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Should Minimum Wage Be Set by Any Governmental Body?

written by Nancy Thorner & Dave Pennington February 22, 2021
Latest posts by Nancy Thorner & Dave Pennington (see all)

The Democrats are always pushing to raise the minimum wage.  That’s mainly because, one, they don’t have to pay it, as all of their staff aides are paid with our taxes and, two, because it is very appealing to buy votes with other people’s money. There’s a third reason, too, as explained below.

A key pillar of President Biden’s American Rescue Plan is the Raise the Wage Act of 2021 (H.R. 603).  It would gradually increase the federal minimum wage to $15 over five years. Thereafter, the federal minimum wage would be indexed to median wage growth. The legislation also guarantees that all workers are paid at least the full federal minimum wage by gradually phasing out the sub-minimum wages for tipped workers, youth workers, and workers with disabilities.

On January 26, 2021, top Democrats introduced a Bill raising minimum wage to $15 by 2025.  House Committee on Education and Labor Chair Robert C. “Bobby” Scott (VA-03) joined incoming Senate Budget Committee Chair Bernie Sanders (I-VT), incoming Senate HELP Committee Chair Patty Murray (D-WA), Senate), Congressional Progressive Caucus Chair Pramila Jayapal (WA-07), and Rep. Stephanie Murphy (FL-07) introduced the legislation.

On January 21, 2021, President Joe Biden signed two executive orders to address the economic toll of the coronavirus pandemic, including expanding food stamps and beginning the process to require that everyone working for the federal government get a minimum wage of $15 an hour. But is America ready?

The federal hourly minimum wage has been stuck at $7.25 since 2009.  Biden will begin the process by requiring that everyone working for the federal government be paid a minimum of $15 an hour.

Organized labor and its supporters have been agitating for a $15-an-hour minimum wage for nearly a decade. Unions have a self-serving reason for wanting an increase in minimum wage, as you will see.

Currently, 29 states and D.C. have minimum wages above the federal minimum wage of $7.25 per hour.

Five states have not adopted a state minimum wage: Alabama, Louisiana, Mississippi, South Carolina, and Tennessee. Two states, Georgia and Wyoming, have a minimum wage below $7.25 per hour. In all seven of these states, the federal minimum wage of $7.25 per hour applies.

Illinois enacted  SB 1 in February, which will phase in a minimum wage increase to $15 by 2025. The measure also adjusted the youth wage for workers under age 18 (it will gradually increase to $13 by 2025) and created a tax credit program to offset labor cost increases for smaller employers.

Is this nation ready for a $15 minimum wage?

Neil Patel, who runs the Daily Caller, on February 10, 2021 explained to Tucker Carlson that a standard minimum wage for the nation makes no sense for a couple of reasons. The first is that the cost of living is at least twice as much in place like New York City, L.A. and San Francisco than it is in small midwestern and southern cities.

The second reason is that an increase will not affect all businesses equally.  A multi-billion-dollar company can, but it could very well put the owner of the corner deli out of business, especially coming on the heels of a lockdown that has already bankrupted so many entrepreneurs.
Even so, despite Patel’s reasoning, even the multi-billion dollar company has to maintain its profit structure and will ultimately layoff some employees, reassign others, and, most likely, raise prices for its goods and services.
Co-author David Pennington spent some months in 1971 attempting to support himself working 40-hours a week at minimum wage when it was $1.60/hour. The pay was even worse for Nancy Thorner, when in 1954 at age 16 she worked as a salesclerk at a 5 and Dime store in Reading, Pennsylvania, earning 85 cents an hour.  Even though the minimum wage was then set at $1.00 per hour in PA, because the store did not engage in interstate commerce it didn’t need to comply with the set minimum wage.

Pertinent questions for consideration

There are questions to be asked of those pushing for a $15/hour minimum wage.

The first question:  If the minimum wage were to go up today, what will happen tomorrow?

As Pennington explains in a scenario that involves that of trade unions and their contracts:
“In the building trades, the several trades negotiate separately. Looking at a few of them can serve to illustrate the situation with all of them. The main players are carpenters, plumbers, electricians, and bricklayers. Now there’s no jumping between trades, so the choosing has to be done before starting as an apprentice. Apart from preferring to drive nails or pull wires, the attraction of one trade over another is earning potential. While there are other factors, the pay rate is a key consideration.”
“Reviewing decades of contracted wage rates we find that there is a certain parity between the trades: the plumbers may be paid 10% more than carpenters under the current contract, for example, but that was true under the last contract, and it will be true under the next contract, as well. Contracts typically run three years, and–depending on what part of the country we look at–do not all come due at the same time. If carpenters successfully negotiate for 7% this month, when the plumbers settle several months later, you can bet it will be for 7%, as well.”

What happens tomorrow, if the minimum wage goes up today?

Part of the answer is quite simple: “The present wage parity will be re-established over a period of time. In the non-contract portion of the hourly paid workforce, those who presently make 25% more than minimum wage will be adjusted up to restore the ratio. Many unions base their wage demands on the minimum wage, so their next contracts will be adjusted up, too. That’s how a higher minimum wage benefits organized labor. In the end, the minimum wage folks won’t have “moved up”, they will still be at the bottom, as they always have been.”

A follow-on question

As further posed by Pennington:  Just how far-reaching are the effects of the parity adjustment?

“One aspect of the question has to do with how high up the pay ranges will the adjustment go? Will it affect the salary of a CEO, a ball player, or a movie star who earns millions now? Not likely.”
“It’s just a guess, based on some historical knowledge, but I believe the parity adjustments will be made as high as middle management. Historical knowledge: the salaried line supervisors at AT&T, years ago, would always get a pay raise by the same percentage, when the union employees under them got a new contract. It was done quietly, but efficiently, so as to not ruffle feathers further, since the union employees may have been on strike and without pay–while their supervisors did their work and had no break in pay.”

Another aspect of the same question

The answer is difficult because of its many details.  The details themselves are straightforward.  As Pennington explained:
“Every business will be a part of the parity adjustment, even if a particular business does not have any minimum wage employees. It comes down to analyzing costs and how they impact prices charged.”

“Since it is the fast food workers who are in the news, let’s look at that industry. One published source states that some fast food restaurants achieve 25% labor cost, as a percentage of sales.”

Some fast food restaurants in Colorado, where Pennington lives, are advertising starting pay of $12/hour. An increase to $15 is a 25% jump. To ensure sustainability, the increased wage will affect menu prices. An $8 item, at present, contains $2 labor. That labor cost will go up to $2.50. In the near term, the menu price could be increased by the same $0.50 to $8.50. However, as the parity adjustments work their way through, with the variable costs changing more quickly, the menu price will, in time, go to $10.”
According to Pennington, “It would seem, at this point, that once the parity adjustments have worked their way throughout the economy, that we’re right back where we started. That’s mostly true. There will be short-lived disparities, but for the workforce, in general, the net effect will be minimal. Wages will go up and costs (prices) will go up with them–and we’ll all be in higher tax brackets. That last consideration suggests we might be worse off than before, doesn’t it?”

A lesson in inflation

What has just been described is the workings of a phenomenon we call inflation.
Inflation works to the advantage of the debtor. Debts incurred with yesterday’s dollar are paid off with today’s dollar, which is both easier to come by and worth less. The nation’s debtor with the largest debt is Congress. That knowledge leads to insights that explain a lot about the decisions Congress makes that affect the rate of inflation–like increasing the minimum wage.
Who is hurt by all of this? Two groups come to mind.  Lenders, of course, who are getting paid back with ‘smaller’ dollars than the dollars they lent.
The primary group hurt by this are the retirees and others on fixed incomes. Eventually, those depending on Social Security will get a COLA increase. Historically, however, those increases do not keep up with inflation. Others, who have annuity income get no such increases.

Final question

Should minimum wage be set by any governmental body?
Pennington and I agree that there is a principle that applies: economic goals cannot be directly achieved through the legislative process.
The corollary to that principle is that any legislative action that purports to achieve an economic goal directly is doomed to failure, both in its stated intention and, more broadly, in the collateral damage it will cause.
[Originally posted on Illinois Review]
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