cost of a Big Mac would go up 50 cents (though I expect the actual change would be much less). If you had the urge for a Big Mac, would that 50 cents really make you less likely to go and get yourself one? And while you were eating it, you could feel good that the person who served it to you is getting a liveable wage, will spend the extra money back into the economy, and in doing so may even create new jobs.

conwaygerl
6665
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conwaygerl 03/02/14 - 05:36 pm
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Minimum wage

Should be a billion dollars an hour.

conwaygerl
6665
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conwaygerl 03/02/14 - 05:37 pm
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Minimum wage

No it should be a trillion dollars a minute.

lachowsj
5768
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lachowsj 03/02/14 - 06:08 pm
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How about this?

Let's pay everyone 1 cent per hour. Things would really be cheap then.

Now that we have gotten through your silliness, maybe we can have a real discussion.

DanCDaves
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DanCDaves 03/02/14 - 07:53 pm
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To enlighten our armchair economists - think beyond Mickey D's

I wanted to share a book, Minimum Wages by David Neumark & William Wascher. It is a 300+ page review of the existing research in the area of minimum wages (published in 2008). This is peer-reviewed evidence based on empirical research and scientific analysis. I realize the popular answer to economics being a science is there are several schools of thought negating one another so it can't be a science any more than sociology or political science - avoiding a dismissive response such as this would be part of having a serious discussion about the matter at hand. If this describes your aversion to economic understanding, you should consider recusing yourself from trying to discuss it.

There is a lot of information on the strengths and weaknesses of various studies along with some very broad conclusions from the wide range of studies. A couple excerpts:

"Based on the extensive research we have done, and our reading of the research done by others, we arrive at the following four main conclusions regarding the outcomes that are central to policy debate about minimum wages. First, minimum wages reduce employment opportunities for less-skilled workers, especially those who are most directly affected by the minimum wage. Second, although minimum wages compress the wage distribution, because of employment and hours declines among those whose wages are most affected by minimum wage increases, a higher minimum wage tends to reduce rather than to increase the earnings of the lowest-skilled individuals. Third, minimum wages do not, on net, reduce poverty or otherwise help low-income families, but primarily redistribute income among low-income families and may increase poverty. Fourth, minimum wages appear to have adverse longer-run effects on wages and earnings, in part because they hinder the acquisition of human capital."

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I found the second and third findings to be the most glaring yet subtle to how raising the minimum wage further will only harm the impoverished and prevent them from earning higher wages.

"Researchers often summarize the existing literature by citing one or two studies claiming positive effects, along with a couple of studies reporting negative effects, which can give the impression that labor economics research is roughly equally balanced on the two sides of the question, and that, therefore, one should not confidently hold the view that minimum wages reduce employment. However, as we have discussed, it is simply not the case that the research literature stacks up so evenly. Rather, the research leans heavily toward the finding of disemployment effects."

----

The review of the evidence in the literature finds that the economy (and thus those actors within that economy) experiences a net loss with minimum wage increases. It provides those making the minimum wage not to seek more skills and provides businesses the incentive not to hire those without the necessary skills, thus preventing those without the necessary skills from entering the labor market.

This argument is the proverbial bazooka to claims that raising the minimum wage has minimal negative effects on the economy. If you have something stronger, please provide a citation.

DanCDaves
2794
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DanCDaves 03/02/14 - 08:27 pm
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DanCDaves
2794
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DanCDaves 03/02/14 - 08:45 pm
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Two can play this game

This economic gobbledygook is just the stuff that is put out by left wingnut "economists" to justify sticking it to poor people. - but in this case, it actually does!

conwaygerl
6665
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conwaygerl 03/02/14 - 08:48 pm
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--This is one of the reasons

--This is one of the reasons we have such a great income disparity in this country right now. --

Good point...income disparity increases with minimum wage.

All a minimum wage increase does is increase the scale of income.

I.e. you make another dollar an hour, but your cost of living increases by a dollar an hour...netting you Zero real gain.

Hence the million dollar an hour request...so raise the minimum wage to whatever....it's not a true solution to poverty

lachowsj
5768
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lachowsj 03/03/14 - 07:44 am
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Source, please

"Good point...income disparity increases with minimum wage."

Conwaygerl, please cite your source to back this statement. I can buy the argument that minimum wage will have some effect on the number hired. The discussion is about how much of an effect and if the benefits outweigh that costs. I don't know of any evidence that minimum wage will actually increase income disparity.

And DanC, love your comment that economists are left wing nuts. Cover your ears and say, "Lalalalalala, I'm not listening." That will really make your point.

conwaygerl
6665
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conwaygerl 03/03/14 - 10:28 am
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source please?

You need a source to tell you that minimum wage is the highest it's ever been and income disparity is also the highest it's ever been?

My source is math.

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