• Tag Archives minimum wage
  • No, Wages Are Not Rising Because of Minimum Wage Laws

    Image Credit: Pixabay-Motointermedia | Pixabay License (https://pixabay.com/service/license/)

    Before lawmakers left for August recess, the Democrat-controlled House voted to raise the federal minimum wage to $15 an hour.

    Such a move would backfire in a major way if passed into law. It would hurt lower-skilled individuals the most, including teenagers, immigrants, and those without a high school degree. And women, who hold more low-wage jobs than men, would be hurt the most, accounting for more than 60% of the resulting lay-offs.

    The push for new wage mandates comes at a puzzling time: We are in the midst of a record economic expansion in which workers in lower-wage jobs are seeing their wages grow faster than many high-wage workers.

    This is no mere blip on the screen. It’s an ongoing trend, as the July jobs report shows.

    Average wage growth has been above 3% for the last 11 straight months. Meanwhile, the lowest 10th percentile of wage earners (people making about $12 an hour) have benefited from more than twice that gain in wages—a 6.6% wage increase over just the last year. That’s equivalent to a roughly $1,500 raise for someone earning less than $25,000 a year.

    Some are now claiming that minimum wage increases at the state level are responsible. One short study, which was repeated in the pages of The Washington Post, shows that states with minimum wage hikes since 2013 have seen faster wage growth for low-wage workers.

    Not so fast. There are some serious problems with this study.

    For one, many states that increased their minimum wage also instituted pro-growth reforms during the same time. New York, for example, improved its business climate in 2014 by cutting its corporate tax to its lowest rate since the 1960s. Missouri; Arizona; Washington, D.C.; Minnesota; and Maine are all among the states that cut taxes during this time period while also raising their minimum wage.

    There is now ample evidence that pro-growth policies, like business tax cuts, fuel wage growth and new hiring. Research on the minimum wage tells the opposite story: one of job loss and wage stagnation.

    The economic fact is that when the government forces businesses to pay an employee a mandated hourly wage, businesses are left with few options: cut hours, lay off workers, or reduce benefits—or some combination of these.

    Most often, businesses are forced to cut jobs, which is why the Congressional Budget Office found that raising the minimum wage to $15 an hour could lead to over 3.7 million workers losing their jobs.

    A 2011 study from The Heritage Foundation painted an even bleaker picture, finding that this policy would force seven million Americans out of work.

    Economists have documented the significant negative impact of Seattle’s decision to raise the minimum wage to $13 an hour. That decision resulted in a drop in employment across the city. Workers who retained their jobs ended up working fewer hours, resulting in a net income loss.

    A similar trend resulted from Illinois’s 2002 minimum wage hike.

    If history is any guide, minimum wage increases lead to slower rather than faster wage growth.

    A 2015 study found that workers in states with small increases in the minimum wage from 2005-2008 ended up with lower wages than they would have had if the state never increased its minimum wage. The minimum wage hike achieved the exact opposite of its goal.

    This happens, in part, because minimum wages shrink the number of jobs available, meaning there are equally qualified workers competing for fewer jobs. Workers who are lucky enough to retain their job see slower wage growth than they would have otherwise because the job market is full of people who can easily replace them.

    Minimum wages also have been shown to incentivize low-income youth to drop out of school, which lowers their future earnings. And, they cut off employment opportunities entirely for workers who cannot yet produce the minimum wage.

    At $15 per hour, workers must be able to produce upward of $35,000 per year. That’s a high bar for anyone just starting out and especially high for teenagers trying to get their first job, perhaps to save for college.

    A study on the long-run effects of minimum wages found that the longer individuals were exposed to higher minimum wages at young ages, the less they worked and earned by their late 20s. The study also noted that “the adverse longer-run effects are stronger for blacks.”

    It may be true that some minimum wage hikes raise wages for a few lucky workers, but it comes at the expense of layoffs and shorter hours for others.

    Workers have much more to gain from sustainable wage increases, and so do employers and customers since both groups want better performance from workers.

    Our economy is currently booming, and a key feature of that is the strong job market. There are now over a million more jobs available than people looking for work. Employers are offering wage increases, bonuses, new training opportunities, and better benefits to retain and upskill their best employees.

    Employers are competing for labor. That puts workers in the driver’s seat, allowing them to demand higher wages and better benefits.

    Moreover, productivity is a major leverage point for workers. When workers are more productive, they bring more value to the company and can therefore demand higher wages.

    The current economic environment has benefited from two things: the 2017 tax cuts and ongoing deregulation. These policies are making American workers more productive.

    The 2017 tax cuts significantly lowered the cost of new investment by cutting the corporate tax rate and allowing companies to write off the full cost of many new investments from their taxes. Now, companies have a greater incentive to re-invest their profits into the tools and research workers need to be more productive employees.

    And, as workers become more valuable through increased productivity, they are empowered to demand higher wages.

    But these tax cuts need to be made permanent to ensure workers continue to experience benefits they currently enjoy.

    The United States’ record-long economic expansion has helped lower-income workers the most, and the whole gamut of pro-growth policies has helped prolong the current expansion. These gains are impressive despite the economic uncertainty exacted by President Donald Trump’s tariff policy and our ever-expanding federal debt, which must be addressed.

    Congress should not tempt the resilience of the American economy by mandating a higher federal minimum wage. Lower-wage workers are feeling a boon like no other in recent memory. The last thing we should do is bring it to a premature end.

    This article was reprinted from The Daily Signal.


    Adam Michel

    Adam N. Michel focuses on tax policy and the federal budget as a Senior Policy Analyst in the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation. His research focuses on how taxes impact the well-being and opportunity of Americans.

    This article was originally published on FEE.org. Read the original article.


  • Sorry, Sen. Sanders: Minimum Wage Hikes Reduce Real Income for Workers


    Many of us remember the anticipation and pride of opening our first paycheck, only to feel sick and indignant at that tiny after-tax total. We might feel salty toward that stingy grocery store or restaurant chain that couldn’t cough up more than minimum wage. The truth is, your employer pays far more to employ you than your hourly rate. Thanks to government-imposed burdens, your bosses could be paying twice as much to employ you as you’ll see in your take-home pay.

    Presidential candidate Sen. Bernie Sanders was blasted from all sides in July after his staff’s complaints about their pay were leaked to The Washington Post. Sanders made the “Fight for $15” minimum wage cause a centerpiece of his campaign, but his lowest-tier employees reported salaries and long hours that amounted to less than $13 per hour.

    Campaign field organizers, usually recent graduates seeking the prestige of a national candidate, generate relatively little value and are sometimes volunteers. Rather than boost salaries, Sanders initially suggested cutting staffers’ hours, upping their per-hour pay but cutting the valuable experience and face-time many had signed up for. The proposal was met with contempt from his supporters and sighs from economists who’d predicted that’s just what employers would do under Sanders’s proposed policies. Battered by the negative press, the campaign relented, goosing lower-tier salaries to $42,000. But at what cost?

    It’s not hard to imagine a field organizer—let’s call him Leon—experiencing the same annoyance and resentment many of us felt opening those first paychecks. If Leon is paid $15 per hour to work full-time, he earns $31,200 per year. But under federal law, his employer also pays $1,934.40 in Social Security taxes and another $452.40 in Medicare taxes. Sometimes you’ll see these two items combined as “FICA” or the “Federal Insurance Contributions Act.” Your employer pays FICA taxes in addition to your wages and by law must withhold your individual share, as well; independent contractors pay both portions themselves. Federal unemployment and retraining taxes cost employers another $427.

    Sanders’s campaign, like other employers, also has to pay health insurance premiums for employees—by far the fastest-growing portion of employee compensation—an average of $15,000 per employee per year.

    All told, Leon’s wage is $31,200, but the cost to employ him under federal law is $49,012. This does not include state and local taxes, unemployment insurance, uniforms, onboarding, and other employment costs.

    But it’s unlikely that Leon actually works 2,080 hours a year. If, like most Americans, he took some paid time off—perhaps a few sick days, even a short vacation—he actually worked more like 1,990 hours.

    If Leon earns $15 per hour, taxes and top-down mandates mean he takes home about $12, but his employer pays $24.63 per hour for his labor ($49,011.80/1,990).

    If Leon and his employer had the flexibility to negotiate, they could easily create a much more equitable agreement for the value of Leon’s labor, but this is illegal. Instead, federal mandates limit their choices and enforce trade-offs to which neither of them agreed.

    Setting a minimum wage doesn’t make everyone’s labor more valuable. It simply makes it illegal for lower-skill, less-experienced workers to be employed at all. By definition, the minimum wage permanently excludes some people from the workforce. Teenagers, the disabled, the recently incarcerated, and exactly the kind of low-experience, low-skill workers the minimum wage purports to protect will be priced out of the job market, trapped in poverty.

    Fewer than 1 percent of total US workers make the federal minimum wage. That small but vulnerable population is statistically much more likely than the workforce in general to be under 20, lack a high school diploma, work part-time, and work in food preparation.

    Workers just starting out will not be helped by making their labor more expensive to employers.

    For presidential campaigns, which nearly always end in debt, $25 an hour may be feasible. But for the kind of businesses that employ most minimum wage workers (retailers, food service), profit margins are extremely thin. If low-skilled labor gets suddenly more expensive, those employers will hire fewer low-skilled workers. Maybe they’ll install more self-checkout stations or a burger-flipping robot. Maybe they’ll have to raise prices or cut hours to make up the margin.

    The Congressional Budget Office released a report confirming that federal wage increases mean less real income for all affected families. At best, government has selected the winners and losers—but in fact, we are all losers.

    Denmark, like other Nordic countries, has no national minimum wage. Instead, minimum wages are negotiated voluntarily by each economic sector. As in the United States, only 1-2 percent of employees actually earn the minimum for their sector, and employment is fairly flexible. In spite of their reputation for a decadent social welfare scheme, pension accounts are private, rather than government-run, meaning your contributions are earmarked for you personally. Personal income taxes are very high (56 percent on average), but the added cost to employers is below 2 percent of wages.

    With the cost of labor kept low, employment is steadily high. With the confidence that they’ll be able to fire an employee who turns out to be a bad investment, companies will “take a risk” to hire and train individuals who otherwise might be excluded from even interviewing. A much closer relationship between individual wage and cost-to-employer also aids low-margin workers in getting the positions they need to gain skills and move up to higher tiers of employment.

    The instinct to help the least fortunate among us is a noble one, but hiking the minimum wage punishes exactly those Sen. Sanders hopes to help.

    Laura Williams


    Laura Williams

    Dr. Laura Williams  teaches communication strategy to undergraduates and executives. She is a passionate advocate for critical thinking, individual liberties, and the Oxford Comma.

    This article was originally published on FEE.org. Read the original article.


  • Why the Minimum Wage Can’t Solve the Poverty Problem


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    If wages for those at the bottom are high, you may naturally expect low poverty rates. No matter how you define it, higher wages would most logically relieve poverty levels. This is also the argument made by the Economic Policy Institute (EPI). An increase in the minimum wage may very well reduce poverty in the short-term. However, there will be adjustments. In reality, a higher minimum wage changes the types of people living in poverty rather than the overall number.

    A higher minimum wage will help those who have a job but not those who are unable to find employment. This favors more skilled and experienced employees who are generally more productive. To an employer, it is more justifiable to employ someone with experience. They are generally able to produce a greater level of output with a higher degree of quality. At the same time, this creates a trap. To the employee, there is less incentive to move on to more productive and higher paid positions.

    What we see is the employee getting paid more. What we don’t see is the loss of their potential output. Not only is there reduced incentive, but there is also reduced opportunity. Many businesses are already moving to flatter business structures. This means fewer opportunities to progress to managerial positions. We are already seeing the likes of Walmart and McDonalds moving toward this kind of structure.

    Though employees on the minimum wage are getting paid more, social mobility suffers. For example, research by Neumark and Nizalova found negative long-term effects from the minimum wage. Their study concluded that the minimum wage had two restricting effects. First, it restricts teens and young adults by deterring their employment. This means they are unable to acquire the necessary employment skills at a young age. Second, employers compensate for the higher wage by reducing their investment in training. Once again, this reduces the long-term skills that teens and young adults gain. Consequently, the ability to move onto more meaningful employment is restricted.

    Furthermore, research by Clemens and Wither also found significant declines in economic mobility as a result of the minimum wage. Their study reiterates the conclusions of Neumark and Nizalova. The reduction in upward mobility is largely due to the reduction in opportunities for accumulating work experience.

    The minimum wage reduces social mobility, but does it reduce poverty? Media outlets like CNBC are quick to highlight that the minimum wage hasn’t kept up with inflation. If it had, it would be nearly $11. So the minimum wage has lost much of its value since its peak in 1968. If there were a link between the minimum wage and poverty, we would expect higher poverty rates today. However, the opposite is true.

     

    The African-American poverty rate declined from 34.7 percent in 1968 to 21.4 percent in 2016. For whites, it declined from 10 percent to 8.8 percent in the same period. The main contributing factor to this decline is economic growth and the availability of jobs, not a higher minimum wage.

    On occasion, the minimum wage has been negatively correlated with poverty. If the minimum wage increases in real terms, poverty also decreases. If we look at the increases in 1997, the minimum wage increased in real terms. The poverty rate subsequently fell from 13.3 percent to 11.3 percent in 2000. This was surely a win for the minimum wage argument, right? Well, this came during a period of remarkable economic growth. When people are employed, they generally escape poverty. When jobs become more available, poverty decreases. The economy grows despite the minimum wage—not because of it. In fact, the empirical evidence provides little support for claims that minimum wages boost economic growth or alleviate poverty during downturns.

    Data from the US Census Bureau stated that 12.3 percent of the population lived in poverty in 2017. That’s roughly 39.7 million people. Of those, 17.2 percent, or 6.9 million people, were considered “working poor.” However, when only those who were continuously employed over the previous year were included, it fell to 5.3 million. Of those, 3.2 million were in full-time work below the poverty level.

    The minimum wage was raised three times between 2007 and 2009. However, this came during o