What Raising The Minimum Wage Will Cost You

We are a country of about 317 million people. Of that, approximately 70 million are under the age of 18 and are presumed to be living with their parents and off their parent's incomes.  So, essentially, there are roughly 250 million people who should be receiving some form of income. That's how many would be affected by higher prices that would be passed on by raising the minimum wage by $2.85 an hour to the proposed $10.10/hour.

According to the Congressional Budget Office (CBO), raising the minimum wage for the 1.6 million workers who earn that wage would actually result in a total of 16.5 million workers seeing their incomes increase. The reason for this is that when you increase the bottom salary level by an extraordinary 41% (as this increase would do), all the salaries above that level will have to be adjusted upwards in order to maintain equity in any typical company's pay scale ladder.  The head of Obama's National Economic Council, Gene Sperling, predicts an even higher number with as many as 28 million seeing their incomes increased.

Now, if we use the 34.2 hours that the Bureau of Labor Statistics says the average American works each week, and we assume the CBO's 16.5 million number that a $2.85 per hour increase results in, an annualized cost of  almost $85 billion will be passed on to us in higher prices.  Divide that by the 250 million people who pay the bills and that's a per person cost of $350 year; or, $700 per family.  If you use the Sperling's 28 million, you're talking about almost $600 a year per individual or $1200 per family.  Obviously, Obama and the Democrats don't seem to think you'll miss all that cash. 

Like it or not, after the minimum wage is increased, 250 million of us will be $350 to $600 poorer each year; and, on an ongoing basis.  For many, that extra cost may have just wiped out any raise they may have received. Especially hurt are the unemployed; the poor; people on fixed incomes; and, those 2 million workers who aren't even paid a minimum wage.

What does that say about Obama's pet topic de jour: Income Inequality?   The simple fact is that when prices are pushed up by wage inflation, the majority of Americans will only get poorer.  It has just the opposite effect of  minimizing poverty.  Job creation and low unemployment are the real means by which poverty is reduced.  When there are too few workers competing for far too many jobs, employers are necessarily forced to pay higher wages in order to fill openings and keep good people. That's how it has worked for years.

We currently have the highest minimum wage in decades and, at the same time, median incomes are down almost 8% with still high unemployment and we have a record number of Americans -- 46.5 million -- who are in poverty.  And, let's not forget, the recession ended nearly 5 years ago. I personally believe that the reason this has been one of the worst recoveries in our history is because or economy is still trying to recover from increases in the minimum wage that took place during the heart of this last recession.  I also believe that our slow growing economy will be even worsened further by another massive increase in the minimum wage.  It is just folly to believe that forced wage increases won't have serious economic consequences.

References:

Raising the minimum wage would help 16.5 million workers but could cost 1/2 million jobs: http://www.washingtonpost.com/business/economy/minimum-wage-hike-could-kill-500000-jobs-but-help-alleviate-poverty-cbo-reports/2014/02/18/d171c130-98de-11e3-80ac-63a8ba7f7942_story.html

Increasing the nation's minimum wage to $10.10 per hour would help between 24 million and 28 million people: http://politicalticker.blogs.cnn.com/2014/03/05/obama-frames-minimum-wage-fight-in-global-terms/

Characteristics of a Minimum Wage Worker: http://www.bls.gov/cps/minwage2012.htm

Average Weekly Work Hours: http://www.bls.gov/news.release/empsit.t18.htm

Are The Rich Getting Richer and the Poor Poorer?

Back in July, Pew Research issued a report titled: "Pursuing the American Dream: Economic Mobility Across Generations."  In it, Pew looked at the social economic progressions of two generations of families; going back to 1968.  The report is extensive and its conclusions could easily be politically exploited; especially if you are on the political left and you believe that the poor are being disadvantaged in American society.  In fact, a writer the the New York Times, Catherine Rampell, did just that when she published her analysis of the report, titled: "Richer Rich, and Poorer Poor."  Certainly, her arguments are valid if you simply look at the size of the piece of economic pie that the rich and the poor share today as compared to four decades ago.

In a nutshell, she focuses in on the fact that salaries for the top 20% of American wage earners have risen more rapidly than those at the bottom.  In fact, when adjusted for inflation, she shows that incomes at the bottom have fallen by 62%. I would certainly agree with that conclusion on a simply statistical basis.  After all, the people who make up the category of "rich" in this country have seen their incomes explode over the last two generations.  Professional athletes, with all their endorsements and high salaries, are more likely to be instant millionaires today than a generation ago. The same is true for all those in the entertainment industry.  At the same time, much-sought-out Wall Streeters, CEO's, and select MBA's and PHD's have seen there salaries rise more rapidly than even 10 years ago.

But, the problem with Ms. Rampell's conclusion of a "Poorer Poor" is that it simply ignores the reality that the poor and lower middle class of today are a lot better off then their predecessors Which is one of the key conclusions on page 5 of the Pew report:

"Eighty-four percent of Americans have higher family incomes than their parents had at the same age, and across all levels of the income distribution, this generation is doing better than the one that came before it."

Ms. Rampell also seems to forget that, in 1968, people making as little as $900 paid a federal income tax.  Today, almost half of all Americans pay no federal income tax.  In fact, those at the bottom, actually get rebate checks if they file a tax return. Further, social programs, like LBJ's Great Society, have greatly improved the lives of the poor in last 4 decades.  They are now guaranteed free healthcare through programs like Medicaid.  Most receive welfare checks. Children get free or low-cost school lunches under the National School Lunch Act. There is a similar program for breakfasts. Today, many of our poor have amenities that the poor of 1968 could only dream of; like TV's, cars, and cell phones.

But, more importantly, Ms. Rampell ignores another key conclusion of that report (again on page 5):

"Forty-three percent of Americans raised in the bottom quintile remain stuck in the bottom as adults..."

Now, when you look at that above statement on a more positive basis, it says that 57% of those born into poverty actually are able to lift themselves out of poverty. Certainly, for those who accomplished this, you can't argue that those people got poorer.

Additionally, the Pew report also concluded that only 40% of those born into wealth remain wealthy.  Conversely, this means that 60% of rich at birth wind up being poorer.  Meaning that Ms. Rampell's conclusion of a "Richer Rich" is, in reality, just all wet. 

To me, this report just proves that the American Dream is alive and well for those who "seek" it out.  And, the key to this is education.  As Pew reported:

"Having a college degree makes a person more than three times more likely to rise from the bottom of the family income ladder all the way to the top, and makes a person more than four times more likely to rise from the bottom of the family wealth ladder to the top."

References:

--- New York Times Article: Richer Rich, and Poorer Poor: http://economix.blogs.nytimes.com/2012/07/10/richer-rich-and-poorer-poor/

--- Pew Report:  Pursuing the American Dream: Economic Mobility Across Generations: http://www.pewstates.org/uploadedFiles/PCS_Assets/2012/Pursuing_American_Dream.pdf

--- 1968 Tax Instructions: http://www.irs.gov/pub/irs-prior/i1040a--1968.pdf

--- Heritage Foundation: Understanding Poverty in the United States: Surprising Facts About America's Poor: http://www.heritage.org/research/reports/2011/09/understanding-poverty-in-the-united-states-surprising-facts-about-americas-poor