Wednesday, September 3, 2014

The Detroit Experiment: Michigan's New Minimum Wage

Most advocates for raising the minimum wage argue that it would pull people out of poverty and, in fact, is good for the economy because it gives people more money to spend.  Because of this, some actually contend that raising the minimum wage creates jobs due to the increased consumer demand and the general strengthening of the economy.

Of course, I'm the old stick-in-the-mud student of economics who believes that raising the minimum wage causes wage inflation and that hurts more people than are helped.  Inflation of any kind, hurts businesses and costs jobs since the vast majority of Americans won't see their wages go up enough to counter the increase in prices.  Thus the consumer buys less and pays more for what they buy.  This is especially true for the millions of Americans who live on fixed incomes or social security, which has only gone up a meager 1.1% in the last 5 years; while overall inflation has exceeded 2%.

So, it will be interesting to see what happens in the city of Detroit following Michigan's Labor Day increase in the minimum wage by 10% to $8.15 an hour.  Here's a city that is already bankrupt with an unemployment rate of 14.5% in April and with more than 38% of the city's residents in poverty.  Currently, the average individual income is $14,861 a year.  By raising the minimum wage to $8.15 an hour, the average minimum wage worker in Detroit could see a full-time salary of $16,300; assuming two weeks of unpaid vacation and no overtime.  And, of course, this is $1,439 higher than the current average salary in Detroit.  But, keep this in mind.  While I don't know exactly how many workers in Detroit will benefit from the hike, on a national basis, there are only 1.5 million workers who earn exactly the minimum wage.  That's only four-tenths of a percent of our population.  But raising it affects many more than just those earning that wage by what I call the leap frog effect.  Because the minimum wage earners instantly get raises, it can leap-frog some other employees above him/her who will then,  in fairness, have to have their wages increased.  Some estimates are that this could affect 17% of all the workers or more than 8% of the nation's population.

In the title, I call raising the minimum wage an experiment.  If the proponents of the increase are correct then good things should happen to Detroit's horrible numbers noted in the preceding paragraph.  However, if I am right, the current downtrend in unemployment will reverse itself. The poverty number will only go higher; and, the average salary won't be affected by much, if any.  Also, it will show how irresponsible the legislature in Michigan was to further risk damaging Detroit (and, other high unemployment cities in Michigan) by passing this new law.  A law that won't just raise the minimum wage this year; but, also all successive years until it tops out at $9.25 in 2018.  And, why?  Because raising the minimum wage in this election year was politically expedient, Yes, even for the Republican legislature; as in the case of Michigan.


Minimum wage hike launches this Labor Day:

Detroit QuickFacts:

Detroit Unemployment Rate:

Characteristics of Minimum Wage Workers, 2013:

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