When I was sixteen, I got my first job as a dishwasher working for the grand rate of $1.10 per hour. It wasn’t much — about $5.70 in today’s dollars — but I was happy to get it. That wage meant $20 per week in my pocket, enough for dinner for two and a movie, or four record albums, or a used car payment and gas. Plus, my meals at work were free. Two years later, when I left home for college, I was earning $2.50 an hour as a chef at more than double my original pay rate.
I think about that once typical American teenage experience every time some politician promises to help the “working people” by raising the minimum wage to new heights. Were I sixteen again, would it be possible for me to walk into a store and find work so easily?
In his 2014 State of the Union address Jan. 28, President Obama promised to sign an executive order increasing the minimum wage for workers under new federal contracts from $7.25 an hour to $10.10, indexing it to inflation, or “the cost of living.” Last April, Rhode Island’s two representatives in the U.S. Congress, Jim Langevin, D-R.I. and David Cicilline, D-R.I., issued a joint declaration that they support the “Fair Minimum Wage Act” creating a $10.10 minimum wage within three years. Just last week, two Democratic candidates for Governor of Rhode Island, Providence Mayor Angel Taveras and General Treasurer Gina Raimondo also proposed raising the current state minimum wage from $8 an hour to $10.10 an hour.
So, what is this rush to the magic wage of $10.10 all about? According to the Heritage Foundation, this would be the highest federal minimum wage, adjusted for inflation, ever, far surpassing 1968’s inflation adjusted minimum wage rate of $8.67 an hour.
The myth behind the concept of the minimum wage is that the “working poor” are being exploited by businesses that are unwilling to pay a “living wage” in order to make “excessive profits” at their employees’ expense. Raising the minimum wage is supposed to balance this apparent unfairness and prevent exploitation of unskilled workers.
Gina Raimondo’s campaign has shown enthusiasm for this issue. Taveras wants gradual increases to $10.10 by 2018, but Raimondo wants the change to take effect by early 2015. “Two-thirds of minimum wage earners are women,” her campaign website states, “so a raise would immediately help women across Rhode Island and their families.”
As indeed, it would — at least temporarily. Every wage-earner would like a 26 percent pay raise for the same reasons: To benefit themselves and their families. But an artificial raise in the cost of labor relative to its market value has negative and painful economic effects.
Contrary to the mythology, the minimum wage does not improve the plight of the poor. As economist Milton Friedman observed in a 1975 television interview, “You’re doing nothing of the kind. What you’re doing is to ensure that people whose skills do not justify that wage will be unemployed.” He concluded, “It is the exact people who the do-gooders are trying to help that are hurt the most — the poorest!”
Imagine raising the minimum wage to $20 or $30 an hour. Would that not benefit all workers and end poverty immediately? Why not pay everyone at least $100 an hour and make everyone rich? Of course, this would be foolishness. Rationally, we know that raising the cost of labor without any efficiency gains always raises the cost of products and services proportionally, no matter how modest the wage increase.
In the most optimistic analysis, these costs would be quietly absorbed by consumers who now must spend more to get what they get now. More importantly, higher costs depress sales and profits necessary to conduct a successful business. For some businesses, a 26 percent increase in unskilled labor costs can make the difference between staying open and going under.
According to WPRI reporter Tim White, Raimondo brushed aside these concerns. “The majority of companies that do minimum wage are big companies: the Wal-Marts (and) McDonald’s,” Raimondo said, “They can afford it.”
But Wal-Mart and McDonald’s, like the many thousands of other small and large businesses in Rhode Island, are not immune from the laws of the marketplace. Rather than operate at a loss, companies that hire unskilled workers will simply find cheaper ways to conduct business and cut back on the number of hours they can offer. Some may leave Rhode Island altogether. Even skilled and semi-skilled workers are affected, because their wages will decline or their jobs cut to make up for the jump in unskilled labor costs.
The Rhode Island Center for Freedom and Prosperity, a non-partisan “free-enterprise public policy think tank,” according to their website, reports that 24,846 out of 465,600 working Rhode Islanders currently have jobs that pay them at a rate of $8.25 per hour or less. Based on a study conducted by economists David Macpherson of Trinity University and William Even of Miami University, the Center estimates that up to 3,466 of those jobs will disappear if this increase takes effect. The study shows that even modest increases have been harmful in the past, such as Rhode Island’s move from $6.75 to $7.40 between 2005 and 2011, which “likely cost teenagers in the state 397 jobs.” They also cite recent census data showing that only 14 percent of minimum wage earners are single parents or sole earners for a family. Most minimum wage earners are single people with no dependents or they are secondary income earners. These secondary incomes can make the difference between a family living meagerly or well.
The true cost of the “living wage” is borne by the people of the state in the form of increased unemployment and welfare benefits, loss of earned income tax revenue, a higher cost of living and reduced productivity.
Lowering the cost of employment, not raising it, will bring prosperity to Rhode Island and generate jobs. Businesses are attracted to locations where they can keep costs down, improve sales and maximize their profits. Our citizens benefit best when businesses thrive.
Scott Lloyd is a Brown staff member who believes in creating more opportunities, not more dependency.