The minimum wage “domino theory”

Minimum Wage Unemployment

There are no doubt progressives who are naive enough to believe that more than doubling the minimum wage would have no serious consequences to the economy. In their minds, the surrounding economy remains static as the individual worker gets a 100% pay raise. However, it is more likely those in congress proposing such an increase are fully aware of the consequences, and for them that is the point. Such short-sighted policy making can result in an economic “domino effect” as the consequences come into view.

Heritage Foundation estimates the increase of the minimum wage from $7.25 to $15.00 per hour can add more than seven million workers to the unemployment line. That’s seven million more people dependent on the government for long-term unemployment benefits, food stamps, and other needs-based public assistance. To a Democrat, that’s seven million more voters. Granted, not all politicians are that cynical. But, they cannot be that ignorant either.

James Sherk, a Research Fellow at Heritage Foundation, points out in an article on the minimum wage issue that the real cost of hiring a full-time worker at the new minimum wage would increase to $18.61. Given that the largest operating cost for most employers is staffing, small businesses could see their typical manpower costs more than double over the period the policy is implemented. If they’re lucky, they’ll be able to pass some of the cost along to consumers. That’s the first thing those of us with a high school economics background think of. However, when you buy something at your local store, you’re not just paying for the business’ overhead – the cost of operating his business – you’re paying the pass-through costs of the goods he sells. For things manufactured in the U.S., the manpower costs of making the product is passed on to the businesses that sell them. That cost increases for American manufacturers just as it does for retailers and service providers.

While the Democrats have baked the minimum wage issue into their platform, settling on the somehow significant figure of $15.00 per hour, the Republicans are coping with a candidate who has had several positions on the issue from the traditional GOP market approach to his latest appeal to raise the minimum wage to $10.00. Neither Donald Trump nor Hillary Clinton has given a clear rationale for their respective bids. Why not $11.13 or $27.04?

Sherk’s analysis shows the proposed increases would affect 44.9 million employees by 2021 – a third of the full-time workforce. He also notes “spillover effects” from employees near the minimum wage who would receive pay increases to maintain pay differentials. In every “Help Wanted” sign, there are looming cost increases for the employer beyond the new hire who joins his team. Along with his skills and abilities, the new full-time employee brings with him government mandates for health care, co-payments for Social Security, disability compensation insurance, and more.

There will be a disproportionate impact on states with lower costs of living. For example, an employer in Mississippi might pay generally lower wages than one in California where the cost of living is higher. Currently, the lower wage in the low-cost state buys more goods and services than the same employee would make with a comparable wage in California. A radical change in the minimum wage would not have a proportional impact.

Sherk compares the impact on Hawaii, where the minimum wage would have to skyrocket to $20.00 per hour to have the same buying power as the $15.00 increase would have in South Dakota, Arkansas, or Alabama.

Finally, the impact would be disproportionate for lower skilled workers. Since employers have to consider the utility value of a prospective hire, he is comparing skills and experience against the cost of hiring a worker. This almost always benefits a more skilled worker, making the first step up the economic ladder even harder for those most in need of a boost. As Sherk observes, “Many of these workers are not yet productive enough to create that much value for their employers, and businesses will not hire them at a loss.”

No Democrat grandstanding in the well of the Senate has ever said, “a key benefit to doubling the minimum wage is doubling the FICA tax per-worker and increasing income tax revenues.” Clearly, those are factors politicians hungry for a new revenue stream consider. If they can raise revenue on the backs of small businesses without calling it a “tax increase,” that is a coup at the expense of the businesses and their employees. But, what happens when the economic dominoes begin to fall?

Those “unintended” consequences will be “discovered” and “fixed” down the road. No doubt, they’ll be “fixed” by yet more onerous government overreach.