Sorry, Forbes, But Minimum Wage Hikes Are Not Job Killers

Author: January 2, 2013 5:39 am

min-wage
On New Year’s Eve, the article of Forbes blog contributor Dr. William C. Dunkelberg, titled, “Why Raising The Minimum Wage Kills Jobs” appeared on the right-leaning Forbes Website with the opening sentence:

“The minimum wage is a major anti-jobs policy.”

With all due respect, Dr. Dunkelberg, I beg to disagree.

When one looks at Dr. Dunkelberg’s Curriculum Vitae at the Temple University Website, one can’t help but be impressed – I mean really impressed; following are just a few of this economic professor’s accomplishments:

  • B.A., M.A. and Ph.D. degrees in Economics from the University of Michigan
  • Served as an advisor to the Secretary of Commerce
  • Served two-year term in the Consumer Advisory Council of the Federal Reserve System
  • Former president of the National Association for Business Economics [NABE]
  • Twice appointed to the Census Advisory
  • Served on the board of The National Bureau of Economic Research
  • Elected member of the Conference of Business Economists (and chairman in 2003)
  • Elected member of the National Business Economic Issues Council
  • First recipient of the Small Business Administration’s Research Advocate of the Year award

So this guy knows his stuff, right? That’s what led me to wonder why he wrote such an article. Now granted, I don’t possess the credentials of Dr. Dunkelberg (nothing more than a specialty certificate in communications, really), but I had reconciled my reluctant Republican self over two years ago to the fact that a hike in minimum wage would help more than hurt the economy. So, naturally, I was curious to read this take on it by such a fiscal intellect, a monetary mastermind, a pecuniary prodigy, if you will. Following is the first question he asks in his article:

“If it works that well, why not make the minimum $50?”

Wait, really? That’s your opening argument? Seriously? Because it sounded eerily like something my fourth-grade daughter would utter after being told she’s grounded for a week and she petulantly replies, “Why not make it a hundred years?” I mean, how do you even respond to an argument like that?


I’ll give it a shot with Dunkelberg (still working on an answer for my daughter). First, Dr. Dunkelberg seems to be operating under the impression that employers who pay their employees a less-than living wage are only paying their employees what they can afford to pay and at the same time make a modestly satisfying profit. What Dr. Dunkelberg is not taking into consideration is that many of these companies (cough, Wal-Mart, cough) interpret “modestly healthy” as “obscenely massive” profits – they have investors to make happy, you know. As long as I’m coughing about Wal-Mart, let’s use them as an example:

According to Business Insider, Wal-mart employs 1.4 million U.S. employees (1% of the U.S. working population). Fortune 500 rankings shows Wal-Mart with a net profit of $15.7 billion. So that’s $11.2K profit per employee, which is about 12% higher than the average profit-per-employee for privately-held companies in 2009 (according to Sageworks).

A modest pay increase for employees would be fairly innocuous for companies like Wal-Mart and others who are getting historically greater returns on their employee investments. But a ridiculously huge 590% wage increase, as Dr. Dunkelberg snarkily suggests, would break even a retail giant’s back. It’s the difference between what a company can and cannot afford to do, and what it chooses to do, both in the legitimate and equitable sense. And that leads us to Dr. Dunkelberg’s next sardonic question:

“[Employers] will suddenly eliminate [accused wasteful spending] to cover higher labor costs, adding nothing to the bottom line?”

Why, yes, if they have to. A good place to start would be executive salaries, which have increased at a much steeper rate than the average worker’s. Additionally, average worker productivity (aka profit-per-employee – see above) has far outpaced worker wages. In fact, there was a five-time greater increase in productivity compared with wages from 1989 to 2010, according to the 2011 Economic Policy report). In other words, there must be some waste going on if companies are getting bigger returns on their employee investment, but not passing those returns on to their hard-working employees. Are we to just assume that if a company could afford to pay its employees a living wage and still make a healthy profit, it would? That companies like Wal-Mart are just as concerned with filling their employees’ pockets as they are the pockets of their investors? Or is that the kind of thing that’s so rare, news stories are written about it?

That brings us to Dr. Dunkelberg’s next point:

“Raising the minimum wage raises the hurdle a worker must cross to justify being hired.”

Really? So if the federal minimum wage is increased, minimum wage employees and those looking for minimum wage jobs are suddenly going to have to increase their vocational value? We already know companies don’t pay employees what they’re worth in terms of the value they bring to the company; rather, they are paid the lowest salary employers can get away with under minimum wage standards and without too much fear the employee will leave. In an employee supply-vs-demand, free-market environment, where the number of unemployed people looking for a job is six times greater than the number of jobs available, any fear that employees would abandon their jobs is virtually nonexistent.

But obliging companies to pay wages that more closely reflect the true value of the employee to its company – that would do significantly more to help a struggling economy than allowing employers to continue inflating executive salaries while ever-growing profits end up in overseas tax shelters.

Dr. Dunkelberg goes on to argue:

“[L]ess than a third of those receiving the minimum wage are families below the poverty line. … So, most of the people benefiting from the minimum wage are not the intended targets of the ‘anti-poverty’ aspect of raising the minimum wage.”

In 2010, 6% of hourly-paid workers, which equates to 4.4 million workers, earned salaries at or below the Federal minimum wage, according to the Bureau of Labor Statistics. If one-third of those (not sure of the exact percentage, since Dr. Dunkelberg didn’t cite his statistic) are living below the poverty line, raising the minimum wage will affect almost 1.5 million workers, along with their families; it will additionally help fuel the economy and lead to more jobs to help others ascend above the poverty line. Makes you wonder about Dr. Dunkelberg’s threshold for a healthy return on the country’s investment.

Dr. Dunkelberg then claims:

Congress raised the minimum wage 10.6% in July, 2009. In the [ensuing] 6 months, nearly 600,000 teen jobs disappeared, even with nearly 4% growth in the economy, this compared to a loss of 250,000 jobs in the first half of the year as GDP growth declined by 4%.

Dr. Dunkelberg is suggesting that the minimum wage hike is to blame for the staggering job losses that have been occurring since the economic downturn. By that logic, perhaps we should credit the minimum wage hike with the ensuing 20% drop in unemployment. Also, Dr. Dunkelberg fails to mention that the trend of job losses began long before the minimum wage hike kicked in. The charts below demonstrate how historical minimum wage increases have had little-to-no-effect on job growth or unemployment.

minimum_wageminimum_wage_hike

As you can see from the Unemployment vs. Minimum Wage chart, the number of drops in unemployment after a minimum wage increase is pretty even with the number of increases in unemployment. The same holds true for job growth – minimum wage hikes have a minimal effect, if any.

By Dr. Dunkelberg’s reasoning, states with minimum wages that exceed the Federal wage minimum would have higher unemployment rates. But there’s little-to-no correlation between a state’s unemployment rate and minimum wage. For instance, Vermont has the third highest minimum wage standard in the country (17% higher than the Federal minimum wage) but has one of the lowest unemployment rates (32% below the national average). On the other hand, New Jersey pays the low Federal minimum and has one of the highest unemployment rates in the country (25% higher than the national average).

Dr. Dunkelberg goes on to insist:

The Law of Demand always works:  the higher the price of anything, the less that will be taken, and this includes labor

and

Firms cannot pay a worker more than the value the worker brings to the firm.

Indeed, firms overall have paid their workers increasingly less than the value the worker brings to the firm. Additionally, Dr. Dunkelberg is applying the ‘demand’ part to the wrong factor. Does he believe that America’s middle and lower class are sitting on all their discretionary income and just waiting for additional employees to assist them in spending it, while employers wait for the price of employees to go down?

Any money in wages the average worker earns really does go directly back into the economy – immediately and very nearly entirely. A survey by CareerBuilder.com, as reported by CNN, shows that over half of all workers live paycheck to paycheck, meaning those workers virtually spend every penny they make. Even of folks earning at least $100K annually, 21% of them claim to be living paycheck to paycheck. So when all that extra income gets spent in the economy, retailers will become busier and move more product because of the new influx of spending. Then those retailers will need to hire workers to handle this new influx. Suddenly, the demand for employees is growing and the supply of employees is shrinking and wages will begin to again increase instead of stagnating the way they have been for the past few decades.

The reason companies are not hiring is not because labor is too expensive. Companies are not hiring because the consumer fiscal ability to purchase their goods is stagnant. And until it increases, companies have little need for a larger workforce.

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