Monday, June 26, 2006
Minimum Wage, Maximum Pandering
Now this is just what Pennsylvania’s businesses need: A cleverly disguised income redistributing tax increase. Of course, it goes by the more politically palatable name of minimum wage hike.
The legislature is closing in on a bill that will boost the state’s minimum wage to $7.15 per hour by July 1, 2007; January 1, 2008 if the Senate version passes. The current minimum is the Federal rate of $5.15.
Let’s cut through all the rhetoric about how working families need a pay raise and look at reality. According to the Department of Labor and Industry, approximately 423,000 workers currently earn between $5.15 and $7.15 per hour—the current and proposed minimum wages in Pennsylvania. Let’s assume that the average wage paid to this group is half way between at $6.15 per hour. That means that after the new minimum goes into effect, the annual wage bill of Pennsylvania’s businesses will rise by almost $900 million, an average of over $2,000 for the 423,000 workers.
But that is not the end of the story. Workers currently earning $5.15 per hour will get a wage jump of $2.00, pushing their employers’ annual cost upward by about $4,000 for those working full time. Now this leads to something called wage compression. Workers who were making say, $7.25 per hour prior to the minimum wage because they had learned skills sufficient to boost their production value above the very low skill, entry-level positions, will find themselves earning little more than people whose market value was previously 30 percent below their own. They will undoubtedly not be very happy about that and will push for higher wages to reflect their superior productivity.
And it gets worse. Obviously, there is no way companies in highly competitive sectors such as eating and drinking, leisure and hospitality, or retailing can afford to absorb wage increases of this magnitude. Certainly, small Mom and Pop businesses that are struggling to get by already will not be able to afford the mandated wage hike. To the extent they can, businesses will try to pass as much of their higher cost along to customers. In that case, the minimum wage boost can be viewed as a higher consumption tax.
To the extent that the enlarged wage costs cannot be passed along to customers, businesses will have to make decisions about personnel cutbacks and/or benefit reductions. Now here’s the really ugly part. Workers who are currently making more than minimum, and getting some health coverage or other company paid benefits, could see those cut back so the company can meet the higher payroll mandated by the state. Wonder how they will feel about that?
It’s the seen and the unseen problem writ large. The workers receiving a nice fat pay jump courtesy of the Governor and legislature will be happy and the politicians will gloat over the marvelous thing they have done for the “little guy”. Meanwhile, consumers who are picking up the higher wage cost through increased prices, the workers who are losing jobs or benefits, and the businesses that might close their doors altogether will get little notice. That’s the way governments that don’t believe in or trust competitive, free markets and who are wedded to statist policies work. That’s also the way governments where politicians focus on the squeaking wheel to the detriment of the body politic as whole operate.
Experience shows us that more often than not, income-redistributing policies lead to a lowering of aggregate production and incomes relative to where they would be absent the policies. That’s the minimum wage story. Government mandated redistribution for a supposed greater good. The public gets suckered every time.
The legislature is closing in on a bill that will boost the state’s minimum wage to $7.15 per hour by July 1, 2007; January 1, 2008 if the Senate version passes. The current minimum is the Federal rate of $5.15.
Let’s cut through all the rhetoric about how working families need a pay raise and look at reality. According to the Department of Labor and Industry, approximately 423,000 workers currently earn between $5.15 and $7.15 per hour—the current and proposed minimum wages in Pennsylvania. Let’s assume that the average wage paid to this group is half way between at $6.15 per hour. That means that after the new minimum goes into effect, the annual wage bill of Pennsylvania’s businesses will rise by almost $900 million, an average of over $2,000 for the 423,000 workers.
But that is not the end of the story. Workers currently earning $5.15 per hour will get a wage jump of $2.00, pushing their employers’ annual cost upward by about $4,000 for those working full time. Now this leads to something called wage compression. Workers who were making say, $7.25 per hour prior to the minimum wage because they had learned skills sufficient to boost their production value above the very low skill, entry-level positions, will find themselves earning little more than people whose market value was previously 30 percent below their own. They will undoubtedly not be very happy about that and will push for higher wages to reflect their superior productivity.
And it gets worse. Obviously, there is no way companies in highly competitive sectors such as eating and drinking, leisure and hospitality, or retailing can afford to absorb wage increases of this magnitude. Certainly, small Mom and Pop businesses that are struggling to get by already will not be able to afford the mandated wage hike. To the extent they can, businesses will try to pass as much of their higher cost along to customers. In that case, the minimum wage boost can be viewed as a higher consumption tax.
To the extent that the enlarged wage costs cannot be passed along to customers, businesses will have to make decisions about personnel cutbacks and/or benefit reductions. Now here’s the really ugly part. Workers who are currently making more than minimum, and getting some health coverage or other company paid benefits, could see those cut back so the company can meet the higher payroll mandated by the state. Wonder how they will feel about that?
It’s the seen and the unseen problem writ large. The workers receiving a nice fat pay jump courtesy of the Governor and legislature will be happy and the politicians will gloat over the marvelous thing they have done for the “little guy”. Meanwhile, consumers who are picking up the higher wage cost through increased prices, the workers who are losing jobs or benefits, and the businesses that might close their doors altogether will get little notice. That’s the way governments that don’t believe in or trust competitive, free markets and who are wedded to statist policies work. That’s also the way governments where politicians focus on the squeaking wheel to the detriment of the body politic as whole operate.
Experience shows us that more often than not, income-redistributing policies lead to a lowering of aggregate production and incomes relative to where they would be absent the policies. That’s the minimum wage story. Government mandated redistribution for a supposed greater good. The public gets suckered every time.
