Minimum Wage Rears Its Ugly Head - Again

Jim Blasingame During the 1920s and 30s, New England's textile industry came under attack. The danger wasn't from armies or terrorists. Their antagonists were the emerging textile factories in the South, whose weapon was wages lower than the New England factories were paying, and the battleground was the marketplace.

Plentiful and motivated workers not burdened by an established pay scale, combined with jobs that didn't require much education or a long learning curve, proved to be low-hanging fruit for opportunistic southern industrialists, and an unfortunate paradigm shift for the New Englanders.

Beauty And The Beast: The Free Market And Politics
For those who love the free market, it was a beautiful thing. Unfortunately, the Yanks didn't see it that way and chose to declare war. The weapon-of-choice? Not innovation, technology, or shrewd operating practices. It was politics.

By definition, a representative democracy, such as we have in America, affords every citizen or legal entity the opportunity to try to influence elected representatives to create or vote for (or against) legislation. No doubt, excellent civics students, the New England textile factory owners decided to exercise this right by petitioning their respective delegations to do something about these pesky southern interlopers.

A Shotgun Approach
Riding to the rescue, Massachusetts Senator Henry Cabot Lodge, Jr., a first term Republican, led the charge to counter this "unfair" competitive attack against his constituents. His weapon was a bill to create a national minimum wage of 25¢, which would, by government fiat, neutralize the southern advantage. Following considerable debate and a bitter political fight, the bill finally passed Congress and was signed into law by President Roosevelt in June 1938.

Notice that the fathers of a national minimum wage weren't motivated by compassion for America's workers. Clearly, the birth of a national minimum wage was 100% about politics at its worst: politicians monkeying around with perhaps the greatest of mankind's inventions, the free market.

Fast Forward
Now comes a latter-day son of Massachusetts to take up the minimum wage cause. But this time it's a Democrat, Senator Ted Kennedy. Unlike his predecessor, Kennedy is not motivated by the interest of regional employers, rather by the plight of workers.

Kennedy argues that increasing minimum wage helps the working poor. While there is significant evidence refuting that position, in terms of employers, the impact of minimum wage is broad, expensive, and sometimes even catastrophic. As you might imagine, I want to focus on what minimum wage increases do to employers. Here are four examples:

1. Since 1938, virtually all workers, especially those who think of their compensation in "per hour" incremental terms, consider the minimum wage as a basis, or floor, from which they reference their own compensation progress. So when minimum wage increases, it's natural for all workers to feel that they have taken a step backwards until their relationship to the national standard is restored. Consequently, an increase in minimum wage creates significant upward pressure on all payrolls, not just those earning minimum wage.

2. Any company that doesn't respond to a minimum wage increase for all employees risks a negative impact on morale. Consider this scenario:

Carol, an unskilled, entry-level worker, begins her career at minimum wage. On her first anniversary date, as a result of hard work, taking initiative, and assuming responsibility, Carol's employer gave her a $1 per hour raise. Carol is rightly proud of herself.

The next day, a new unskilled, entry-level employee, John, is hired and assigned to Carol for training. But on that same day, the Federal government increased the national minimum wage by $1 per hour. With John starting out making the same hourly rate as Carol, how does she feel about her progress now? Left with immediate higher payroll expenses and a potential morale problem, this employer's only crime was to reward the efforts of one employee and give another one a job.

3. Some labor contracts use the national minimum wage as a platform upon which an hourly factor is added. So when the government increases the minimum wage, each worker participating in those contracts gets a raise automatically without delivering one notch of increased productivity for the firm that makes their payroll.

4. Every dollar of increased payroll carries with it an increase in the payroll tax, which employers match for their employees. Since a government mandated increase in payroll expense is a de facto tax, we then would have a tax on a tax.

A Rising Tide Floats All Boats, Except In Kennedyland
During the 90s, to all but the most ardent advocates of a free market, thriving businesses and unprecedented wealth-creation made arguing against Senator Kennedy's position for increases in the minimum wage seem cruel and heartless. But the Senator's position disregarded the evidence: With virtual full employment, most employers were more prone to take a pulse than to take an application. The booming economy increased the market value of human labor, thus affording ALL workers the abundant opportunity to earn their own wage increases without help from the government. It became a seller's market, and the sellers in this marketplace were workers.

In an era of prosperity, Senator Kennedy's one-note minimum wage song demonstrated that, 70 years after its birth, increasing minimum wage is still 100% about pandering politics, not economics.

That Was Then. This Is Now
Let's look at the current economic facts:

• Looking at the equity indexes, it's evident that the "Bear" now rules on Wall Street, and is sitting on your 401K account. The Bear won't retreat until profits return, and arbitrary increases in payroll expenses won't hasten the emergence of profits or a Bull market.

• A year after September 11, 2001, and the Enron expose, the first of several corporate accounting scandals, the economy is still languishing, and optimism is cautious at best for 2003. Economic recovery is tied closely to new corporate investment on capital items and people. A minimum wage increase will not contribute to new corporate investment.

• The Consumer Confidence Index was 114.0 in August, 2001. One year later confidence of consumers, the driving force in the U.S. economy, has dangerously dropped to 92. Employment stability is key to consumer confidence. How does a national increase in minimum wage create more job stability and consumer confidence?

• According to the U.S. Department of Labor, national unemployment today stands at 5.7%, and there seems to be no employment silver bullet to be found. Businesses need reasons to hire more people, one of which is not an increase in the minimum wage.

• According to Ray Keating, Chief Economist of the Small Business Survival Committee, a report recently released by The Kaiser Family Foundation and the Health Research & Educational Trust, shows that the annual ticket for small businesses to provide healthcare insurance for employees has risen at double digit percentages for the third year running. Add this de facto tax to a government imposed increase in payroll expense and you threaten the survivability of thousands of small businesses, and jeopardize the jobs and opportunity they create.

• The Federal Reserve Board has lowered the Fed Funds Rate to 1.75%, which gives rise to a 4.75% prime rate, both of which are the lowest since John Kennedy was President. If you know anything about Fed leverage you know two things: 1) a 1.75% Fed Funds Rate means the U.S. central bank is extremely concerned about the strength of the U.S. economy, and 2) the Fed is perilously close to being out of ammunition to stimulate the economy if recovery continues to be illusive. The last thing the Fed needs right now is a minimum wage increase.

And then there is this:

• Ted Kennedy is still pushing a 30% minimum wage increase, from $5.15 to $6.65 per hour.

What's wrong with this picture?

Stimulating The Economy
Currently, there are a few proposals working their way through Congress, which are targeted to help those who sign the front of over 70 million paychecks every week, small business owners. But Senator Kennedy continues his Business vs Employee brand of politics, and is threatening to hold these bills hostage to a minimum wage increase.

In fairness, the Bay State's senior senator has many minimum wage fellow travelers on Capital Hill, including Senator Tom Daschle, and sadly, more than a few feckless Republicans. With the facts placed in evidence, couldn't an increase in the national minimum wage be called "congressional nullification"? What game are these guys watching?

Let The Market Be Free
In a free market, prices of goods, services, and assets are based on value, intrinsic or perceived. Human labor is one of the most critical components of a free market, but like any other component, the price paid must be justified by value delivered.

When politicians monkey with the marketplace, like increasing the minimum wage, they create artificial values by government fiat. When the economy is booming, minimum wage is mute. But during a downturn, an increase in the minimum wage can be devastating for employers, especially the small ones.

Write this on a rock...An increase in minimum wage at this time is tantamount to a direct attack on business, especially those who can least afford to be attacked, small businesses. By insisting on an increase in the national minimum wage, Senator Kennedy and all who support such an increase are saying to America's small businesses, "I'm against you."

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