Coyote Blog » Blog Archive » Minimum Wage Increases Are Mostly Paid for by Consumers
"Apparently there is a new CBO report on the effect of a Federal minimum wage hike to $15. Before I get into the economic impacts, I want to observe that the $15 Federal minimum wage is a political smart bomb that hits mostly red states in much the same way as the reduced Federal tax deductions for SALT (state and local taxes) was a smart bomb that mostly hit blue states. From an equity standpoint it is insane to have the same minimum wage in rural Alabama as in San Francisco, but since its main negative employment effects will be in red states I think this may be a feature rather than a bug for Democrats. Anyway, for years folks have made the argument that government-mandated minimum wages are necessary because of the power imbalance between employers and low-skill workers which allows employers to exercise monopsony power and keep wages below some theoretical market clearing price (which is a total laugh -- if you really believe this you can come to my company and try to hire for unskilled positions at the top of the economic cycle and see how much power we have). The progressive theory is that companies therefore earn excess profits due to this power. But that is almost impossible." True. "You can see that the CBO obviously does not buy the progressive argument about excess corporate profits. 90% of the wage increase is paid for by consumers in the form of higher prices. My bet is that most of the business income loss is not margin compression as much as lost sales due to higher prices. Note also the inefficiency of the minimum wage even in these optimistic numbers -- consumers and businesses contribute $53 billion in value to increase wages by $44 billion. The rest is a net loss to the economy and my bet is that these numbers underestimate this loss." This is how one replays the moribund Obama economy. Why progressives want the economy to stultify, I have no idea but they seem to believe this is the way to prosperity. "If you want to help poor people, economic growth and reducing barriers to hiring low-skill workers (combined with efficient transfer programs) is the way to go -- in this context the minimum wage increase can actually be counter-productive. One other reason minimum wage increases are a bad anti-poverty program is that most of the data I have seen points to about a third of minimum wage jobs held by earners in families below the poverty line. So 2/3 of the increased wages from a minimum wage increase go to non-poor households." But is the goal poverty reduction? Nothing I have ever seen would indicate this is a real goal of the progressives. To the contrary, the goal would seem to be to create a permanent underclass which the progressives can promise economic fixes which never fix anything but which cause the permanent underclass to continue to vote Dem/progressive. "Last summer I had the cover story in Regulation Magazine titled, "How Labor Regulation Harms Unskilled Workers." I fear we are heading to a European model of very high minimum costs of employing anyone, which tends to result in a two-tier system of well-paying jobs for skilled and educated employees and lifetime government relief for the unskilled and under-educated." I hope not. We are at a crossroads, do we double down for another helping of the now long dead progressive model or do we move on, find a new socio-economic model and perfect it? Down one of these roads lies prosperity, down the other lies societal death, watch Europe, and vote wisely.
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