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Livable Wage, Economic Reality

McDanielProponents of increasing the minimum wage generally argue that it will improve the standard of living for low-income earners. However, numerous studies, including one completed by the Congressional Budget Office, which provides nonpartisan analysis for the United States Congress, have shown that minimum wage increases reduce employment. Consequently, a minimum wage hike can increase earnings for some workers and cause job loss and reduced earnings for others. Artificially mandating increased wages through government action also has the negative effect of increased inflation; thereby, further reducing any potential gains made by low-income employees. The cost of goods and services rise, as the money to pay the increased labor cost must come from somewhere.

I do not doubt the sincerity or compassion of those who wish to increase the earnings of low-income workers, but the law of supply and demand is not a suggestion. There are far better ways to increase the amount of take home pay that low income workers receive, such as expanding the Earned Income Tax Credit, reducing or eliminating payroll taxes on minimum wage earners, and, of course a more effective public education system that would provide them the needed skills to succeed. Most importantly, these employees will have the satisfaction and the dignity of becoming self-sufficient.

The poor cannot afford counterproductive initiatives like the Flagstaff Living Wage Coalition is attempting to advance in their name. According to the U.S. Department of Labor, nearly 65 percent of minimum wage earners are part-time employees. Many of those jobs are held by students and those with no experience. The benefits of the experience gained through a first job, even at relative low pay, provides the first step on the ladder of upward mobility. The vast majority of people who start out earning minimum wage do not remain there for long.

A study performed by the Manhattan Institute for Policy Research that was published in July examined the employment effects and antipoverty implications of raising the federal minimum wage to $12 and $15 per hour respectively. They found that raising the federal minimum wage to $12 per hour by 2020 would cost 3.8 million low wage jobs and by raising the wage floor to $15 per hour would cost 6.6 million jobs. This is, of course, a national study, but the negative employment effects in Flagstaff would be similar.

We already see evidence of job losses and price increases in areas where an increased wage floor has been implemented. Seattle increased its minimum wage to $11 per hour on April 1 on the way to $15 per hour by 2017. The U.S. Bureau of Labor Statistics has published the early effects of the wage hike on the Seattle metro area restaurant industry. Between January and June of 2015, restaurant employment in the Seattle metro area decreased by 1,300 jobs and by one percent, the largest decline for the industry during that period since early 2009, during the Great Recession. In May, the month following the minimum wage hike to $11 per hour, restaurant employment decreased by 1,000, the largest single monthly loss of Seattle area restaurant jobs since the Great Recession. Restaurant employment in the rest of the state of Washington increased by 2,800 jobs, or 3.2 percent, during the same period. The only honest conclusion that can be drawn regarding Seattle’s decision to artificially raise the wage floor is that it has been counterproductive.

Our local economy is largely tourist driven and according to the City of Flagstaff’s Economic Vitality Division, 31 percent of our jobs are in retail trade, arts, entertainment, accommodation and food service. What about the effects of the businesses that employ the local people that we know around town? These are the businesses that will feel the brunt of an artificial wage increase as well as an increase in payroll tax that the employers must pay. In the retail industry, wages are the single biggest expense a company has. Any major increase in a minimum wage affects the entire staff. If an introductory employee’s wage goes up 50 percent, the entire ladder of staff pay – from bookkeepers to managers to buyers – will go up 50 percent for parity among the entire group. Our local retailers/restaurants/hotels, etc., have to stay competitive with extensive online price comparisons. They simply cannot price their local goods and services higher than what any of us can find online. If the cost of labor is increased, and our locally owned businesses are unable to raise their prices, there could be other Flagstaff businesses that are “out of business.” Putting our local treasures out of business will only exacerbate the poverty problem and will change the character of Flagstaff.

It is no wonder that the Flagstaff Lodging and Restaurant Association recently voted to oppose the livable wage initiative. Multiple local restaurant owners have expressed extreme concern about this initiative and are fearful they would have to close their doors if it went through. The executive director of the Flagstaff Family Food Center, Food Bank and Kitchen stated quite bluntly that if Flagstaff instituted a $15 per hour minimum wage, the Food Bank would have to close. Stating there would simply be no way they could handle the additional payroll burden.

I spoke with Dr. Dennis Foster, senior lecturer of Economics at the W.A. Franke College of Business at NAU, and asked him for his thoughts on the issue. He stated:

Economists concern themselves with how we can best cope with the problem of scarcity. How do we encourage producers to make the goods we actually want? How do we get producers to use as few resources as possible? How do we promote innovation so that someone can figure out ways to produce more cheaply? Markets solve these problems by providing prices as a signal for resource use. When prices are set/changed by government edict, the consequences can be very damaging to our economic health and these consequences only worsen with time.  

When the government sets a minimum wage, it must lead to both a decline in the amount of labor demanded and in a rise in the amount of labor made available for work. The difference between these two is unemployment. The result is a matter of logic and proponents of a minimum/living wage cannot escape that result.  

Who is most likely to be part of this unemployment? It will be workers that are generally unskilled, with little education and little/no work experience. That pretty much translates into young workers. It shouldn’t be a surprise to anyone that the unemployment rate among 16-19 year olds is more than three times the national average for all workers – 18.1 percent versus 5.3 percent. Even among older workers, for those over 25 but with no high school degree, the unemployment is 8.2 percent.  

The imposition of a minimum wage hurts the most vulnerable in our society and the societal problems that emerge will be magnified over time. If a teenager can’t get started in the work force because the government sets wages above their equilibrium value, then this delays their acquisition of skills and experience. One may argue that income inequality is a direct result of such a government mandate.

Waving a magic wand to raise wages and “make life fair” does no such thing. It hurts those least able to cope and deters their entry into the labor force. It also penalizes businesses that hire workers at the minimum wage in the first place. This employer has given someone a job and now is punished with having to pay even more. This discourages these kinds of businesses in the first place and encourages them to find methods of automation that can be employed in lieu of labor.

Most of us start out in entry-level jobs that pay much less than when we acquire increased skill and experience. I am grateful for my first job as a dishwasher as it taught me the skills needed to move up to where I was able to learn even greater skills. When minimum wage levels are set without regard to productivity, those without corresponding skill sets (like me at 16) would be priced out of jobs. There is nothing compassionate about reducing the chances of someone getting a job. Simply put, minimum wage laws have unintended negative consequences. We would all love to live in a world where scarcity didn’t exist and everyone has everything they want – but we don’t.

Stuart W. McDaniel is the government affairs director for the Greater Flagstaff Chamber of Commerce





One Response to Livable Wage, Economic Reality

  1. Howie M September 22, 2015 at 5:02 AM #

    Good article. Unfortunately you will never convince the left, because their forte is breaking laws, even immutable laws like supply and demand, and never admitting they are wrong. Additionally, they have banned the word “consequences” from their lingo. I have been pushing for politicians to include a statement of foreseeable harmful effects in every law, rule, regulation and policy with little success. Maybe the way is to get a president who will not sign a bill into law without one.

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