The Case Against Raising Federal Minimum Wage

Filed under: Features,Global Business Issues,Management,Wages & Hours |

The federal minimum wage in the United States has been a hotly debated ever since it was enacted in 1938.

Labor activists and liberals have actively pushed for a higher minimum wage, claiming that the minimum wage must also serve as an adequate living wage for all workers.

Rep. Ron Paul opposes the minimum wage

Rep. Ron Paul — opposes the minimum wage

The current minimum wage rate, they claim, is much too low to serve as a living wage in today’s economy.

Economic conservatives and others argue that raising the minimum wage hurts employers and is actually detrimental to the economy as a whole.

Both points of view have good arguments supported by numerous studies and statistics.

The debate continues today with President Barack Obama calling fro increasing the minimum wage for the fist time since 2009, an increase that approved by Congress in 2007 .

The Cato Institute, a conservative think tank that opposes government intervention on behalf of workers, cites numerous studies in seeking prove that raising the minimum wage increases unemployment, especially among young workers.

Here are links to some Cato articles on the minimum wage:

Obama’s Minimum Wage Hike: A Case of Zombie Economics

The Negative Effects of the Minimum Wage

Raising the minimum wage may help individual workers, but it would hurt the economy as a whole, opponents argue.

A minimum wage increase, they claim, would put too much financial pressure on already struggling businesses, especially small businesses.

This pressure on employers would force them to spend less on goods and services, and even force them to lay off workers.

This would especially apply to young or inexperienced workers that the businesses cannot afford to continue paying at the newly raised minimum wage rate.

George Stigler -- critic of the minimum wage

George Stigler — critic of the minimum wage

The damage caused by a minimum wage hike, they claim, would far offset any economic benefits created by giving minimum wage workers a small amount of extra spending power.

In 1949 Nobel Prize-winning economist George Stigler, a leader of the Chicago School of Economics with Milton Friedman, wrote the classic critique of the minimum wage’s shortcomings in reducing poverty:

  • Employment may fall more than in proportion to the wage increase, thereby reducing overall earnings;
  • As uncovered sectors of the economy absorb workers released from the covered sectors, the decrease in wages in the uncovered sectors may exceed the increase in wages in the covered ones;
  • The impact of the minimum wage on family income distribution may be negative unless the fewer but better jobs are allocated to members of needy families rather than to, for example, teenagers from families not in poverty.
  • Forbidding employers to pay less than a legal minimum is equivalent to forbidding workers to sell their labour for less than the minimum wage. The legal restriction that employers cannot pay less than a legislated wage is equivalent to the legal restriction that workers cannot work at all in the protected sector unless they can find employers willing to hire them at that wage.[3]

Minimum Wage Opponents

From The Huffington Post come this list of prominent opponents of raising the minimum wage.

Many have praised President Obama’s call to increase the federal minimum wage, saying it would help working-class families make ends meet and could possibly have a ripple effect that would increase wages across the board.

But the proposal is likely to be met by fierce opposition from Republican lawmakers and business groups, arguing that a boost in the minimum wage will force businesses to cut back, putting job growth at risk.

Click here to read about 11 vocal minimum wage opponents

Minimum Wage Debate: Some Seek To Obfuscate

CBS News reports that some opponents of increasing the minimum wage may be less than truthful.

The Center for Union Facts is a non-profit advocacy group owned by a corporate PR firm. In this case, the group has issued its first broadside, claiming that President Obama’s proposed increase in the minimum wage is “political payback to labor unions.”

The group claims that an examination of available collective bargaining agreements shows that wages are often tied to the federal minimum wage. An increase in the minimum wage can trigger automatic raises or mandated contract renegotiations, sometimes even if the workers already make more than the new minimum level. However, the details of the research by the Center for Union Facts do not necessary support the conclusion.

The organization is one of a series set up by Richard Berman that “provide as much as 70% of revenues for his firm, Berman and Company,” according to a 2010 analysis by The New York Times.

In the Center’s 2010 filings with the IRS, out of total revenue of $808,873, the organization directly paid Berman just under $10,000 as president and executive director and paid his firm $577,345.

Although managing director J. Justin Wilson says that the organization gets its funding from foundations, corporations, and individuals, in a 2007 interview with 60 Minutes, Berman admitted that he was paid by corporations to “take on causes that might seem politically incorrect” while keeping client names out of the public eye. Companies can make charitable donations to the non-profits and the transactions are legally private.

As Berman said, his organizations often goes after people for “exaggerating the hell out of a story.” But an examination of the evidence that Berman’s group cites as it attacks raising the minimum wage suggests they’re doing some exaggeration of their own.

Read the full story here:

Front group ups battle against minimum wage hike

Arguments Against Minimum Wage Laws

Opponents of the minimum wage claim it has these effects:
  • As a labor market analogue of political-economic protectionism, it excludes low cost competitors from labor markets and hampers firms in reducing wage costs during trade downturns. This generates various industrial-economic inefficiencies.[43]
  • Hurts small business more than large business.[44]
  • Reduces quantity demanded of workers, either through a reduction in the number of hours worked by individuals, or through a reduction in the number of jobs.[45][46]
  • May cause price inflation as businesses try to compensate by raising the prices of the goods being sold.[47][48]
  • Benefits some workers at the expense of the poorest and least productive.[49]
  • Can result in the exclusion of certain groups from the labor force.[50]
  • Small firms with limited payroll budgets cannot offer their most valuable employees fair and attractive wages above unskilled workers paid the artificially high minimum, and see a rising hurdle-cost of adding workers.[44]
  • Is less effective than other methods (e.g. the Earned Income Tax Credit) at reducing poverty, and is more damaging to businesses than those other methods.[51]
  • Discourages further education among the poor by enticing people to enter the job market.[51]
  • Discriminates against, through pricing out, less qualified workers (including newcomers to the labor market, e.g. young workers) by keeping them from accumulating work experience and qualifications, hence potentially graduating to higher wages later.

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