The Minimum Wage Bomb

Today, the Federal minimum wage is being raised by nearly 11% or by 70 cents from $6.55 to $7.25 per hour (See Full Story). This change will affect at least 4 million workers in America. With the rate of inflation at about 2.2 to 2.3%, this is an increase in the minimum wage that is over 4-1/2 times greater than the current average rise in prices in America (See U.S. Department of Labor Report, Last Line of Table Q2).

Even in the best of times, any increase in the minimum wage would result in some amount of workers being laid off. Now, in the midst of a recession, a boost in the minimum wage could be even more detrimental to the employment situation than this country has ever seen before. Here are my reasons.

More Lost Jobs.

Almost all economists agree that raising the minimum wage will result in some job losses. However, there is a division among them as to how dramatic that impact would be. Some argue that the greater benefits outweigh any small loss of jobs. Of course, that might be a "hard sell" for those losing their jobs to the increase.

Certainly, in the best of economic times, the increase of the minimum wage could be lessened by the employer offsetting the increased labor costs by increasing their prices for their products and/or services that they sell. But, we aren't in the best of times. Product and services pricing is being constrained by the extremely tight competition for business in the midst of a deep economic recession. In an extremely labor intensive business, such as landscape maintenance, the consumer isn't going to tolerate an 11% increase in pricing when their own money is tight. This puts the employer in position to cut people; rather than lose customers.

Think of it this way. If a small company has 10 workers and those 10 workers suddenly become eligible for that 70 cents per hour raise in their wages, that's a combined increase of $7 per hour for that company. That extra seven dollars an hour is equal to the wage for one new employee being paid under the old minimum wage. If that company couldn't afford to hire another employee before the minimum wage increase went into effect, it certainly won't be able to afford the effective cost of another employee after the new minimum was imposed on them. Therefore, if a business owner can't raise prices, they will have no other choice but to let at least one of those 10 employees go.

It should also be mentioned that, depending on each State's individual laws regarding their own minimum wage, any increase in the Federal minimum can also trigger automatic increases in the State's minimum wage. Therefore, the loss of jobs can be expanded to include workers who were not directly affected by the Federal change in wages.

Lastly, a bottom up increase in wages can have a ripple effect for pay scales of worker who are above the minimum wage. That means that a company could be forced into a pyramidal series of wage increases in order to maintain wage parody for its longer-term and more valuable employees. This, too, could result in more entry-level employees being let go because most good companies would want to protect the jobs of their more senior and more experienced workers.

Losses in Federal and State Tax Revenues.

Businesses only pay income taxes on their profits. Profits are what is left over after a business deducts all it's expenses, including salaries, from the money or revenues that it takes in.

Based on what I just pointed out, the money that will be used to pay for the new minimum wage will be directly taken out of profits and moved into the pockets of the minimum wage earners. Since most all of the minimum wage earners are part of the 40% of Americans who don't pay any income taxes, that means that there will be a complete loss of tax revenues on that money that is being used to pay for the increase. For each dollar of a company's profits being use to pay the minimum wage, our Federal government could lose between 10 cent and 40 cents in tax revenues; depending on how profitable that company was before increase went into effect. States, too, will lose tax revenues if they have a progressive tax and if low end wage earners pay little or no taxes.

Any way you shake it, there will be a loss of tax revenue at a time when our Federal government and most States are realizing massive budget deficits.

Forced Wage Increases for Union Workers Could Kill Some Businesses and further hurt Governments.

Because many union contracts include a negotiated clause that would automatically adjust union wages upwards when the minimum wage is increased, many manufacturing and service companies will see cost increases for those workers who aren't even making the minimum wage. As a consequence, this could push some marginal companies into bankruptcy or into a complete shuttering of their businesses.

For the Federal government and some state and local governments, this could be a double-edged sword. First, as previously noted, there will be a loss of tax revenues as profits are being reduced. But, more than that, federal, state, and local expenses could increase when these kinds of "automatic clauses" are put into effect and if government employees are the ones being affected. That's because almost all state, local and federal workers belong to unions. In a State like California, that already has a massive budget deficit, this could be disastrous.

Consumer Price Inflation.

If they can, some companies will raise their prices to meet the new payroll demands of their minimum wage earners and for any other wages, above that level, that must be adjusted. In a recession, this type of price inflation is highly counterproductive. The consumer is already absent in this economic downturn and higher prices will only make "buying things" less attractive. That will further hurt the economy and could have the ripple effect of creating more job losses.

Some Workers Will Lose Government Aid Benefits.

Depending on whether or not a minimum wage earner is the sole provider of a family with children or a single parent, the increase in their salary could, in some cases, result in their loss of government subsidies like medicaid, food stamps, Temporary Aid to Needy Families (TANF) and many other special aid programs. The exact number affected and the amount of aid that will be lost to any low-income wage earner is probably unquantifiable. However, it is only logical that some minimum wage income earners , depending on the family structure, will exceed the pay threshold for some or all of their aid benefits.

My Final Comments.

I have never been a believer in a Federal minimum wage. I believe that the minimum wage should be left up to the individual states. That's because the standards of living vary so greatly from state to state. What might be a good wage in Tennessee or Mississippi may be an unlivable wage in a place like New York or San Francisco.

Every action by our Federal government always has some downside associated with it. When the Democrats passed this massive change in the minimum wage law in 2007, the economy looked to be in good shape. However, now, nothing could be farther from the truth and the impact of their actions will do nothing but send this economy into deeper depths. I don't know how many workers lost their jobs in 2008 when, on July 24th, the minimum wage was upped by 12% to $6.55 per hour. But, for sure, with the recession already underway at that time, there had to be some losses of jobs and, surely, some losses in tax revenues.

Now, with an ever increasing rate of unemployment, this 2009 increase couldn't have come at a worse time. Don't be surprised if this newest punch to the midsection of our business community doesn't have an even more disastrous effect on business profits in the next two quarters to come. I would even guess that some employees were given walking papers as of yesterday; the day just before the wage increase went into effect. If so, that fact should be reflected in the number of employees filing for first-time unemployment insurance over the next two weekly reporting cycles.

In a strange way, the prior Republican Congresses are responsible for this mess. From 1994 on, when they had complete control of Congress, they ignored doing anything about the minimum wage. They could have passed legislation that gradually and automatically increased the minimum, year-by-year, so that we wouldn't have had this massive impact that will hit our businesses today. But, they did nothing. Therefore, it was only logical that the Democrats, after having taken complete control of Congress in 2006, would make up for all those lost years by passing legislation that would literally and mindlessly correct the situation in just two short years. The Republicans had their chance to disarm the Democrats; but, they didn't! Now, we all might be paying for their sins of absenteeism on this issue with continued skyrocketing unemployment and the cost that will bring to our economy.