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Increasing the minimum wage: It doesn't make cents

By Gregg Coughlin
web posted June 16, 2014

But it does help eliminate competition for big business and buy votes in the 2014 mid-term elections. Or at least that's what Wal-Mart and the Democrat party hopes will happen. Politics makes for strange bedfellows indeed.

A 2011 report by the U.S. Census Bureau claims that over 46 million people in the U.S. live in poverty. A 2013 report from the Bureau of Labor Statistics shows that the "working poor accounted for 10.4 million of this number." Moreover, a recent United Nation's Children's Report also claims that "one in five American children fall below a relative poverty line," resulting in the U.S. ranking "34th of the 35 countries surveyed."

President Obama and the Democrat Party have taken the opportunity to use this supposed poverty crisis for political leverage. At a glance, their efforts sound noble. In a radio address delivered in late April, President Obama argued that raising the minimum wage to $10.10 "would lift wages for nearly 28 million Americans." However, Scott DeFife, a lobbyist for the National Restaurant Association, said that the minimum wage proposal is largely seen as a campaign action, and not an effort to legislate minimum wage changes.

Non-economists (read: the American public) usually express widespread support for an increase in the minimum wage. Earlier this year, an Associated Press poll found that 55 percent of the public supports a minimum wage increase and 21 percent are against it. In a bid to bolster their image, the Democrats can support the minimum wage increase even if they know full well that it won't pass because this makes them look like they are trying to do something to fix the "poverty crisis." On the other hand, Tea party voters—on whom the GOP will rely heavily in the 2014 midterm elections—were 43 percent against an increase in the minimum wage and 28 percent for it in the same poll.

The gridlock, while explainable through political differences, also makes sense because raising the minimum wage is bad policy. In February, a CBO Study found that President Obama's proposed minimum wage increase would raise the incomes of 16.5 million low-paid workers but also result in the loss of 500,000 jobs. Economists writing in the Journal of Human Resourceshave found that the net effect of an increase in the minimum wage "was an increase in the number of employees living in poverty or near it."

Despite these numbers, the presidents of Wal-Mart and Costco recently came out in support of an increase in the minimum wage. While this may seem counterintuitive at first, it should come as no surprise, as Wal-Mart has previously backed laws increasing the federal minimum wage. Big retailers such as Wal-Mart Costco are much better able to absorb a minimum wage increase than their smaller competitors. A University of California-Berkeley study showed that if Wal-Mart "raised its minimum wage to $12 and passed 100 percent of it on to consumers, it would only have to raise prices by 1 percent." 

Likewise, because most Costco and Wal-Mart employees make above the market rate, these corporations would be largely unaffected by any raise in the minimum wage. By contrast, smaller shops would have to raise prices or cut employees to absorb the higher costs imposed by a minimum wage increase. Costco and Wal-Mart support of the minimum wage may look like a good PR move, but it also serves the interests of the bottom-line for each company. "Small businesses are the least able to absorb ... a dramatic increase in their labor costs," notes the National Federation of Independent Business, making the recent actions by Costco and Wal-Mart another example of rent-seeking (i.e. large corporations using government regulation to gain an artificial advantage over their competitors).

As a result, the National Retail Federation and National Federation of Independent Businesses strongly oppose any minimum wage hikes, because every single one of their members is smaller than Walmart. Larger companies can afford to pay exorbitant lobbying fees to get favorable legislation.  

According to Joseph Sabia, a professor of economics at San Diego State University who has written extensively on the minimum wage, "much of the empirical evidence published in peer-reviewed journals suggests that minimum wage increases fail to alleviate net poverty even among vulnerable populations that minimum wage advocates wish to help." To make matters worse, most credible empirical studies on the subject suggest that an increase in the minimum wage reduces low-skill employment (the very group minimum wage increases purport to help). In a recent study, Sabia found that only 13 percent of workers who would be affected by an increase in the federal minimum wage actually lived below the poverty line.

As Nobel Prize-winning economist Milton Friedman once said, "one of the great mistakes is to judge policies and programs by their intentions rather than their results." In this case, perverse political incentives motivate an increase in the minimum wage and lead to even more job loss in our struggling economy. ESR

Gregg Coughlin is a student studying Economics at Hillsdale College.

 

 

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