Inequality debate places minimum wage front and center
One of the more contentious aspects of the debate about income inequality is the proposal to increase the federal minimum wage of $7.25 per hour to $9 for non-exempt workers. In his State of the Union address Jan. 28, President Obama promised to issue an executive order requiring government contractors pay their workers at least $10.10 an hour.
Stuart Hoffman, chief economist with the PNC Financial Services Group, explains that the minimum wage has not been increased for seven years. It is fortunate, then, he noted, that inflation has remained relatively low at 2 percent.
Hoffman believes increases of the minimum wage constitute an income distribution scheme that creates job losses when payroll costs rise.
“Workers who remain employed have greater spending power, but the situation grows grim for the employee who is out,” says Hoffman.
In fact, William Dunkelberg, chief economist for the National Federation of Independent Business, argued in the pages of Forbes that, “As a jobs program, raising the minimum wage is a real loser. Congress raised the minimum wage 10.6 percent in July 2009. In the ensuring six months, nearly 600,000 teen jobs disappeared, even with nearly 4 percent growth in the economy, this compared to a loss of 250,000 jobs in the first half of the year as GDP growth declined by 4percent. Why? When you raise the price of anything, people take less of it, including labor. The unemployment rate for teens remains unacceptably high. Workers of all ages that are relatively unskilled are adversely impacted by this policy.”
The tie between minimum wage increases and unemployment is very real, says Darlene Robbins, president of The Northeast Pennsylvania Manufacturers and Employers Association. She emphasizes that employers have limits on their cash, and spiraling health-care costs are also hurting balance sheets.
“Any loss of capital eventually creates less consumer spending, and depresses the economy,” says Robbins.
Kim Hawk, past president of the Northeast Pennsylvania Society of Human Resource Management, confirms that, despite low inflation, business is dealing with cash-flow pressures, such as rising prices for energy and health care. She concludes the time is not right to inhibit economic recovery with a legislated wage increase.
“Only free markets should influence compensation — definitely not legislation,” says Hawk. “Benefit costs have become terribly painful, and this is one of the reasons small pay raises have become the norm.”
Susan Shaffer, an independent workforce consultant, offers an entirely different angle on the minimum wage. She calls upon commerce to place greater value on the efforts of workers in service industries. “I find it discouraging that society doesn’t value service,” says Shaffer. “For example, food-handler jobs are so vital, because mistakes can sicken or kill people, but they are paid so poorly. And, a hotel front desk employee is much more important to the quality of a guest’s stay than the shareholders or the company’s president.”
Gene Barr, president of the Pennsylvania Chamber of Commerce, acknowledges that the idea of raising the minimum wage has a populist appeal. But, Barr also says additional money to increase employee pay cannot just be “found.” Moreover, raising the wage will result in fewer minimum-wage jobs, which are crucial because they provide opportunities to learn entry-level skills. “A legislated wage increases doesn’t put more money into economy,” says Barr. “It just moves around the money that already exists.”
He explains that two-thirds of minimum wage jobs are at small business, but more than half of minimum-wage earners live in households with incomes above $50,000. When viewed against total employment, 75 percent of minimum wage jobs are part-time, 77 percent of the workers have no children and 25 percent are teenagers.
“Pennsylvania teenage unemployment is 15 percent and for minority youth ,unemployment is 30 percent,” says Barr. “Do we really want to raise the minimum wage knowing that jobs will be lost?”
The idea of a minimum wage increase is popular and sounds good to the public, says Nate Benefield, director of policy analysis with the Commonwealth Foundation for Public Policy Alternatives. Yet, Benefield also believes that the public has limited understanding of the effects created by mandated wage increases. He says forcing the wage increases by fiat creates the nasty side effects of job loss and reduced work hours.
“Many of our unskilled workers are at minimum wage. We could wind up pricing them out of jobs because of a wage hike,” says Benefield. “Teenagers at the entry level also receive invaluable experience from these jobs. Increases to the minimum wage will create less workplace exposure for these kids.”
Tim Kearney, Ph.D., chairman of business department at Misericordia University, explains that the minimum wage has a tendency to move in big jumps or remain stagnant, depending on the economy. During the prosperous times of the 1990s, labor demand increased and wage scales moved up.
This is in contrast to today, where there’s a labor surplus, automation is widespread and the balance of power has shifted to the employer. “The minimum wage debate should be shifted to productive discussions about how to move the economy forward and move wages up over time,” says Kearney. This process should be a public-private partnership where the participants are not antagonists.”
Satyajit Ghosh, Ph.D., professor of economics and finance at the University of Scranton, completely disagrees. He is an ardent advocate of legislation that would eventually bump the minimum wage up to $10 per hour, but he also believes legislation alone can’t fix America’s income inequality problems.
Dr. Ghosh questions the validity of two typical arguments about minimum-wage increases. In the first case, opponents of a wage increases say minimum-wage earners are only a small part of the labor market, accordingly, there’s no point in saddling business with the cost increases.
The second argument says, if the minimum wage is raised, the increased costs will be a disaster for small businesses with narrow profit margins and job losses will result.
“These arguments are inconsistent,” charges Dr. Ghosh. “They can’t both exist and be accurate.”
He points out that half of minimum-wage employees are the top earners in a family. For these people, the low wages constrain purchasing power, resulting in depressed consumer spending. In addition, a large portion of minimum-wage earners are head-of-household single mothers. Dr. Ghosh acknowledges that a wage increase to $10 hour won’t eliminate poverty, but he calls it a step in the right direction.
“When the richest country in world can’t offer salaries for people to put food on the table and have adequate shelter, something is very wrong,” says Dr. Ghosh. “This is a moral question, and a question about our values system. I am still hopeful these low wages are going to improve, because societal mindsets do change.”