Minimum Wage Increase: Facing the Facts is Our Moral Responsibility

This week CNBC reported on its quarterly All America poll, a survey on a variety of political economy topics. (Videos of the report can be seen at the CNBC website.) One of the topics in the report was the attitude of people towards increasing the minimum wage.

Not surprisingly, most people are in favor of increasing the minimum wage. Hiking the minimum wage is always politically popular, which is perhaps why it is a go-to policy when other economic policies are not popular. Also not surprising therefore, Democrats are making a 40 percent increase in the minimum wage the biggest talking point in their economic policy agenda this year.

Of course, as every first-year student of economics can tell you, there is always a trade-off on every economic choice. Where there are winners, there are also losers. In this case, a 40 percent increase in minimum wages will have a variety of trade-off effects. One effect will be an increase in the cost of doing business, for those businesses that employ a lot of low-skilled workers.

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These businesses will not be as profitable as they adjust to the higher required wages. We can expect that industries that employ a lot of low-skilled workers will grow more slowly, if at all, after the minimum wage is increased.

It is possible that the affected industries might be able to increase prices on their products, to make up for the higher wage costs. But this is no sure thing in the highly competitive industries that use low-skilled workers, such as the fast food and casual dining industries. The exception being that in those competitive industries, businesses will try to offset the higher cost of wages with new technologies to reduce the reliance on low-skilled workers. We can expect to order our meals at self-service electronic kiosks, or smartphone aps to take our orders. This is already being tried, and we can expect it to accelerate after a 40 percent increase in minimum wages. Eventually, there will be even fewer entry-level job opportunities, as the rising minimum wage puts the unskilled or inexperienced worker out of a job. It will be a silent effect; it's hard to notice the jobs that don't get created due to the high cost of the minimum wage.

In the past, it was possible to dismiss the political popularity of increasing the minimum wage with the argument that if the people truly understood the trade-offs of the increase in minimum wages, they wouldn't be so much in favor of an increase. The job of opponents to the minimum wage was to educate the voter, so they could understand the damage that increases in minimum wage would do to the businesses that create jobs for low-skilled workers, and the lost opportunities for the would-be workers who get priced out of a job.

Thus, the BIG surprise in the CNBC All America poll is the result that the people get it that prices will go up. They understand that jobs will be lost. When asked if the benefits of higher minimum wages are worth losing job opportunities for the lowest paid workers, most chose higher minimum wages. While this position is ethically challenged, it cannot be argued that the people are making an ignorant choice. They know there will be consequences, and still they favor an increase in the minimum wage.

Now the fact that increasing the minimum wage is politically popular, and survey evidence shows awareness the policy will entail a cost on society, does not mean that raising the minimum wage is good policy. It only means it is good politics. There will be a political price to pay for a principled stand against increasing the minimum wage; a price that is not much reduced by a voter education campaign.

It's time to face the facts, and forcefully push for a better policy alternative to increasing the minimum wage. Republicans invented the Earned Income Tax Credit, as a better policy alternative. It still is a superior public policy, and should be prominent in any anti-poverty program. But what is needed right now is a better policy which is also a better political counter policy to the minimum wage increase that is being pushed by the Democrats. This means the better alternative not only has to be seen as a better policy by the wonks in Washington, it has to be seen as better by the ordinary voters in America. What the Republicans need is a policy alternative that results in higher wages for low-skilled workers. They need a policy that does not destroy opportunities for unskilled and inexperienced workers by pricing such workers out of a job. They need an alternative policy that does not drive businesses to automate processes and eliminate jobs for real people.

A better policy alternative is to modify the minimum wage so that there are required wage increases every six months for the first 24 months, ending up with a wage that is 40 percent higher after two years than the starting wage. Do not change the starting minimum wage, but put in place required wage increases, so that after two years on the job the low-skilled worker ends up with at least a 40 percent higher wage. Since the starting minimum wage is unchanged, there is little or no destruction of job opportunities, and less motivation for a business to substitute machines for people. Wages will increase 40 percent, but only for the workers who have stayed on the job and gained increased proficiency to offset the higher wage costs.

Some may object, and argue that profit driven businesses will fire workers after six months instead of raising their wages. But this objection is unlikely, since supporters of a 40 percent increase in the minimum wage argue that employers will benefit due to lower turnover rates, and satisfied workers. If businesses will benefit from lower turnover based on a 40 percent increase in wages, why would they create turnover by firing an experienced worker to avoid a required 10 percent wage increase?

Personally, I am not convinced that minimum wage is good policy at all, but I do accept that it is good politics. If we have to have a minimum wage, let us design it to do the least damage to the job opportunities of the least skilled and least experienced would-be worker. That is our moral responsibility.

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