Raise the minimum wage for more unemployment
By Brett Lynch
Income inequality is a current political issue that has been mulled over by philosophers, economists and political scientists for generations. Minimum wage by design was created to address such inequality. Seattle recently passed a $15 per hour minimum wage, an issue becoming more popular among political debates. Depending on the economic outcome, other cities may follow Seattle’s lead if its policy proves to be beneficial for the city.
The motivation behind raising the minimum wage is to help combat income inequality. It is important to point out the history of the origins of the minimum wage. Minimum wage laws were introduced into the market in 1938 with the passing of the Fair Labor Standards Act, a bill concerning fair wage and working conditions. It was an important part of the New Deal program designed to prevent the exploitation of workers desperate for jobs in the recessionary times.
In a most basic sense, the problem is about the poor being fed up with the wealthy having too much control over money and power. Pundits often speak on how to solve the problem of income inequality. There’s no doubt such inequalities exist. However, one could argue inequalities are necessary for a society to thrive. It is debatable that income inequality needs fixing.
Inequality follows innovation and ability. The emphasis should not be placed on the fact that inequalities exist, what matters are the reasons inequality exists. If, for example, a society has increased technological innovation or greater efficiency, inequality can be a positive thing. If, instead, the inequality is due to some form of corruption or cronyism, inequality is bad. There are countries of both high and low inequality that have high GDP growth. There is no denying that prohibiting innovation and therefore inequality prohibits growth. Growth and equality are trade-offs.
The pay increase is beneficial for people who already have jobs, but for those seeking jobs it will become more difficult to find a company that is willing to hire a low-skilled worker, hence increasing unemployment. Businesses may even move towards automation, decreasing the quantity of jobs available even further. Most economists recognize that over a long enough time period, unemployment will prevail over a wage increase.
In addition, it becomes much more difficult as an employer to give raises to other employees when you are required to pay larger sums of money to low-skilled workers. Firms have increased difficulty making a profit; prices must increase in order to make up for labor costs, but the price can only be raised so much.
For college students with student loan debt and looking for jobs, there will be fewer jobs available with a minimum wage increase. For those students already with jobs, the minimum wage pay raise will be nice. However, prices around you will rise and you will not benefit financially as much as you think.
The Seattle minimum wage increase is a good case study that represents a larger issue: the government thinking it knows best.
Say, for example, you think minimum wage should be higher for parents with kids as opposed to hiring a teenager, so in an effort to assist these parents, you create a law that states parents with kids should be paid a higher wage.
Sounds reasonable. When implemented, due to a higher cost of hiring a parent, businesses looking for low-skilled workers instead hire more teenagers. The very people you were attempting to help were the ones hurt most by your policy, although well intentioned.
New York increased its minimum wage to $9 per hour. Governor Andrew Cuomo, D-NY, is in favor of increasing the state’s minimum wage to $10.10 per hour, a rate endorsed by president Barack Obama that Hawaii, Connecticut and Maryland will implement by 2018.
Governor Peter Shumlin, D-VT, recently signed a minimum wage increase to $10.50 per hour, the highest state-mandated wage in the country. San Francisco and Chicago are both considering raising the wage to $15 per hour. All of these states have Democratic legislatures and Democratic governors.
Raising the minimum wage does decrease income inequality, but relative to other factors surrounding inequality such as single-parent homes, access to educational opportunities and globalization, it makes a rise in the minimum wage appear more negligible and blatantly more political.
It’s a good political move to want to raise the minimum wage. Who other than Scrooge or the Grinch would be opposed to people making more money?
The National Federation of Independent Business recently conducted a study regarding the effect of the $13 per hour minimum wage increase. Their findings were the minimum wage increase could result in a loss of 323,000 jobs and a loss of $224 billion in real output over the next 10 years. Fifty-seven percent of those jobs lost will be from small businesses.
Passing policies that hurt job growth are not in California’s best interests. Proponents of big government claim the rise in minimum wage will bring people out of poverty. This claim is coming from the legislature whose state is consistently ranked in the bottom tier of the country by other CEOs in relation to its business climate, and also has the country’s fifth-highest unemployment rate.
The problem with government is it has no problem being generous with other people’s money. Ironically, during the Obama administration, an administration devoted to decreasing inequality, the income gap has been growing.
What happens to low-income workers who are no longer able to receive a subsidy for their healthcare insurance required by Obamacare? Any money made by the increase in wage may take away this option, making no real difference in disposable income because there are now new costs for them to address.
How Seattle responds to the nation’s highest minimum wage increase remains to be seen. It will have a significant role in determining future policies of cities around the country.