With President Obama’s call (link no longer available) to raise the national minimum wage to $10.10 per hour, Americans have been divided on how this would affect businesses and workers. Many opined that an increase would pull millions of workers above the poverty line, stimulate business profits, and even benefit taxpayers by reducing the number of citizens on food stamps.
In reality, raising the national minimum wage would harm the very people it’s intended to help. By forcing business owners’ hands on the matter, the government would accelerate unemployment, diminish resources and profits for businesses, intensify the social divide, and undermine the free market.
There’s a notable difference between raising and enforcing a higher minimum wage. The former is and should be a natural response to an uptick in productivity, left to negotiations between employers and employees. In the free market, business owners pay their employees what their labor is worth, contingent on the demand for labor and the supply of it. Paying more than its estimated contribution to the bottom line eats away at profits and investments. By the same token, paying less risks losing valuable employees to competitors.
The government’s raising the national minimum wage is quite different. It is thereby imposing a price floor on the job market—regardless of productivity or business growth—and deciding what a laborer’s value is without fronting the extra cost. In fact, taxpayers already have to cover the $10.10 per hour that contractors working on new federal service contracts now receive as a result of a recent executive order.
The inevitable effects will be job losses and forced capital investments to avoid overpaying for manual labor. Businesses that instead tried to keep underachieving employees on staff would be paying them more without generating corresponding business value.
For example, say John’s employer pays him $7.25 an hour because his work produces a value of $7 to $8 per hour. If his employer invests in tools and machinery that increase the output of John’s work, then paying him a higher salary would be fair and justified. However, if the government decided that workers like John needed to be paid a minimum of $9 per hour and John’s work still produced, at most, $8 worth of value, then his employer is forced to donate $1 worth of wages for every hour that John works. On a company-wide scale, this could put the entire business in financial jeopardy; it is charity, not productive business.
The decree leaves employers with little choice but to let John go.
Instituting a minimum wage increase could also have serious repercussions for workers who don’t lose their jobs. A higher wage floor could actually discourage some employers from granting pay raises above that amount. They could see the minimum wage as their legal obligation and decide that any remuneration above that amount is unnecessary.
But the main consequence would be keeping out of the job market those who do not (or cannot) produce value above the set price for minimum wage. And that would perpetuate unemployment.
The Congressional Budget Office’s estimates that 500,000 jobs could disappear as people like John lose their jobs over a minimal difference in value. Even that is an oversimplification because the real loss must account for jobs that will never be created due to the minimum wage. It may be that there are as many or even more jobs after such a reform than before, but the valid comparison is the number of jobs that would have been.
The government’s argument that everyone should be able to live above the “poverty line”—a political concept constructed to play on emotions and convince people to support a redistribution of wealth—consigns to joblessness people with real or perceived differences. That is, those who are minorities, disabled, sick, or part of other disadvantaged groups.
Explored logically—leaving aside the political propaganda that tends to accompanies these discussions—the issue becomes clear. Raising the minimum wage is wrong for businesses and workers in America. It hinders the creation of jobs that don’t pay at least the minimum wage. A policy hindering job creation isn’t a way forward. It helps neither businesses nor workers. The government should instead adopt a policy that will help get this country’s citizens back to work and its companies thriving.
What is that policy?
Imagine if the wage floor were eliminated: unemployment would essentially disappear. Companies would be free to open jobs at salaries appropriate to the value they produce. And those stuck in unemployment would gain access to jobs that, while not paying a lot, would afford these Americans basic employment experience, expand their network, and enable them to work their way up to higher income levels over time.
The reason the minimum wage is not the complete disaster it should be is that many of us simply disregard it. We cheer enterprising youth for selling services like mowing lawns, babysitting, and running errands. They gain experience while putting some money in their pockets. But this is prohibited by a minimum wage. Unless these enterprising youngsters are paid what’s legally required, they and their customers are criminals.
Government intervention is not required to “better the lives” of the workers in this country. As businesses grow, employers naturally hire more workers and/or boost wages to compensate current employees for greater responsibilities. This is how the free enterprise system works and how it benefits everybody involved. Just look at Walmart. In February, it announced a voluntary pay increase for its employees to $9 per hour for entry-level positions and $10 per hour for existing employees. Company leaders, without prompting by the government, clearly recognized a need and saw business value in paying their employees more.
The value of each and every job across America should not be determined in Washington. Allowing this only disrupts the balance of the market and prohibits the creation of new jobs. Market wages are based on the value produced, and productivity improvements determine when and how pay increases will occur. The sooner America can reach that conclusion, the faster the country—and the economy—can recuperate.