Increasing the Minimum Wage will never bring Prosperity

Over the last few years and normally during presidential elections, increasing the minimum wage has been a talking point for many Democrats. Naturally, there has been some pushback. On January 26th, 2021, I posted the Tweeted article (see below) from FEE.org on my Facebook page and ignited a heated, mostly constructive, debate. I then quickly began to realize that many people do not understand basic economics principles or business ownership. Rather than continuing to debate online, I decided to sit back and watch the emotional comments fly back and forth.

‍This post will focus on why continuing to increase the minimum wage is treating the symptom vs addressing the problem/predicament. Due to the complex nature of this topic, there will be many visual aids to help explain why Increasing the Minimum Wage will never bring Prosperity.

Personally, I believe that all people have the right to “pursue happiness” by being paid a market rate for their labor. As I have written in the past, no government will ever be able to legislate happiness or economic prosperity for all, it is completely unrealistic. There will always be winners and losers. Based on facts, I see an increase in the minimum wage to $15/hour as doing more harm to those at the bottom of the economic ladder than good... This post is My Common Sense on why....

...who has the obligation to pay this living wage? And is that obligation independent of the employee's economic value? It seems most.. take the position that people deserve to be paid a so-called living wage regardless of whether or not they produce sufficient value for their employers to justify that wage. As an employer I have to disagree. - Local Attorney

History of Minimum Wages

‍The minimum wage was first introduced in the United States with the Fair Labor Standards Act of 1938 (FLSA) and was originally conceived as a way to help bolster wageworkers and decrease class stratification. Passed under President Roosevelt, this act called for the first national minimum wage of 25 cents an hour. This created a floor on wages in the labor market and attempted to help promote more fair labor standards throughout the USA. One of my frequent FB commenters, responded that the minimum wage was invented so that a single parent could not only put food on the table but also own a home. This statement is factually inaccurate. According to the 1900 census, only 8.5% of children were in single parent households. This number rose to 9.1% in 1960 and has tripled as a share of American households since 1960. Single parent homes were not a consideration when discussing initial minimum wage laws back in 1938.

Below is a chart that shows the history of the minimum wage, you can also view the info below here: History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938 - 2009

The Federal Minimum wage of $7.25/hour has not changed since 2009 and many in the current political climate want to see that $7.25/hour rate be raised to $15.00/hour to provide a "living wage," which is a mostly subjective figure. If you look at the history of minimum wage increases below, you will get a visual idea of how much of an increase of $7.75/hour is compared to previous increases.

Between 1938 and 1973 (35 years), the Federal Minimum wage increased from $0.25 to $1.60 per hour. Between 1974 and 2009 (35 years), it increased from $1.60 to $7.25 per hour. How many more times must it be increased before folks realize they are on a hamster wheel without an exit strategy?

Characteristics of Minimum Wage Workers

In general, the total number of minimum wage workers has decreased over the past 40 years.

Find more statistics at Statista

‍The percentage of hourly paid workers earning the current Federal Minimum Wage or less ticked down down from 2.1% in 2018 to 1.9% in 2019. This remains well below 13.4% recorded in 1979, when data were first collected on a regular basis. In 2019, 82.3 million workers age 16 & older in the US were paid at hourly rates, representing 58.1% of all wage and salary workers. Among those paid by the hour, 392,000 workers earned exactly the prevailing federal minimum wage of $7.25 per hour. About 1.2 million had wages below the federal minimum. Together, these 1.6 million workers with wages at or below the federal minimum made up 1.9% of all hourly paid workers.

Here are some additional highlights from 2019 data:

‍AGE - Minimum wage workers are young. Although workers under age 25 represented only about one-fifth of hourly paid workers, they made up just under half of those paid the federal minimum wage or less. Among employed teenagers (ages 16 to 19) paid by the hour, about 6% earned the minimum wage or less, compared with about 1% of workers age 25 and older.

GENDER -Among workers who were paid hourly rates in 2019, about 3% of women and about 1%of men had wages at or below the prevailing federal minimum.

ETHNICITY - The percentage of hourly paid workers with wages at or below the federal minimum differed little among the major race and ethnicity groups. About 2% of White, Asian, Black, and Hispanic workers earned the federal minimum wage or less.

EDUCATION -Among hourly paid workers age 16 and older, about 3% of those without a high school diploma earned the federal minimum wage or less, compared with 2% of those who had a high school diploma (with no college), 2% of those with some college or an associate degree, and about 1 percent of college graduates.

MARITAL STATUS - Among workers paid an hourly wage, those who were never married (who tend to be young) were more likely than married workers to earn the federal minimum wage or less (about 3% vs 1%).

FT vs PT - About 5% of part-time workers (people who usually work fewer than 35 hours per week) were paid the federal minimum wage or less, compared with about 1% of full-time workers.

You can also see a state-by-state breakdown here: Minimum Wage Workers By State.

According to a PEW research study, the Food & Beverage industry employs the largest number of minimum wage workers. This is likely due to the low skilled nature of most F&B positions, that the role can be part time or full time, and a F&B position is logical first job for any teenager.

Despite this data being slightly dated (from 2012), the employee numbers shown above are likely still trending accurately. No surprise, but Wal-Mart is shown as the largest employer of minimum wage employees followed by Yum! Brands, McDonalds, and Target. I cannot locate data to support this hypothesis, but let's assume that most minimum wage workers shop at Wal-Mart for groceries, clothing, etc. and unfortunately since it is some of the cheapest food possible, eat many of their meals at Yum! Brands locations and McDonalds. Should the minimum wage be raised to $12, $15, $20 per hour, etc., the increase in employee expenses at these companies is simply going to be passed onto the consumers in the form of high prices for burgers, tacos, pizzas, and everything at Wal-Mart. Does increasing their hourly wage along with their cost of living truly "help" bridge the gap between the wealthy and the working poor? No...

For anyone advocating for a minimum wage increase, make sure you consider folks earning just slightly more than $15/hour or whatever the proposed, subjective, minimum wage recommendation may be. After a regulated minimum wage hike, those workers making just above the new minimum wage will now pay more for goods and services without an increase in their income.

Labor Supply

The figure below "Effects of Increasing the Real Minimum Wage" provides the results of a theoretical increase in the minimum wage from $5 to $6 per hour on the labor supply (it suppose that the price level is constant, so an increase in the nominal minimum wage implies an increase in the real minimum wage.) The increase in the minimum wage leads to a reduction in the level of employment: employment decreases from 32,000 to 24,000. Labor is now more expensive to businesses, so they will need to cut labor hours. At the same time, the higher minimum wage means that more people would like jobs. The increase in the amount of labor that people would like to supply, and the decrease in the amount of labor that firms demand, both serve to increase unemployment. Since more people now want these higher wage jobs but the jobs are not available, Govt benefits will also be increased to meet this new "living wage" standard set arbitrarily by the Federal Govt. This cycle will continue over and over (devaluing US dollar, increase the minimum wage, increase govt benefits, rinse, and repeat). Has anyone ever asked, "why did the minimum wage provide a better standard of living and better purchasing power in the 1960's, but it does not today? What changed? Why did "things" get more expensive"

An increase in the value of the hourly real minimum wage from $5 to $6 leads to a decrease in employment from 32,000 hours to 24,000 hours (a) and an increase in unemployment (b).

The Devaluation of the US Dollar

Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair. -Sam Ewing

Over the past 100 years, the US Dollar has trended towards devaluation because of 2 primary causes.. #1. The US Dollar is no longer backed by Gold and #2. The Federal Reserve Bank (FED) creates money at will to prop up the economy.

Most of us already have a basic understanding of inflation. According to Merriam-Webster, the definition of inflation is “a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services.” The definition highlights a common assumption by many: that inflation means rising prices. However, inflation is not about rising prices; it’s about an expanding (or inflated) money supply. Higher prices are a consequence of inflation, not inflation itself. If you do not have a good understanding about how the Federal Reserve creates money, watch this 4 minute video. If you already grasp this principle, move on.

According the the chart below, the purchasing power of the "minimum wage" was at it's peak in 1968. The real value of the minimum wage (adjusted for inflation) is 17% less than 10 years ago and 31% less than in 1968.

The chart below shows how the purchasing power of the US Dollar has been adversely affected since the Federal Government stopped backing the US Dollar with Gold. The minimum wage does not matter as much as the cost of the goods and services required for life. If the cost of basic goods and services increases and wages do not, there will be a breaking point.

Since 1968, more money has been created that any other period in human history, but the minimum wage has not kept up with the inflation of the money supply. So what do we do, continue to increase the minimum wage every few years (symptom treatment), or stop inflation (actual problem)? While Monetary Policy and Money Creation are rabbit holes that will not be ventured into for this post, they are the problems/predicaments that must be overcome in order to provide true economic prosperity for most Americans. If you recall a previous post, "problems" have solutions and "predicaments" only have outcomes. I am unsure whether our economy is past the point of viewing the devaluation of the US Dollar as a problem or a predicament since the potential solution(s) would require mass adoption, participation, and less government control/regulation.

Even now, during the $15/hour discussion, there are already cries that $15/hour is not enough, and it should be $24/hour. Thanks to economists like Dean Baker, there are folks pushing back against these ideas with economics facts. $15... $24... $48... $96... if the federal government continues to create money in an attempt to prop up a broken economy, small business should prepare for future wage hikes if they employ any hourly employees. Likewise, consumers should expect their goods and services to continue rising in price, not only because of Inflation but because of a minimum wage that is higher than the market is willing to compensate and those costs will be passed onto consumers in the form of higher prices.

‍My Common Sense

When I was in high school (1995-1999), I made minimum wage as a Shift Manager at Domino's Pizza (Charleston and Litchfield Beach, SC). Like a large portion of minimum wage earners, I was also living with my parents. Back in 1998 and at a minimum wage of $5.15/hour, I earned enough money to pay for my vehicle expenses, my Motorola flip phone bill via Alltel, and saved some for college. I do not know how anyone currently living in the US could sustain themselves or a family on a Minimum Wage income, but minimum wage is not designed to be sustainable, that's why it's called the "minimum" wage. Just because I earned minimum wage 20 years ago, this does not make me an expert or fully understand the plight of the minimum wage employee. However, I truly want to see people do well for themselves and believe an artificial minimum wage does more harm than good.

If I owned a Domino's Pizza franchise, here's how the new minimum wage would be implemented. Let's say my net profit is around $100k per year per store and lets say I own 5 stores. Lets also say that the average pizza retails for $9.99 + tax across all 5 stores and that my employee expenses are 40% of my overall expenses. Since I employ a large portion of minimum wage employees and others between the minimum wage and the proposed $15/hour proposed minimum wage, I am concerned about a mandated hike in my largest expense. To better plan for this wage hike, I go ahead and raise all of my employees pay to at least $15/hour. Since this is a more than 50% raise for some of my employees, my labor expenses just went from 40% of my overall expenses to more than 70% of my overall expenses. As a restaurant franchise owner, Domino's Corporate has informed me that I can adjust my prices as needed to cover the additional employment expenses. Not only do I adjust my pricing to make my average pizza $13.99, I also cut back on the hours for all of my staff in an attempt to become more efficient, and accept the reality that my former net $100k per year per store is going to be more like $75k per store or less. As a result of cutting labor hours, 30% of my staff is forced to find 2nd jobs to make up the lost pay. Unfortunately, no jobs are available for my employees that need additional income; therefore, the only place for those employees to turn is to the Local, State, and Federal Governments for assistance. Lets also assume that many of my employees eat at Domino's, McDonalds, Taco Bell, etc. for a large portion of their meals because it's cheap. At the same time, other franchise owners are doing or preparing to raise prices. Not only did a large portion of my employees hours get cut, but their cost of living also increased. They would have been better off economically staying at the former minimum wage of $7.25/hour. Also, to keep this post from being 100 pages, I am not going to discuss the primary place these employees shop, Wal-Mart. You can bet that their prices are going up too.

In reality, the minimum wage will always be ZERO, because that is the realistic minimum value for labor. If someone who wants to find a job is unable to find a job, they are making ZERO per hour. Also, if an individual does not have any skills that benefit an employer, that employer is going to pay them ZERO.

The minimum wage law is very cleverly misnamed. The real minimum wage is zero—and that is what many inexperienced and low-skilled people receive as a result of legislation that makes it illegal to pay them what they are currently worth to an employer.

— Thomas Sowell (@ThomasSowell) February 3, 2021

‍When the Federal Government sets a minimum wage, that number is designed to have that portion of the population looking to the Federal Government for additional assistance in the form of Government provided benefits. This is the easiest way to setup a "buyable" constituency. Unfortunately, most of the public immediately jumps onto the minimum wage increase bandwagon before actually considering the economic consequences of their support.

When the Minimum Wage gets raised to $15/hour or whatever other number is chosen at will, there will be an immediate increase in unemployment, an immediate decrease in the number of hours for those employees, an immediate increase in government provided benefits at all levels, and shortly thereafter or immediately, an increase in the price of goods and services across all vertical markets. Until society is able to address Monetary Policy at a macro level and restrain the Federal Reserve, inflation will continue to increase, the buying power of the US Dollar will continue to decrease, and all of the hourly employees at or near the bottom of the economic spectrum will continue to suffer the results.

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” ― Upton Sinclair

If you want to have a constructive conversation about this topic or any others, message me, and let's grab coffee or a beer.

Have a good one,

Dan