Raising Minimum Wage Will Aggravate A Bad Situation

I was just a young boy back in 1938, when Congress debated the proposed Fair Labor Standards Act - the “minimum wage bill.”

According to the record, the proponents declared, “A bill of this kind is very necessary if we are going to help the underpaid workers of our country, reduce the relief rolls and spread employment.”

The opponents responded, “This wage-hour bill is political and not economic; it will increase unemployment, not decrease it. Instead of providing more work … (it) will create more unemployment because it would further stimulate the use of labor-saving machinery.”

When I hear the same rhetoric today surrounding the debate over President Clinton’s proposed minimum wage hike, it seems like we haven’t learned a thing in the past six decades.

But we have learned quite a bit about the effects of rises in the minimum wage since it was enacted in 1938. And I may have learned more than most people, having created more than 1.5 million jobs in the last 35 years.

First, I learned that employers do not rush out to employ more people when the price of their labor goes up. I also learned that unskilled adults suffer disproportionately.

Politicians like to sidestep the job-loss issue because they know it is difficult to determine how many jobs were not created because of a price increase. It is not unlike figuring how many people didn’t buy a car because its price jumped 20 percent, from $10,000 to $12,000. Much of the negative effect on employment is hidden from public view.

But as an employer, I see firsthand what happens when the cost of employing someone goes up faster than that employee’s productivity. Economists call it the substitution effect. The unavoidable real-life response of businesses like mine is to ask our employees to take on more responsibilities or work longer hours (time-and-a-half is still cheaper than a new hire when you add in the hidden costs of FICA, other employment taxes, training, etc.) Or else we use more self-service and automate.

Eventually, when we do hire someone new, we favor higher-skilled candidates, which means unskilled adults are the big losers.

When the minimum wage increases, people with better education or skills are willing to accept jobs they were previously unwilling to take. As a result, the less-educated or less-skilled adult moves to the bottom of an even larger pool of job applicants. Faced with higher costs, the employer has to find someone with more skills, someone who can be trained faster and perform multiple duties to offset the higher wages. As researchers at the Institute for Research on Poverty at the University of Wisconsin and at Boston University have found, teenagers and young adults benefit while older unskilled adults and welfare recipients are crowded out of the job market.

In an effort to raise the minimum wage by 20 percent, from $4.25 to $5.15 an hour, minimum wage hike proponents, including Clinton and Labor Secretary Robert Reich, have stated that its true value is plummeting. The reality is it has far outpaced inflation. When the president says the wage will be at a 40-year low next year if we do not raise it, he is being highly selective in his facts. If the minimum wage had been tied to rise with the Consumer Price Index since 1938, as was proposed at the time, it would be $2.63 an hour today instead of $4.25. The president’s statement is only “true” because he is using 1956 as a starting point for comparison, a year when Congress set the wage even further ahead of inflation than usual.

The truth is, labor costs have been legislated so far out in front of inflation and employee productivity that employers have little choice but to hunt for more predictable substitutes.

Cake-decorating machines, automatic taco makers, meatball makers and the more exotic “pizzabots” or “sushimatics” are expensive to buy and install, but the long-term costs are predictable. And you only need one skilled employee to operate each machine, instead of the three or four lesser-skilled people who were previously employed.

Nearly six decades of real-world experience has taught us that raising the minimum wage does not “help the underpaid workers of our country, reduce the relief rolls and spread employment.”

Employers understand this, but after 60 years, some in Washington still don’t.

xxxx