Arguments Against Minimum Wage Hikes

I recently went into my local poke restaurant for lunch, and I noticed a framed letter on the wall as I waited in line. The letter was to the faithful customers, and it stated that all of the prices were increased by $1 due to the impact of the recent minimum wage law legislation. I knew the manager of the restaurant, so I asked a little more about how the new wage hike was affecting business. He stated that not only are prices increased for customers, but since the restaurant is a small business, they had to cut back on benefits given to employees in order to keep the business and cover costs. Lastly, I noticed how his employees were all young ambitious Generation Z’ers. He stated that with the increased wages, applicants who are truly poor or have no education don’t apply because of the surplus of 17 to 19-year-olds willing to work in order to pay for high tuition college fees. Most of the people working for him were not poverty-stricken or single mothers, rather most could write code or help you develop a website. This was interesting: a law that is proposed from an ideology proclaiming to care for the poor and oppressed, is actually having an inverse effect.

Currently in America, there are many who fervently advocate for legislation to “help” the poor and oppressed. Many of these policies, however, only virtue signal without doing anything at all for the oppressed. Moreover, many policies that sound compassionate actually do more harm to the people it’s meant to help. This particular essay gives arguments against minimum wage hikes. Despite the compassionate appeal to raise the minimum wage in order to help minorities and low-skilled workers in America, the economics and data tells us a different story.

#1: Minimum wage hikes hurt small businesses

Minimum wage laws increase costs for businesses, making it more difficult for small businesses to pay their employees accordingly. When Seattle recently increased its minimum wage, several restaurants that couldn’t afford the higher labor costs had to shut down immediately. Kelly Ulmer, owner of Almost Perfect Books in Roseville, California, had a business model that was employee-friendly, offering shares of all profits to the employees each week. “As the minimum wage increased, the profits decreased,” she says. “All of my employees actually made more money at $8 an hour than they do at $10 an hour because I had actual money to give them.”[1] Anytime minimum wage laws are enacted, the biggest initial outcry comes from small businesses who don’t have the cash flow to take the economic impact of the wage hike.

Many people found it eerie that Walmart CEO Doug McMillon called on Congress to raise the minimum wage in 2019. Here you have a CEO of a multi-billion-dollar company looking like a generous saint. Before we anoint Mr. McMillon, keep in mind that Walmart benefits greatly from minimum wage hike because it increases their revenue after the collateral damage done to small businesses around the country. You see, big businesses have more cash flow to pay the extra costs from the minimum wage hike. Thus, small businesses take the biggest financial hit.

#2 Minimum wage hikes increase unemployment

Low-skilled workers who would be employable at a low wage become unemployable at an artificially higher wage. And that explains the perverse cruelty of minimum wage laws: it inflicts the greatest harm on the very workers it is allegedly designed to help.

Similar to my first point, a minimum wage hike reduces the quantity by labor because employers can’t afford to pay everyone the increased wages. Therefore, companies have to lay-off people in order stay afloat. Also, if we begin to think about the future with the increase of artificial intelligence, minimum wage laws incentivize companies to use AI rather than people to save on costs.

As an aside, for those who love to point to the Scandinavian countries as the paragon of “the ideal society,” keep in mind that Switzerland is one of the few modern nations without a minimum wage law. As of December 2019, Switzerland’s unemployment sits at a meager 2.1%. The last time Americans saw unemployment rates that low was in the Coolidge administration when unemployment was 1.8%. By the way, there was no federal minimum law implemented during the Coolidge era.

#3 Minimum wage hikes harm low-skilled workers

If the government raises the minimum wage, the higher wages can lure more skilled workers to compete for jobs they may have once avoided. A college student who wouldn’t have taken a McDonald’s job for $9 an hour may find it worthwhile at $15 an hour, leaving fewer opportunities for, say, an uneducated immigrant from South America. Going back to the aforementioned impact of the Seattle minimum wage ordinance, researchers at the University of Washington reported:

“Our preferred estimates suggest that the Seattle Minimum Wage Ordinance caused hours worked by low-skilled workers (i.e., those earning under $19 per hour) to fall by 9.4% during the three quarters when the minimum wage was $13 per hour, resulting in a loss of 3.5 million hours worked per calendar quarter. Alternative estimates show the number of low-wage jobs declined by 6.8%, which represents a loss of more than 5,000 jobs. The work of least-paid workers might be performed more efficiently by more skilled and experienced workers commanding a substantially higher wage.”[1]

And this highlights the essence of the economic logic that explains why the most vulnerable workers (low-skilled, uneducated, teenagers, etc.) are the group that is most harmed by minimum wage laws — those laws artificially raise the wages of low-skilled workers without increasing their productivity, and therefore significantly reduce their employability relative to higher-skilled workers.

#4 Minimum wage hikes hurt the oppressed

Many people don’t realize that in 1930, the unemployment rate for blacks was lower than the white unemployment. It’s unbelievable because people assume that racism was so persistent in 1930, it ought to have left most if not all blacks without any opportunity for employment. Despite rampant racism, however, there were more black workers than white workers.

Back in 1948, the unemployment rate for 17-year-old black males was just under 10%, and no higher than the unemployment rate among white male 17-year-olds. How could that be, when we have for decades gotten used to seeing unemployment rates for teenage males that have been some multiple of what it was then — and with black teenage unemployment often twice as high, or higher, than white teenage unemployment?[3]

The disparity in unemployment between black and white workers occurred when the minimum wage regulation went into effect during the 1950’s, and the racial gap in unemployment expanded.[4] With the artificial increase in wage, blacks were priced out of jobs.

Many people automatically assume that racism explains the large difference in unemployment rates between black and white teenagers today. Was there no racism in 1930’s and 1940’s? No sane person who was alive in 1948 could believe that. Racism was worse — and of course there was no Civil Rights Act of 1964 then.

It’s important to note, however, that the economics of supply and demand often carries more weight than racist policies. To use another historical example, during Apartheid in South Africa where it was illegal to hire blacks in most occupations, blacks nevertheless outnumbered white workers. During this time, there was no minimum wage law in South Africa, so many blacks were able to do the work that whites refused to do. Thus, economics carried weight even in South Africa apartheid.

Final Thought

Why is this important? Because ideas have consequences. And if we perpetuate ideas without looking at facts, history, and the collateral impact on society, then you get the kind of country that devalues liberties and freedoms needed to thrive. Perhaps it’s better to think about ideas, like minimum wage hikes, using facts and reason without depending on emotional “compassionate” arguments that end up causing more harm than good.  Just a thought.

 

 

 

 

 

 

[1] Esha Chhabra, Forbes (May, 2017)

[2]Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle” by Ekaterina Jardim, Mark C. Long, Robert Plotnick, Emma van Inwegen, Jacob Vigdor and Hilary Wething.

 

[3] Thomas Sowell, “Intellectuals and Race,” 2013.

[4] Actually, the federal government established a minimum wage in a 1938 law called the Fair Labor Standards Act. However, this law was never in effect because a decade of high inflation had raised money wages, for even low-level jobs, above that minimum wage.

The Not So Free-Market Economy

 

Edward G. Ryan, the chief justice of Wisconsin’s Supreme Court, warned the graduating class of the state university in 1873: “The question will arise, and arise in your day, though perhaps not fully in mine, ‘Which shall rule – wealth or man; which shall lead – money or intellect; who shall fill public stations – educated and patriotic free men, or the feudal serfs of corporate capital?’”

One of my favorite Dr. Seuss books is The Lorax. Perhaps is because with eloquent subtly he uses personification to illustrate the danger of corporate greed upon both the environment and human beings. The beauty of the story concerns how the choices we make impact everyone around us. The idea of the inter-connectedness of mankind is a congenial thought when talking about world peace, but runs into difficulties when we talk about the economic well-being of others. The current plight of American economics is one that is rigged and riddled with greed while the idea of freedom morphs into a chimera. So this begs the question: is the Lorax of today the 2007-2008 crash and the continued economic exploitation of our plutocratic government? And more importantly, is anyone listening to the Lorax?

Economic Exploitation

So that I don’t sound too dramatic, here is the current picture. By 2007, the year before the crisis, the top 0.1 percent of America’s households had an income that was 220 times larger than the average of the bottom 90 percent. While recovery for the bottom percentage of Americans has been a Sisyphean feat, the wealthy have bounced back resoundingly. The wealthy had more to lose in stock market values, but those recovered well and relatively fast: the top 1 percent of Americans gained 93 percent of the additional income created in the country in 2010, as compared with 2009. Furthermore, if we consider the Walton family of Wal-Mart, the six heirs to the Wal-Mart empire command wealth of $69.7 billion, which is equivalent to the wealth of the entire bottom 30 percent of U.S. society. For the sake of brevity, I won’t divulge into the working conditions and wage disparity of the average worker at Wal-Mart, or the externalities of labor exploitation in factories in the East in order to maximize shareholder profits. And through all of this, the median household income is still the same as in the mid-seventies when adjusted for inflation. Unbelievable.

This is country that spends more on our prisons than education. A country that is sitting and watching large pharmaceutical companies rake in billions while hundreds of thousands of Americans can’t afford to fill their prescriptions. A country that appears completely content that the crash that not only created a vast loss in American’s retirement accounts, but also $6.5 trillion loss in housing valuations. Lastly, and unbeknownst to most Americans, the extreme poverty of people living at least one month of the year on 2 dollars a day person or less, the measure used by the World Bank for developing countries – had doubled since 1996, to 1.5 million. The “poverty gap,” which is the percentage by which the mean income of a country’s poor falls below the official poverty line, is another telling statistic. At 37 percent, the US is one of the worst ranking countries in the Organization for Economic Cooperation and Development (OECD), the “club” of the more developed countries, in the same league as Mexico (38.5 percent). The Lorax has been warning us for a while, but we’re not listening.

The Free-Market That Isn’t Free

With the rabid social inequality in our society today, it begs the question: how free are we? I mean, we’re told we live in a “free-market” society with “free enterprise,” with “freedom of contract,” “free trade,” and “free speech.” But when we dig deeper into the policies that are being implemented, it appears that the one’s tilting the scale in their favor is government officials, Capitol Hill lobbyists and corporate lawyers. When we’re dealing with a rigged system, freedom looks completely different to the hedge fund manager and the Wal-Mart employee.

As economist Robert Reich notes, most political debates soon turn to whether the “free market” is better at doing something than government. As Reich states:

“Few ideas have more profoundly poisoned the minds of more people than the notion of a “free market” existing somewhere in the universe, into which government “intrudes.” In this view, whatever inequality or insecurity the market generates is assumed to be the natural and inevitable consequence of impersonal “market forces.” What you’re paid is simply a measure of what you’re worth in the market. If you aren’t paid enough to live on, so be it. If others rake in billions, they must be worth it (Saving Capitalism, 19).”

The question typically left to debate is how much government intervention is warranted. Conservatives want a smaller government and less intervention; liberals want a larger and more activist government. One’s response to it typically depends on which you trust most (or least): the government or the “free market.” But this dichotomy is utterly false. There can be no “free market” without government. A market – any market – requires that government make and enforce the rules of the game. In most modern democracies, such rules emanate from legislatures, administrative agencies, and courts. Government doesn’t “intrude” on the “free market.” It creates the market. Yet the interminable debate over whether the “free market” is better than “government” makes it possible for us to examine who exercises this power, how they benefit from doing so, and whether such rules need to be altered so that more people benefit from them. So who exercises the power?

Who Exercises the Power?

The power backing the “free market” lies with the wealthy elite in or close to those in government. Under the guise of “freedom,” the rest of America sits on the sidelines watching astonishingly at escalating campaign contributions to back particular candidates and their agendas, burgeoning “independent” campaign expenditures, growing lobbying prowess, platoons of lawyers and paid experts to defend or mount lawsuits, public relation campaigns designed to convince the public of the truth and wisdom of the policies they support, think tanks and sponsored research that confirm particular positions,  and ownership and economic influence over media outlets that further promote particular goals. Under these circumstances, arguments based on the alleged superiority of the “free market,” “free enterprise,” “freedom of contract,” “free trade,” or even “free speech” warrant a degree of skepticism. The pertinent question is: whose freedom?

Illusion of Freedom

Our freedom is dictated by the government officials and their squadron of lobbyists and lawyers who represent corporate interests. The “free market” is a delusion of freedom that is-what-it-is because of policies of the elite.  Need more proof? Ask yourself why in Stockholm, Sweden you can get high-speed internet in every inch of the city (for around $20/month) but in the U.S. Comcast has an increasing monopoly such that they can ratchet up prices and limit your choices in order to deepen their pockets. By the way, Comcast and other cable operators spend millions of dollars each year lobbying and contributing to political campaigns (in 2014, Comcast ranked thirteenth of all corporations and organizations reporting lobbying expenditures and twenty-eighth for campaign donations).

Want another example? Most jobs will have you sign a contract agreeing that you will go to arbitration, rather than take your complaint to court –  if you have experienced some form of abuse. And here’s the catch: your company selects the arbitrator. According to a recent study, employees complaining of job discrimination got relief only 21 percent of the time when their complaints went to arbitration but 50 to 60 percent of the time when they went to court.

How about the countless times you are prompted to check off ‘you are agreeing to the terms and conditions’? I have yet to meet somebody who reads every word and can actually understand the legalese in those agreements. When consumers sued several hotels and online travel agencies for allegedly conspiring to fix hotel room prices, lawyers for Travelocity, successfully defended the company in court by arguing that customers who used its site could not participate because they had “agreed” not to sue. We are told to believe that we have ‘freedom of contracts’ but this is not the truth. This is coercive. Buyers and sellers have no real alternatives when a large corporation have locked up a market through its intellectual property, control over standards or network platforms, and armies of lawyers and lobbyists. Under such circumstances, contracts are inherently coercive, or so it might seem. And contracts today are often filled with conditions (likely in small print) that deny employees, borrowers, and customers any meaningful choice. Nonetheless, large corporations possess the political and legal clout to make sure they’re enforced.

Let’s keep it going. Bankruptcy was designed so people could start over. But these days, the only ones starting over with ease are big corporations, wealthy moguls, and Wall Street, who have enough political clout to shape bankruptcy law to their own needs. In 2008, The Street’s biggest banks had bought hundreds of billions of dollars’ worth of risky products, such as subprime mortgages, collateralized debt obligations, and mortgage-backed securities. As you probably remember, the banks that were mislabeled “too big to fail” did indeed fail, and then were promptly given an estimated $83 billion dollars in low-interest loans from the federal reserve. Did the mass amount of homeowners get any help? Nope. As homeowners found themselves owing more on their mortgages than their homes were worth and unable to refinance. Yet Chapter 13 of the bankruptcy code (whose drafting was largely the work of the financial industry) prevents homeowners from declaring bankruptcy on mortgage loans for their primary residence. When the financial crisis hit, some members of Congress, led by Illinois senator Dick Durbin, tried to amend the code to allow distressed homeowners to use bankruptcy. That would give them a powerful bargaining chip for preventing the banks and others servicing their loans from foreclosing on their homes. The bill passed the House, but when in late 2009 Durbin offered his amendment in the Senate, the financial industry flexed his muscles to prevent the passage, arguing that it would greatly increase the cost of home loans. The bill governed only forty-five Senate votes, even though Democrats were in the majority. Partly as a result, distressed homeowners had no bargaining power. More than five million of them lost their homes, and by 2014 another two million were near foreclosure.

I could keep going and detail the rigged system that gives double-digit interest to student loans debt and those needing cash advances. I could outline how the corporate interests have the bargaining power over the healthcare system. Such that, by the 1980s, the anti-trust laws had dissolved in a way that hospitals began merging into giant hospital systems, capable of getting higher reimbursements from insurers. The results were a ratcheting up of health care costs, along with fewer choices. In 1992 the average American city had four hospitals; by 2014, it was served by just two.

Final Words

At what point do we say “this is not right”? At what point to we begin looking into candidates voting records on issues that truly impact every individual in this country? At what point to we disavow ourselves from the lies of “immigrants as rapists and who don’t contribute” and that “the number one threat to our freedom is ISIS”? The real threat is the incremental changes to the “free market” economy in policies that tilt the scale in favor of the elite and further silence the voice and freedom of everyone else. At the beginning of this post I mentioned the warning of the Lorax in Dr. Seuss’ classic story. No matter how much the Lorax warned, no one listened – until it was too late. The warnings of the present dangers are before us in a decimated U.S. middle-class and growing economic disparity. But does this truly convict us to do something about it?

~ Wes Fornes

 

 

Social Immobility

Written over 3 hours at Starbucks in Los Gatos with The Prodigy blasting in my ears. I did not cite any of the stats, but will provide source if you email me. Most of the data points are from the Brookings Institute, economist Robert Reich, Joseph Stieglitz (“The Great Divide”), Naomi Klein (“Shock Doctrine”) and several Elizabeth Warren interviews.

Justice for the Few

The Declaration of Independence provides hope with the admonition of securing our unalienable rights, which includes life, liberty and the pursuit of happiness. Why should children be excluded or at least start their life with an insurmountable deck stacked against them? This is indeed a moral problem facing the US that will either seek to argue for spreading opportunities to all, or a consolidation of opportunity for those born to wealthy parents. Within this narrative, the onus is on us to think through the complexion and contours of justice and fairness.

When considering the distribution of basic rights and liberties, children are the worthiest candidates for equality. They are a special group given they have no control over the parents or the environment they are born in to. In the US today, kids born into poverty have the slimmest opportunities of transcending poverty when compared to other developed countries. The unfortunate reality is that most children born into poverty in the US are sucked into a viscous cycle that entraps middle-class families. Consider that median income is lower than it was in 1978 (adjusted for inflation), while median housing/rent has increased since 1978, and our government continues to financially gut our education system, while college tuition has increased by $9,000 compared to 1980-81 (adjusted for inflation). America carries the unprivileged honor of being a country where the life prospects of an American are more dependent on the income and education of a child’s parents than in almost any other advanced country for which there is data. Probably the most important reason for lack of equality of opportunity is education: both its quality and quantity.

A key point in this discussion is that no one makes it on his or her own. The senseless Conservative jargon of rugged individualism that expects you to pull yourself up by your bootstraps is meaningless when you have no straps on your boots. The truth is that those at the top get help from their families compared to those lower down on the ladder. This opportunity gap is seen near where I live in the Silicon Valley within the city of Palo Alto. On the west side of highway 101 you have an upper class with school kids gaining access to a plethora of top schools with top tier teachers, highly educated tutors on every corner, SAT prep courses in every shopping center, and STEM (science, technology, engineering and math) programs to name a few. While next door in east Palo Alto, you have an underserved non-white population with children surrounded with above average homicide, crime, and gang rates. But’s let keep things in perspective with regard to California overall, it is still a state in which last year more money was spent on prisons than in than the education system. When it comes to the development of children, it really does take a village.

Another reality to the inequality gap reveals troubling systemic implications. Externalities are the side effects or consequences – often covert – that are the results of the economic policies in place. Such systemic externalities with regards to income inequality are correlated with inequalities in health, access to education, and exposure to environmental hazards, all of which burden children in more segments of the population. Indeed, nearly one in five poor American children are diagnosed with asthma, a rate that is 60% higher than that for non-children. Learning disabilities occur almost twice as frequently among children in households earning less than $35,000 a year than they do in households earning more than $100,000. The externalities of the enormous income gap we see in the US serves to entrap children from social mobility. Joseph Stiglitz points out that 42% of children who are born into poverty (in the US) will remain in poverty as adults; which is more devastating than any other advanced country- even Great Britain which has a history of class structure (where only 30% of their children remain in poverty as adults).

“In a recent study that looked at Americans in selective colleges, only around 9 percent come from the bottom half of the population, while 74 percent come from the top quarter.” Robert Reich

Social mobility in the US has been stifled with the advent of colleges serving as cash cows rather than bastions of development. College graduates earn more than $12,000 more per year than those without college degrees; the gap has almost tripled just since 1980. While colleges ought to serve the purpose of equipping future innovators, it has nevertheless turned into big business for banks salivating over collecting student loans. Student debt for seniors graduating with loans now exceeds $26,000, about a 40 percent increases (not adjusted for inflation) in just 7 years. But an “average” like this masks huge variations. According to the Federal Reserve Bank of New York, almost 13 percent of student loan borrowers of all ages owe more than $50,000, and nearly 4 percent owe more than $100,000 – these debts are beyond the abilities of the student to pay; and this is evidence by the soaring delinquency and default rates. Some 17 percent of student loan borrowers were over 90 days or more behind in payments at the end of 2012. And tuition? Well average tuition, room and board, at four year colleges is just short of $22,000 a year, up from $9,000 (adjusted for inflation) in 1980-81. And even more startling, in 2013, the total student debt came to around one trillion dollars, which surpassed total credit card debt for the year.

At what point do we say something needs to change? The ethic that needs to be advanced is not equality of outcome, but equality of opportunity. I am not saying that a heart surgeon ought to earn the same income as a school janitor. I am simply stating that both should have equal opportunity to carve out their future careers from whence they exit the womb.

To accomplish this task will take a vast change in our government’s economic policies. Before I am charged with being a socialist, you must consider the period of shared prosperity between 1945-1970’s. You had tax rates that never crept below 70%, a GI Bill, and strong unions that breathed life into a bourgeoning middle class. But the tipping point came in the Nixon and Reagan era that has brought about a destabilizing form of unrestrained capitalism that is rigged for the wealthy. With tax cuts for the elite igniting the myth of trickle down economics, massive de-regulation, lack of accountability between banks “too big to fail,” and an inept government that did not adapt to globalization and technological advancements.

My point is this: There comes a tipping point when moral principles need to be addressed and parsed. We have already reached the tipping point. When it comes to equality of opportunity and social mobility, it’s time we pull the wool from our eyes and consider economic policies that benefit the whole rather than the few. We are all better off, when we are all better off.

~Wes Fornes