The Minimum, Minimum Wage

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It is un-American to pay workers a pauper’s wage, and it is un-American to mandate that a company must pay an employee more than his work is worth. The debate about the minimum wage may be much more complex than the concept of work value and government intervention in private enterprise compensation, but those are the basic building blocks for this argument.

The Economic Policy Institute recently issued a report that shows increases in the minimum wage improve national consumer spending. The organization’s views get plenty of support from the data collected for the study, but there is a great deal of information missing. This flaw does not make the report wrong but it does make it incomplete.

The EPI document can be summarized in a sentence. “Each increase provides financial relief directly to minimum wage workers and their families and helps stimulate the economy.” The details of the analysis are that the increases in the minimum wage in July 2007 and July 2008 will have improved consumer spending by an estimated $4.9 billion. The term “estimated” is often used when making a clear and certain point is impossible. The report goes on to project that the July 2009 increase will drive another $5.5 billion in spending in the year that follows.
The deep flaw in the reasoning that higher wages create wage earner s who spend more is that it does not take into account the sea change produced by the recession: one that has turned spenders into savers.  Nor does it account for the significant decrease in available consumer credit. Banks and credit card companies are cutting their exposure to defaults as quickly as they legally can. Workers making the minimum wage may face hurdles to getting credit that a person making $100,000 a year with no personal debt would face.

The EPI wants the readers of its study to believe that there has not been any shift in the way that individual Americans view their personal finances. Most economic data show that a dollar earned is a dollar saved. This explains why the nation’s shopping malls are deserted.

The more inflammatory assumption from the EPI study is that it does not give enough consideration to the effect that mandated raises have on the businesses that are forced to enact them. A dollar an hour may not seem like much unless a business employs 1,000 people. That amount could be the difference between a profit and a loss at many companies which are up against unprecedented decreases in sales due to the poor economy.

The smallest American businesses also face a dilemma. It is nearly impossible for many of them to get bank credit. That means that they run off the cash flow from their operations or financing from their owners. A short period of falling revenue can put a business with ten or twenty people out of business fairly fast. Alternatively, a company with modest revenue may simply have to fire someone to cut costs.

The minimum wage is not a neutral program and that is especially true when the business climate is as harsh as it is now.

The appropriate arguments for the minimum wage may have very little to do with consumer spending at all. Increasing wages to increase spending is an imperfect model at best. At its worst, it is complex financial engineering that can never be appropriately tracked because of the hundreds of thousands of people and thousands of businesses that are involved. At the core of the debate about the minimum wage is the more basic concept of what a “living wage” is. There is a cost for living independently from public assistance in America. It may be different in New York City than it is in Akron, but there is a real cost to supporting citizens who work a full day and are paid hourly sums that would certainly push them below the poverty level.

Arguing that someone should get paid a sum of money that will turn him into a voracious consumer is like saying the monthly stimulus checks from the federal government will improve retail spending. If every nickel the public gets goes into a savings account it is not much of a stimulus program.

Douglas A. McIntyre