An Extremely Divisive Debate
There are few topics as divisive as the minimum wage policy debate. Understandably, salary and wages are a sensitive subject.
However, it's important to note that in economics, every change in the level of price benefits one set of parties and hurts another set of parties. For instance, rising home prices hurts first-time cash home buyers, but benefits those who already own homes. I know of no price level that, if modulated up or down, would harm absolutely all economic participants. Or be a total net economic negative. If you are aware of such a phenomenon, please comment below.
For instance, if stocks go up, stock owners benefit and short sellers are harmed. However, rising stock prices are seen as a net economic positive, and even though there are harmed parties, they tend to be less widespread than the benefited parties. Even the much maligned rising healthcare costs benefit their share of parties: insurance & hospital administrators, biotech, healthcare workers and others.
Another important thing to note is that $15 per hour is being phased in gradually to minimize disruption, not overnight. Consider Seattle's implementation of it:
Remember To Be Thinking "At the Margin"
Even a small $0.01 hike in the minimum wage would theoretically cause some workers to lose their jobs. That's because applied to millions of workers, some organizations could not afford to pay even a small amount more per hour, and would lay people off. This is known as "thinking at the margin."
I'm writing this article in response to an article published on Seeking Alpha regarding city-by-city hikes of the minimum wage to $15. In it, the author argues that a minimum wage hike to $15 will have detrimental impacts on the middle class, and that:
- Minimum wage earners will be just as poor at $15/hr as they are at $7.25/hr due to resulting increased prices.
In order for $15/hour workers to be "just as poor" as $7.25 workers due to increasing prices, inflation of 106.89% would have to occur overnight. That's technically hyperinflation. Hyperinflation has never occurred, and would be unprecedented in US economic history.
But let's just presume, for the sake of argument, that 106.89% hyperinflation inflation occurred in the country due to a $15 minimum wage. There would still be winners.
Those currently heavily indebted would be able to pay back their burdensome loans with devalued dollars. For instance, there is a minimum wage worker out there somewhere who owes $100K in student loans. Their ability to pay back the student loans would be boosted dramatically. The effect is even more obvious if the minimum wage worker owed $50K on a mortgage for a house worth $50K. The house would presumably increase to $103K overnight, for an instant boost of $53K in net worth due to the inflation. In other words, there would be $7.25 minimum wage workers who would get richer overall, not poorer.
Let me be clear. My argument here isn't that there will be hyperinflation if there is a minimum wage hike. Hyperinflation would be disastrous for the economy as a whole, even though some individuals would certainly benefit financially. My argument is EVEN if there were 106% inflation as implied, there would still be winners, because under any economic policy change, there are winners and losers.
A stronger argument, I believe, for $15/hour minimum wage causing poverty is that workers currently making $7.25 would have their hours cut back more than 52% or lose their jobs entirely due to the new $15/hour minimum wage.
- Those currently barely making a living wage will enter the poverty class. The middle class shrinks while the poverty class grows.
This is a rather vague statement. I believe the author is further arguing that inflation from a wage hike to $15 will draw many into poverty. However, more money in the hands of poorer people can also result in new job creation and upward wage pressure. Low wage workers spend a higher percentage of their income, unlike high-wage workers who save more of their take-home pay. Additionally, low-wage workers currently cost taxpayers considerable sums due to the government benefits they receive, such as food stamps.
- 100% of all Americans have their cost of living reduced as prices increase across the board.
This statement is clearly logically incorrect and should rather read:
- [sic] All Americans [will] have their cost of living
reduced[increased] as prices increase across the board.
Inflation isn't a boogeyman if wages are rising faster than it for most occupations. Whether wages are rising faster than inflation is the important consideration, not necessarily if there is increased inflation or not. Even pensioners shouldn't fear inflation too much, as social security is linked to CPI increases.
Again, I would like to see economic studies which clearly show that increasing the federal minimum wage coincided with inflationary spikes to back up these claims. Comment below if you know of such data.
A higher minimum wage could result in higher eventual earnings for ALL workers, even those who make well above $15 per hour due to the effects of increased consumer discretionary income.
- Job losses accelerate as entry-level positions are replaced by automation.
This is undeniable. This trend has already been occurring. Robots require no wages, no sick days, and no benefits. The incentive to automate is tremendous, whether the minimum wage is $7.25 - as it is now - or $15. Self-ordering kiosks have gotten a lot of attention as a pushback to fast food workers' "Fight for $15" movement.
We can't blame higher wages for increasing automation, as wages have been stagnant and productivity has been rising. From 1973 to 2014, productivity grew 72.2%, yet inflation-adjusted wages only rose 8.7%. It appears that the productivity gains brought about by technology haven't been shared with workers in the form of higher pay.
This has been a break from the long-term trend of rising productivity and wages. It seems that increased productivity is not translating into higher wages for workers. Will higher wages make it even worse for workers due to automation? Perhaps, but the creative destruction of rote jobs that lend well to automation may create new opportunities for workers in other areas. Perhaps it's better for workers to face the new economy head-on, rather than holding onto a job that will be soon automated in the near future? It's the destruction of old industry jobs and the creation of new industry ones which makes for a dynamic economy.
- Further job outsourcing abroad to escape an artificially inflated cost of labor.
Not everything can be outsourced. Try outsourcing sprinkler fitting, HVAC, medical, electrician or janitorial work. While many of these workers make over $15 already, many do not.
For instance, there are roughly 2.36 million janitors in the US. There median pay is $23,440 per year, or $11.27 per hour. Their jobs cannot be outsourced, but could be automated. While $15 an hour for janitors could increase the trend towards automation, it would undeniably benefit some workers.
We can "think at the margin" and presume that somewhere, out of 2.36M workers, there is a 65-year-old janitor working 40 hours a week making $12 per hour, or $480 gross per week. They can't really work full-time comfortably due to arthritis, but they do so anyway. Suppose a $15 minimum wage is enacted. Even if their hours got cut back to 32 hours a week, they would still be making the same amount of money for 8 hours less work. In other words, better off.
Further, our $12-an-hour 65-year-old janitor plans to retire in 2 years. Even if the hike to $15 accelerated the eventual development of the Janitorial Robot v1 that will replace their job to 10 years instead of 15, it won't affect them negatively.
With the change of any economic policy such as the minimum wage, there are always winners and losers. By thinking "at the margin," we can discover some of these winners and losers from a theoretical perspective. They are real people impacted by important economic policy decisions.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.