Wednesday, January 10, 2007

Free Money

A raise to the minimum wage looks imminent. The Democratic controlled congress is on board and the President has indicated he's inclined to sign such a bill if he receives one.

Apparently, no one let the Congress or the President know there is no such thing as free money.

Let's go along with claims that there are a vast number of people who work at minimum wage for 40 hours a week, 52 weeks a year. Now let's suppose there is some small business with 50 of these workers. Currently, this company would pay $535,600 in wages for those workers each year. When the congress raises the minimum wage to $7.25, this company will have to pay $754,000 for that same labor — an increase of $218,400, close to a quarter of a million dollars. Ouch.

Our pretend company now needs to come up with an extra $18,200 a month. If the company is profitable, perhaps it can dip into it's profits. Or it can try to get it's suppliers to cut their costs. Or it can raise the prices of it's products. Or they can try to get their workforce to be more productive so they can get a workforce of 35 to do the same job the workforce of 50 was doing.

None of these options are attractive. Especially to the working poor.

Suppliers suddenly offering lower prices isn't likely, but if it does happen at all, it is probable that it is because the suppliers have gone overseas to hire lower-wage workers, laying off low wage American workers in the process.

Cutting into profits means the company will be less attractive to investors, so when the company wants to grow and add more jobs, investors will be less likely to come on board.

Raising prices means the people buying these products will have to pay more to get them. If the products this company makes are bought by the working poor, the wage increase they received will simply go to buying more expensive products.

And leveraging increased working productivity to get 35 workers to do the job of 50 is just a fancy description for 15 workers getting laid off.

At best, the increase is negated by new inflation. At worst, many low wage workers find themselves out of jobs.

Of course this all assumes that the working poor and minimum wage workers are the same group of people. They aren't. Five percent of the US workforce makes less than $7.25. Five percent is also the percentage of the workforce that is 16-19 years old. Coincidence? I think not. And, just how many 16-19 year olds do you know that are working 40 hour weeks to pay off their mortgage as the sole provider for a family of four?

Fortunately, since the working poor aren't the same group as those making less than $7.25, an increase to the minimum wage will only cause minor economic disturbances. Unfortunately, due to this same fact, the minimum wage increase will do close to nothing to help the working poor.

Update: One chamber down. If you are a teenager, when the summer rolls around, my best wishes towards your chances of finding a summer job... (And my apologies, as an American, for electing law makers that are awful at economics.)

Update (5/26): TIME is reporting that it looks the House, the Senate, and President are all about to pass a re-written minimum wage bill...

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