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GUEST COMMENTARY: Raising minimum wage important for economic recovery

Friday, November 26, 2010 | 12:01 a.m. CST

When he was campaigning in 2008, President Barack Obama promised to raise the federal minimum wage, declaring "people who work full-time should not live in poverty." Obama proposed raising it to $9.50 by 2011. That would merely adjust the minimum wage for inflation and restore its 1968 purchasing power.

Despite the very modest increase he proposed, neither the White House nor Congress has done anything to make it happen. In fact, at least three prominent Republican Senate nominees advocated abolishing this worker protection altogether as they fought tough races. It's a good thing they all lost.

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We need to raise the minimum wage, not eliminate it. Boosting the minimum wage would help our lowest-paid workers as well as the entire economy. According to the Economic Policy Institute, every dollar increase in wages for a worker on the bottom rung of the pay scale creates more than $3,500 in new spending after one year.

The minimum wage, established during the New Deal to provide a "minimum standard of living necessary for health, efficiency and general well-being," is falling short. A person working full time at the $7.25 hourly minimum wage would earn $15,080 annually before taxes and deductions.

Consider a working single mom with two children: the federal poverty level for this family is $18,310. She could work full time and still earn $3,000 less than poverty wages.

While raising the federal minimum wage would only be a small step in helping low-income families (other income-boosting measures like the Earned Income Tax Credit and dependent care tax credits are proven to be more effective in fighting poverty), it's nevertheless an important step for ensuring that workers in minimum and near-minimum wage jobs can better bridge the gap between their meager income and expenses.

In addition to raising the minimum wage and indexing it to inflation, the government must ensure that all workers get this fundamental labor protection. In 2009, approximately 3.6 million people earned the minimum wage or less. A stunning 2.6 million of those people legally earned less than the minimum wage because they're excluded from the 1938 Fair Labor Standards Act.

Home health workers, who provide invaluable care to the elderly and disabled — allowing them to live with dignity in their own homes — are still excluded from minimum wage and overtime protections under the so-called "companionship exemption."

Before the end of the year, the Department of Labor is slated to finally include reform to the companionship exemption in its regulatory agenda. Yet, home health workers are only one segment of the workforce that's excluded in one way or another from meaningful labor protections that all workers need and deserve.

President Franklin D. Roosevelt's New Deal responded to the Great Depression by establishing a safety net that could alleviate poverty and help the economy recover. The minimum wage, an essential labor right, is just as important now as it was then.

Some officials and newly elected lawmakers are now proposing dangerous "recovery" strategies, such as cutting taxes for the rich and slashing budgets for social services that will leave millions of Americans behind. While it's reasonable to presume that it's risky to boost wages during a recession, several economic studies indicate otherwise. Increasing the minimum wage, and thereby increasing purchasing power for the poorest Americans, actually helps the economy recover.

Raising the minimum wage would be a step toward restoring dignity for millions of workers, enabling many ordinary working Americans to become part of the economic recovery rather than its collateral damage.

Tiffany Williams is the advocacy director for Break The Chain Campaign, a project of the Institute for Policy Studies. This was distributed through OtherWords.org, also a project of the institute.


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Comments

Sam Tyler November 26, 2010 | 9:46 a.m.

The high rate of unemployment among teenagers, and especially black teenagers, is both a scandal and a serious source of social unrest. Yet it is largely a result of minimum wage laws. We regard the minimum wage law as one of the most, if not the most, anti-black laws on the statute books. – Milton Friedman, Nobel Prize winning economist.


All wages are based on the minimum that a business must pay for labor. If the Minimum Wage (MW) is X, then taxes raise the Minimum Cost of Labor (MCL) to ~1.45X. This is the floor of MC and all other wages are a multiple of MC.

So far, so good, it is obvious that a rising tide lifts all boats. However, the cost of living is the average price of all goods and services.


Past studies by and large confirm the prediction that higher minimum wages reduce employment opportunities and raise unemployment, particularly among teenagers, minorities and other low-skilled workers. – Masanori Hashimoto


All Prices can be broken down into a few parts: Cost of Labor, which include the costs of tools and energy to run those tools; Costs of materials, which includes all costs in this paragraph; Costs of location, which includes transportaion and facilities, Costs of government, which includes all taxes, licenses, and fees; and Profit.

In our economy, Profit is the only part of Price that is not directly effected by law, and has for many years been hovering at 2.4% of revenue averaged across the economy.


The standard of living of the common man is higher in those countries which have the greatest number of wealthy entrepreneurs. – Ludwig von Mises.


Cost of Labor is a trickle up cost that effects material costs, location costs, government costs due to Bracket Creep, and the quantity, but, in the long run, not the percentage, of Profit.

Because most of the Costs Of Goods Sold are percentage based, raising the Cost of Labor by X% raises the COGS by (X% + Y%) x P%, where P is the 2.4% of Profit/

In conclusion, raising the minimum wage always raises the Cost of Living more than the percent raise in wages.

More reading:

The Hidden Costs of a Minimum Wage
http://blog.mises.org/10337/the-hidden-c...

Against the Minimum Wage
http://blog.mises.org/10854/against-the-...

Inhumanity of the Minimum Wage
http://blog.mises.org/10454/inhumanity-o...

Minimum Wages and Employment
http://blog.mises.org/13712/minimum-wage...

The Job-Killing Impact of Minimum Wage Laws
http://blog.mises.org/12965/the-job-kill...

The Minimum Wage, Discrimination, and Inequality
http://blog.mises.org/9257/the-minimum-w...

(Report Comment)
John Schultz November 26, 2010 | 11:51 a.m.

Hmm, this comment seems a bit suspect:

"According to the Economic Policy Institute, every dollar increase in wages for a worker on the bottom rung of the pay scale creates more than $3,500 in new spending after one year."

A $1/hour raise for someone working 40 hours per week amounts to $2080 in a year. How can that account for them spending almost double that, unless they go into debt or spend savings?

Setting a minimum wage will inevitably price people out of the labor market because an employer is not going to pay someone more than their labor is worth. When I worked a part-time warehouse job in college, I earned minimum wage. I also lived at home at the time. Once I graduated from college and got my first "real" job, I was making approximately two and a half times the minimum wage if my recollection is correct. Education and initiative, not government and public policy institutes, will do a lot more to increase wages.

I found this table by trying to locate the study mentioned by the article:

http://www.epi.org/publications/entry/ta...

Take a look at some of the statistical breakdowns (and I'm slightly amused and not surprised that the age cutoff is at 20 years old and not a bit older) and see if you can determine some interesting statistics. Such as 61.2% of minimum wage earners being single with no kids. Or less than half are full-time workers. Or that almost 90% don't have a college degree.

(Report Comment)
Yves Montclear November 26, 2010 | 12:25 p.m.

If you really want to find out the mentality of the people you are dissecting in your post, Mr. Tyler, let us try lowering the minimum wage.

See how minimum wage earners react to that.

Mr. Tyler provides a spectacular rebuttal, and a correct one, rather than the 'feel good' diatribe by Ms. Williams in her article.

But, let us use a quick thought experiment...if raising the minimum wage is bad, than lowering it might be good, right?

I will again point out, many of the people who are making that minimum wage won't understand the method. Most of those people don't quite grasp the concept of "the Cost of Labor by X% raises the COGS by (X% + Y%) x P%, where P is the 2.4% of Profit".

They will not like at all the fact they are getting less money. Even if their money has spending power, that is actually worth more.

They will not comprehend the long range plan. They will just get angry, and then violent.

In another conclusion, there is no simple solution here.

Two hundred years from now, as it has for almost one hundred years in the past with the federal government involved, the content of this article will still be debated. This issue will still exist.

(Report Comment)
Phil Goldsmith December 2, 2010 | 4:47 a.m.

As a minimum wage earner, I have a few insights into this. A little background first. I'm married, no children, late 20s.

Now then, I agree that when minimum wage goes up, so does the spending power of the individuals earning it. I'd certainly not turn down a dollar raise. I imagine few people would. However, prior to the wage increase a few years ago, the argument was used that increasing the wage from $5.15/hr to the current rate would cause massive increases in prices on everything. So far, I have not seen that.

I can certainly understand that increasing labor costs should increase cost of goods. And, by that same logic, decreasing the wage would decrease the cost of the same goods. But, let's not kid ourselves. If you decrease the cost of labor, prices will not lower. However, I'd imagine someone is going to get a great bonus, and shareholders would be much happier.

In a perfect world, yes, lower wages would mean lower prices. However, recently many businesses, large and small, have drastically lowered their wages, by decreasing the number of total employees. And yet, I have not seen a massive reduction in the prices I pay.

Your logic, from a mathematical point of view, is sound, but when you throw people into the mix, it falls apart.

(Report Comment)

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