Business Owners for a Higher Minimum Wage? Say It Isn’t So

Business Owners for a Higher Minimum Wage? Say It Isn’t So

In a July 23rd  press release, a group calling itself “Business for a Fair Minimum Wage” calls for a three step increase in the Federal minimum wage from the current $7.25 per hour to $9.80 per hour by 2014 and then to index the rate to inflation beyond 2014.  Before laying out the case against a minimum wage and specifically a Federal minimum wage, it is instructive to look at the businesses who are ” signatories” to the call for “fair” (which means ever higher) minimum wages.

 

 

The group has a website, “businessforafairminimumwage.org.” The website does not provide a history or a mailing address.  This alliance is sponsored by another group called “Business for Shared Prosperity”. Again no history or postal address.   But the Shared Prosperity group does have an interesting set of policy goals and legislation that it supports. One: through the fair minimum wage group it is supporting a higher minimum wage; two: it supports the President’s plan to end the Bush tax cuts for individuals with incomes over $200,000 and couples over $250,000; three: it supports implementation of the President’s so-called Buffet rule: four: it opposes tax cuts for corporations on the grounds that corporations already pay too little tax.  

 

Needless to say, these positions are diametrically opposed to the positions of a vast majority of business organizations in the country.  So, who are these people?

 

The “Business for a Fair Minimum Wage” group has just three state business signatory lists: New York, Illinois and Maryland. Not exactly a national or even representative movement.  They might get a few more states having the deep blue political environment of the three current members. But there are unlikely to be many states in the purple or red category that will be providing many signatories. And it is a bit presumptuous for folks in New York and Illinois to be telling the country how to run an economy in light of their rankings on key economic measures calculated by CNBC recent ranking of the states report (see Policy Brief, Volume 12, Number 36).

 

New York ranks 47th in terms of the cost of doing business and 50th in business friendliness. Illinois ranks 46th in business friendliness and 45th in overall economic performance. Meanwhile, Maryland ranked 42nd in cost of doing business.  Although, thanks to its proximity to DC, Maryland’s economic performance was in the midrange with a 24th place ranking. Nor do Illinois, New York or Maryland fare well in the Tax Foundation rankings of business tax burdens.  

 

Moreover, the signatories do not appear to be representative of the business community in the three states. As of July 24th, New York had 230 signatories on its list of supporters of the “Business for a Fair Minimum Wage” group’s statement of support for raising the minimum wage.   In Illinois there are 21 signatories and in Maryland 53.  Of those a majority appear to be businesses that probably do not hire minimum wage employees. That is, there are consultants, psychologists, architects, designers, CPAs, doctors, non-profit organizations, the Upstate Medical Center and the Greater New York Chamber of Commerce. In New York there was one bakery on the list and a couple of farms. But there was notable paucity of retailers, restaurants and service companies that offer most of the entry level jobs. The same pattern holds in Illinois and Maryland.

 

The conclusion to take away from this is that the “Business for a Fair Minimum Wage” organization has far too few signatories to be viewed seriously as an indication of what the business community in these states thinks or believes about the minimum wage. According to Resources for Entrepreneurs there over 1.7 million small businesses in New York state, 1.0 million in Illinois, and 477,000 in Maryland.  So, what are we to make of the miniscule number of businesses who have added their names to the list of businesses supporting a higher minimum wage?   In simplest terms they are out of touch with the vast majority of the business owners in their own states and in the U.S.

 

Two questions for these signers. First, do you have any entry level employees and do you pay them above the required minimum? Second, are entry level wages in your state or city already above the minimum wage?  Obviously, any firm can choose to pay whatever wage it wants to pay or feels it should pay-although it might not survive if it overpays relative to what its competitors are paying. If any signatories are not currently paying what they believe is fair, what moral standing do they have to tell other businesses what wage rate they should pay? And, if the market wage for entry level workers is already well above the minimum wage, it is disingenuous to argue that businesses in cities or states with lower market wages ought to pay a higher minimum wage that is even further above the market wage. Clearly, on a cost of living adjusted basis $7.25 per hour is a much higher wage in Kansas or Mississippi than it is in New York City.  In New York, the minimum is well below the market wage for entry level jobs while in some lower cost of living states, $7.25 per hour could well be above the free market wage.

 

All of which raises the question, why is New York the epicenter of this so-called business effort to boost substantially the Federal minimum wage?  The most likely effect will be to reduce significantly jobs in lower cost of living states. Is that their unstated objective?

 

Here’s the bottom line. Minimum wages higher than market wages are a government effort to create income redistribution by causing a misallocation of resources.  Any money paid to a worker that is above the worker’s contribution to a firm’s revenue must result in one of two things or a combination of the two.  One, the firm will try to raise prices to cover the higher costs resulting from a boost in the minimum wage if it is to maintain profit levels and continue to pay the non-minimum wage employees. If the demand for the firm’s product is highly elastic, the firm’s sales will fall along with revenue. If the firm has an inelastic demand, the price hike could cut unit sales but not reduce revenue. In either case, the firm will sell fewer units of product and need less labor.

 

Two, rather than raise prices, the firm can look for ways to cut costs by reducing employees, eliminating overtime,  lowering worker benefits for all workers, or place more workers on part-time status so that they do not have to pay benefits. 

 

If companies are making significant profit more firms will be enticed to enter the market and compete-unless it is a protected monopoly for which there is no viable substitute product or service. That will raise demand for workers and put upward pressure on wages. That is the best and only sustainable route to higher real wages. Unprofitable companies are unlikely to be able to withstand mandated higher costs and will close or drastically cut back, putting more labor into the market and in the unemployment lines.

 

At a time when the unemployment rate is so high for entry level workers such as teenagers and low skill workers, it makes absolutely no sense to impose a policy that will further weaken the number of jobs available. And if it is government created demand to provide stimulus to the economy that minimum wage raisers seek, it might be well look at the enormous deficit spending and unprecedentedly easy monetary policy that is in place now. If those are not stimulating enough demand to boost economic growth, raising the minimum wage has no chance of doing so-and will do significant harm.