Success and the Minimum Wage – Part 3

The minimum wage act is not technically a welfare program.  It is, in effect, a regulation on a private contract between an employer and an employee.  But it’s purpose is aimed at the same class of individuals that most of the welfare programs also address.  It’s primary aim, I believe, is to help those at or below the poverty line have a level of income that will allow them to have the basic necessities of life.  In this case, however it’s not funded by the government, but by the private sector.  But it interacts directly with some of the welfare programs in ways that can either raise or lower welfare payments and it also can effect tax revenue.  It does not require employers to hire anyone, but says that if someone is hired, he or she should be paid a wage that, for full-time employment, would at of near the poverty level.  Sounds pretty simple so far?  The difficulty is in determining the resulting consequences to attitudes and incentives of employees as well as companies, the effect on the economy as a whole as well as government tax revenue and expenditures.  Simple arithmetic?  Maybe, but it involves solving multiple inter-dependent equations simultaneously.  Nothing is as simple as it seems.  The legislative decisions involve deciding who and what jobs are to covered and at what level the minimum should be set.  So in order to get a better handle on this, it might be useful to consider categories of employees who might be effected, the possible effect on different types of employers, and then the possible overall economic impact.

Employee Groups Affected:

  • Youth – teenagers and students living at home:  In the last few days, I’ve heard from several people who worked at menial jobs at low wages as a teenager.  All said that this was a valuable learning experience for them.  It helped them have ambition for a more challenging work life at higher pay and appreciation for making the effort that would do the things that would help them accomplish that.  I can identify with this; while I was still in school I worked in the summers at such a job.  It was a good learning experience, but the wage rate and overtime rules would probably be illegal under today’s work rules.  I didn’t consider it unfair and I was glad for the money.  I didn’t have to support myself.  I lived at home, so this was “spending money” that I wouldn’t have had otherwise.  I would no doubt have felt differently had I been on my own or worse- had a family to support.
  • Adults needing to support themselves and othersThere are several different situations to consider here including a) Singles with no dependents b) Married couples without children c) married couples with one of more children and d) Single parents.  People in each of these categories have different needs.  Where one lives (e.g. big city or small town in a rural area) can also make a significant difference.  Generally singles with no dependents have more options.  At one point a few years ago, I decided that my group had jobs that could be done by people with two-year associate degrees – not every job needs a 4 year degree.  We started interviewing at a local junior college.  I expected that we would find people out high school who had gone straight into a two-year program.  Not so.  Most of the people we interviewed were several years out of high school, many had four-year degrees.  I remember one guy  had a BA degree in Greek Literature. He was an honor graduate in his field, but after college he learned that there wasn’t much demand for Greek scholars, so he had gotten an associate degree in computer science.  We hired him.  There were others with similar stories.
  • “Wal-Mart Greeters” and others wanting supplemental income:  There are retirees who would like to get out of the house and do something that would provide a little extra “spending money”.  There are also married couples where one spouse has a good job, but the other would like to do something to earn a little extra money.  These may not be “hardship cases”, but they may be increasingly important to our economy as the ratio of the number of retirees to the number of working people goes up significantly in the next few years.

Company and employer categories:  There are many different types of companies with some jobs needing people with minimum skills – which is what minimum wage jobs usually are.  There is perception that these are “entry-level jobs”.  There probably some entry-level positions at this pay rate, but the better characterization is probably “low skill”.

  • Minimum Skill Service companies:  Some companies – such as office cleaning companies, et.al. are highly dependent on manual labor to provide service to their customers.  Increasing the minimum wage would likely impact their costs directly and significantly.  They would be forced to increase their prices but how much this might affect them is uncertain.  Office cleaning companies compete primarily against other domestic companies who would be subject to the same increase in cost.  So unless their customers decided that the increase in cost would require them to use less service, there might not be a significant direct impact.  Other types of companies in this category could be hurt worse if they were providing a more discretionary service.
  • Manufacturing Companies and others needing primarily high skilled employees:   In our town we have aircraft mechanics making in excess of $100,000/yr.  These are probably the critical jobs for these type companies.  Minimum wage increase might have a minimal effect of their total costs.  This could cut two ways.  They may decide low pay employees who might be doing discretionary work might not need to be cut because the increase in cost was not material; or they might decide the work wasn’t critical and they could do without those jobs.
  • Companies in between in dependence on low skill jobs:  Wal-mart, and some of the “big box” retailers might be an example in this category.  They no doubt have a number of low skill jobs.  An increase in cost might encourage them to find ways to automate and eliminate some of these and/or they could raise prices.  Price increases might hurt the low wage earners more than others.

Possible Economic and other consequences:

  • Effect on the number of jobs available:  Generally in a free market economy, an increase in price of goods or services, reduces the amount used.  How significant this would be is difficult to say, but the number of minimum skill jobs available would likely be reduced by some amount.  There would probably be more impact during periods of recession than when the economy was strong for two reasons; 1) In a full employment situation – if there were more jobs than people the market price for low skill jobs could be higher than the minimum wage and 2) during a recession companies are actively looking for ways to decrease cost anyway.  So timing is important.
  • Attitudinal considerations: As mentioned in earlier posts, welfare payments can result in lack of motivation to make the effort to take personal responsibility for meeting ones needs.  There is an argument that welfare payments keep people from looking for work that would not pay more than the welfare that they would lose if they had a job.  Higher minimum wages might help this situation, or not.
  • Inflation:  An increase in labor costs is one of the drivers for inflation.  The relative impact of an increase in minimum wage is unclear, but again, it could depend on where we are in the business cycle.

So what are my thoughts at this point?  Currently the minimum wage is $7.25/hr.  A full-time job is approximately 2,000 hours, so full-time earnings at minimum wage is $14,500.  The Federal Poverty Guidelines for 2013 for one person households in the lower 48 states of the U. S. is $11,490.  (Alaska and Hawaii are set separately – there is also a significant difference between small town middle America, and big Cities like NYC and LA,  but I don’t think these are differentiated for Fed Government purposes – but maybe they should be for some purposes.)  So for a single person household the minimum wage fulltime income would be higher than the poverty level.  However for a family of four, the poverty level is $23,500, so unless there are two wage earners, a family four potentially has some real difficulty.  Is this fair? Depends on your point of view.

  • The level of the minimum wage:  I would leave it  alone.  It doesn’t look too far out of line to me.  While I cannot disagree with the premise that we should reward people for making the effort to support themselves with a wage that will meet their basic needs, the current level doesn’t look that far out of line.  Besides, with the continuing recession and the relatively high unemployment rate, the timing is not good.
  • Who it applies to:  For our youth, I think working provides valuable experience.  To the extent that the minimum wage might limit teenage employment, I would change that.  But there may not be a simple way to do that.  I don’t think we’re trying to help the “Wal-Mart greeters” with the minimum, but they are probably past the point where additional education will help.
  • Other Considerations:
  1. What might help people achieve more in the long run than increasing the minimum wage would be to help them with gaining additional job skills.  Historically, we had apprentice programs to train people for skilled work.  Today I believe it’s more common for that training come from a post high school technical program that is not necessarily paid as part of the public education programs. Most business people who I know would say that today we need post high school training to meet most critical company needs.  If this training were more available as a public education offering, maybe it would be an alternative to the need for higher minimum wages?
  2. The minimum could be raised at some point, but when we are trying to climb out of the Great Recession is not a good time to do it.  But before we do anything I would like to see someone do a more comprehensive research study on the whole set of questions including things not addressed here like foreign competition and immigration.

1) Nothing is as simple as it seems.  2) Life is not fair  and  3)there’s no free lunch.

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About tjc13

BE - Chem Engineering, Vanderbilt Univ, MBA, University of Tulsa - Worked for an energy and chemical company for many years and then started a management consulting business working for both for-profit and not-for-profit organizations.
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