Minimum Wage Increases: Who Really Benefits?

By Rabbi Steven Pruzansky

New York and California are set to raise the minimum wage from $10 to $15 per hour over the next few years, which sounds like good news for people struggling to make ends meet. What's wrong with artificially raising wages across the board is illustrated by this priceless statement issued by California's Governor Jerry Brown: "Economically, minimum wages may not make sense. But morally, socially, and politically they make every sense because it binds the community together to make sure parents can take care of their kids." It was eloquently ridiculed by Dan Henninger in the WSJ but the statement bears deconstruction, if only because it illustrates the shallowness of the American electorate for whose support, if not love, Brown is appealing. Sadly, he probably means well.

Well, why does raising the minimum wage make no sense, economically? One would think that the more money a worker earns, the better for him, his family, and the commercial enterprises in which he will spend his hard-earned money. So why not raise the minimum wage to $20 per hour, or, even better, $100 or $1000 per hour? Why can't teachers or nurses earn as much as Alex Rodriguez? Certainly many teachers and nurses will have better seasons.

The answer is because wages cannot exceed the productivity of the worker or the business will fail. This is the "no economic sense " to which Governor Brown is referring. A worker earning $10 an hour must produce at least $10 worth of product or service. If he produces more than $10, he is either underpaid or the employer is profiting. If he is consistently underpaid, then he has the right, in a free society, to take his services elsewhere and be paid what he is worth. Usually, the employer benefits, as he is the one who is risking his capital in the business and his profit comes partly from the wage/productivity differential in his favor.

Conversely, if the worker earns, say, $15 per hour and produces value of only $10 per hour, then the worker is getting a windfall even as the employer is losing money. Since most employers are not in business to lose money, one of three things will happen: a small number of workers will lose their jobs (hence the spike in unemployment most studies show is a consequence of artificially raising the minimum wage); or, as is happening in the entry level jobs where the minimum wage is most common, the jobs are being automated (that's why most people pump their own gas - outside of New Jersey, the only state that bizarrely prohibits drivers from servicing themselves - and even fast food restaurants are reducing staff and automating), in which case many employees will lose their jobs; or the company goes out of business, in which case everybody loses their jobs.

That is why teachers, nurses and a host of other professions (rabbis, for one) that accomplish more for society in real terms do not produce enough "economic" value to be paid what a mediocre professional athlete earns.

Obviously there is a number whereby the minimum wage can be raised and not trigger those Draconian consequences, but the number is speculative, much debated, and will probably vary from industry to industry. That is why a "one size fits all" increase is more problematic. And, certainly, one can make a cogent argument that some floor for wages is necessary to inhibit abuse but a ceiling is necessary as well. What $15 does that $17 or $13 or $10 wouldn't is a partial mystery, although it has the advantage of being an easily calculable figure.

Each business will decide to what extent the higher wage will impair their profitability and/or viability. Buy why would ostensibly intelligent politicians impose a wage hike that they know will lead to increased unemployment among the most vulnerable elements in society, especially among the youth for whom minimum wage jobs are often their portal into the work force?

For politicians, raising the minimum wage sounds caring in the short term but it is a very populist move, not to mention popular. Many people will earn more money in the short term, and not just those who earn the minimum wage (few do). But there are jobs whose earnings are indexed to the minimum wage (2X, 4X, etc.) and so many workers (i.e., voters) will be scheduled to benefit, although they too will be subject to the wage/productivity rule delineated above. Many of them will be casualties of this hike as well. So why would politicians support something that in due course will lead to higher unemployment among their constituents?

One reason might be that they have shielded the unemployed from the consequences of their bad decisions through unemployment insurance. Therefore, politicians have an interest in maintaining, increasing and prolonging unemployment insurance as long as possible. Part of every person's paycheck goes to defraying this eventuality but of course most of it just comes out of the government budgets and adds to the deficit. The dislocation to the family and the psychological stresses on the unemployed are not really factored in by the political class. So raising the minimum wage sounds kind, as Brown mentioned, and it makes sense "politically" because also for a reason that I never considered until several days ago. Call it the latest government scheme.

Here's how a letter writer (Henry Schmid of Sonoma, California) to the WSJ put it last week, and the government plan is brilliant: the tax implications of raising the minimum wage are enormous. "For a family of four with both spouses making the minimum wage, their federal tax will increase from $4106 to $7219, payroll tax will increase from zero to $379, and the $2400 food stamp credit will be lost. Of the $20,800 increase in income in going from $10 to $15 an hour, $7778 will be diverted to the government, which doesn't include loss of other income dependent government welfare programs and added costs due to the resulting inflation. Over one-third of the wage increase will flow to the government in the form of increased taxes and reduced benefits."

 I'm assuming his figures are correct, and if they are, the scheme is ingenious when you think about it. The minimum wage increase is just a means for the government to get more revenue from the people, once again from business. And even if there is an interest in getting people off the dole and into the workforce, do those celebrating the doggedness and sensitivity of the liberal politicians pushing the higher minimum wage realize that many, if not most, of the beneficiaries will lose money, in the form of benefit reductions? And if they lose their jobs altogether, well, now their government benefactors have more money to redistribute in the form of unemployment compensation. Indeed, one of the debilitating peculiarities of the welfare state is that it often disincentivizes employment by denying benefits to people who earn more, I suppose, than they should.

Win, win, win, lose. The politicos look good and get the votes of the beneficiaries who do not realize how they are being harmed. The politicos get more money into the government coffers to redistribute and reward their favorite groups of constituents. The workers think they are earning much more money,  and actually are earning more money, but not as much as they think and are oblivious to the real consequences of the increase. Business pays more of its earnings to government, and either lays off the unsuspecting workers or raises prices, which usually depresses consumer spending (depending on what is being sold). Business suffers, the consumer suffers, and the worker suffers. The only entity that benefits is government.

It is ingenious, but not very moral. The letter writer suggests increasing the Earned Income Tax Credit, which would help the needy. There has to be a better way, linking increased wages to increased productivity, and keeping people gainfully employed for their own spiritual well-being as well as securing their path to financial stability and success. But don't expect the politicians to find, endorse or encourage that way. For them, it is not as lucrative.