This is the script I used for the latest episode of my podcast, "Consider This!" Usually, I cover a variety of topics, but in this show I stick to just the minimum wage issue brought up by the President in his State of the Union speech.

In the State of the Union address recently, the President said this, “Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour.” A couple things about that.

Most people who make the minimum wage are not living in poverty; they’re living with their parents. Yes, it’s children who haven’t left the nest yet and are still being fed and housed by Mom and Pop. So to characterize them as living in poverty is just not accurate.

The government’s Bureau of Labor Statistics website has a page detailing information about minimum wage workers from 2011 that is revealing. It’s interesting to note just how many people we’re really taking about. Of all Americans who are working, 59% of them are paid hourly. Of that group, just 5% of them are paid at or below the federal minimum wage. (Some are below the minimum due to some exemptions.) Of that group, about half are over age 25. This comes to about one and a half percent of all American workers. And as Megan McArdle notes, while some in that over-25 set are poor, on average they’re not. This is still, in absolute terms, a decent number, but it’s nowhere near some epidemic of poverty that can be laid at the feet of the minimum wage.

Here’s another bit of relevant information. About half of those getting minimum wage or below also get tips and commissions in addition to their hourly wage. None of the graphs and charts that people use to support the idea of an increased minimum wage ever show you that.

So then, if so very few are actually living on a minimum wage, what’s the harm in increasing it? Won’t that put more money into the economy and spur it on? Well first, you have to ask where that money comes from. It doesn’t just magically appear on the pay stubs of workers. It comes from one of two things; increased prices and/or decreased employment. To see what I mean, let’s say we increase the minimum wage a lot, and consider what would happen. Then we can surmise what would happen with a smaller increase.

So instead of increasing labor costs of low-wage firms by 25%, let’s make the federal minimum wage $20 per hour, just about tripling it from its current value. What would happen, especially to the small businesses that are so essential to our economy? Their labor costs rise dramatically and they have to adapt. To say to them, “Well just make less profit” is not a reasonable answer. The smallest of businesses would be the hardest hit, and it would be a big barrier to entry for new small businesses. So the higher the minimum wage goes, the small business sector starts to wither, and we make it harder to get them going. This is not good for any economy, let alone one limping along after a recession.

If a business keeps from going out of business, thus losing all their jobs, they must recover from this by increasing their prices or letting some employees go. Maybe they try to keep the employees they have but cut back on new hiring. Again, we’re hitting the economy where it hurts. We’re going to see lower sales, lost jobs, or both.

But never mind that (it seems that some are saying); the remaining employees are making money that will be injected into the economy. Their employer’s business’ prices may rise, but not everyone’s. Well, more businesses than you think. It’s not just the wages at the bottom that would get hiked. Many union contracts are written such that other wages are tied to the minimum, such that theirs is a certain amount or a certain percentage above the federal minimum. We’re not just giving people making the minimum a raise; we’re giving loads of union members a raise, too, who were making more than the minimum already. So all those worker percentages I mentioned before? Throw them out. A minimum wage increase affects many times more people than just those folks.

In the end, we’ve raised wages, and raised prices at the same time. And since the wage was mandated rather than market based, but the price of goods is market based and thus isn’t as flexible, we’ve put people out of work in this readjustment, and those still working don’t nearly get the new buying power they thought they’d get. This was for a tripling of the minimum wage, but smaller increases just do the same damage at a smaller level.

But why would we want to do any damage at this point in time? (At any point in time?) Because it feels right, in spite of the reality? Well, we shouldn’t be making economic decisions on emotion.

So we start out with the misunderstanding that, somehow, people are living off the minimum wage. The reality is that most are not, and those that are don’t live off it for very long. It’s a start to what is hopefully a long and prosperous job. Raise the minimum too high, and those jobs evaporate.

Add to this the misunderstanding that only those getting the minimum wage are getting the increase. The reality is that, here, a lot more people get a raise, or have wage negotiations automatically triggered, when the minimum goes up. So prices go up more than expected, and which affects everyone.

The bottom line is this. If a minimum wage hike is always a good thing, why not just hike it to $20 an hour? If you are for $9 but against $20, please explain why your argument against $20 doesn’t apply to $9 as well.

Filed under: Economics

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