Matching Seattle’s $15 Minimum Wage Will Breed Poverty

minimumwageBrookings Institution analyst Gary Burtless takes a dim view of Seattle’s $15 minimum wage, to be instituted during the coming years. His concern mainly stems from the inevitability of would-be Seattle business owners and employers setting up shop just outside the city limits, where the minimum wage is anticipated to be much lower.

But Burtless doesn’t have a problem with a $10.10 national minimum wage proposed by President Obama. And he apparently would support Washington state raising its minimum wage to match or more closely match Seattle’s $15 wage floor.

“The risk of this kind of harm is vastly smaller when the minimum wage is increased at the state or national level,” he writes. “If the Administration can persuade Congress to boost the national minimum wage, all employers—inside and outside a city’s limits—will be required to raise the pay they offer to their most poorly paid workers.”

Burtless apparently is not concerned that a $10 or $15 state or national minimum wage will price workers out of the job market — to an even greater extent than is the case now.

If Washington state or Seattle’s surrounding communities boosted their minimum wage to $15, employers would hire workers only if those workers produced at least $15 worth of output. If a worker is being paid $15 per hour, but the extra sales thanks to that worker only amounts to an average of $14 per hour in revenue, that worker is causing the employer to lose money. And therefore the worker likely would be laid off or not be hired in the first place.

To produce $15 worth of output per hour, a worker has to have skills. It could be technical skills, management skills, people skills, verbal skills, or other types of skills. It could be skills, for example, to operate a sophisticated cash register while at the same time communicating effectively to customers. Not everyone has those kinds of skills. The existing minimum wage is one reason why the unemployment rate among minority young people approaches 40 percent. A $10 and/or $15 minimum wage will price even more people out of the job market. Already, in Washington state, the unemployment rate among 16- to 19-year-olds is about 30 percent. That’s because their relative lack of skills prevents them from producing more than $9.47 per hour of output – the state’s current minimum wage.

Whenever anyone tells you that they want to raise the minimum wage to help the poor, be aware that this course of action will mostly harm the poor. It’s a big reason for the poverty and high unemployment among America’s low-skilled and unskilled.

One Intern’s Bizarre Notion of “Subsidy”

minimumwageThere’s a recent Guardian article headlined, “Tax breaks for CEOs pay for million-dollar salaries: CEOs’ salaries are ballooning thanks to tax breaks that turn bonuses into government subsidies for corporate America”.

It makes two laughable assertions: that stock options are a government subsidy to businesses, and particularly bizarre, that the minimum wage is a subsidy to businesses. The latter is positively Orwellian, straight out of the Ministry of Truth: the state is imposing a regulation on you making it harder to run your business, and that’s a favor to you so you should appreciate the good efforts of the state.

Jana Kasperkevic, described as “the fall US Business intern for the Guardian US”, writes that “Many argue that there are two subsidies at work: tax breaks to keep CEO pay high, and a low minimum wage to keep worker costs low.”

Payment in stock options is incredibly complex for accounting and tax purposes, and complex topics can be easy to demagogue, which Kasperkevic faithfully does. To  get a feel for some of the complexity, read this. Here, however, I want to focus on the other main allegation: that the current national minimum wage is a subsidy to employers.

First of all when an employer is coerced by the government into paying a minimum wage above the market-clearing wage, that’s the opposite of a subsidy. It’s a cost – imposed by the government.

What Ms. Kasperkevic probably means to say is that welfare benefits such as food stamps are not only a government subsidy to a particular person, but also to that person’s employer, and faults the employer for accepting that government subsidy.

Kasperkevic doesn’t realize it but she’s actually making an indictment against the government. Her argument assumes that the employer is getting away with paying lower wages than would be the case without the welfare payment, which in turn assumes that if the welfare payment were removed, then the employer would be forced to raise wages by the amount of the welfare payment in order retain that worker. So under this situation the government is creating artificially low wages. Remove the welfare, and wages will rise, she implies.

Whether wages actually would rise is an open question with many factors involved. If not, then Kasperkevic is wrong – the employers are not getting a subsidy; only the direct welfare recipient is.

Meantime, Kasperkevic essentially says that coercing employers to raise wages by boosting the minimum wage would reduce government spending on welfare benefits such as food stamps.

While some people could become ineligible for welfare under this scenario, many other people would become newly eligible for welfare due to being laid off. If the minimum wage were raised from $7.25 to $10 per hour, a worker only would be retained if he or she produces more than $10 per hour of output. While many people have the skills to produce just above $7.25 per hour of output, they don’t have the skills to produce $10 per hour of output. In that case the employer would be losing money on that worker, and the latter would be laid off (unless the employer for some reason is fine with losing money).

So a higher minimum wage would result in more unemployed people, creating new demand for welfare benefits. Spending on welfare benefits, therefore, likely would not go down, but up. The reality of a minimum wage hike would be the opposite of what Ms. Kasperkevic implies.

A higher minimum wage can only avoid unemployment if all of the working population is skilled enough to produce output above the minimum wage. For example if the minimum wage is $7.25 per hour and all of the working population is skilled enough to produce, say, at least $11 per hour of output, then raising the minimum wage to $10 likely won’t produce unemployment.

But alas, large segments of the U.S. working-age population aren’t skilled enough to produce $11 per hour of output let alone $7.25 per hour of output, especially minority youth and those who can’t speak English. And it shows: unemployment among black teens is a mind-boggling 42 percent. Raising the minimum wage would boost that unemployment rate even higher (all other things being equal). And it would boost demand for welfare even more.

So in addition to a minimum wage boost being a cost, not a subsidy, to employers, it would be the kiss of employment death for low-skilled workers.