Will Teenage Minimum Wage Hurt The Poor?

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Talk to any restaurant owner and you’ll immediately get two comments: “Covid was H-E-double toothpicks” and “We might not survive Albany’s minimum wage mandate.”

Of course, both points cover many different types of businesses, but it’s the latter sentiment that impacts businesses that rely on entry level workers to butter their bread, especially restaurants (yes, the metaphor was slyly chosen).

Interestingly enough, up until 100 years ago, the Supreme Court deemed minimum wage laws illegal. In 1923 the Supreme Court declared it “simply and exclusively a price-fixing law.” Once FDR threatened to pack the Court, the justices began changing their tune. In 1937, the Court birthed the “living wage” concept when it decided “a single employee was helpless in dealing with an employer… he was dependent ordinarily on his daily wage for the maintenance of himself and family.”

Few would argue that the cost of living in New York City and its surrounding environs far exceeds that of Western New York. Albany practically acknowledged this when it raised the minimum wage to a “living wage” a few years back. The raise became effective quickly down state. In our neck of the woods, it rolled out slowly over several years.

But it rolled out nonetheless.

Now, this has been explained on these Commentary pages before (see “Lemonade, Minimum Wage and Daddy’s Tough Decision,” Mendon-Honeoye Fall-Lima Sentinel, May 4, 1989), but almost any honest economist will tell you raising the minimum wage never works.

You’re smart enough to know this without the need of asking an economist. The proof it doesn’t work is evident to all. What more evidence do you need to understand raising the minimum wage is a failed policy than the simple fact that they keep raising it. If it really worked, they wouldn’t need to raise it again.

There’s worse news here.

It’s not that folks, and elected officials in particular, who are willing and enthusiastic members of the minimum wage cult don’t know economics (can anyone ever really know economics?). No, it’s much worse than that. It’s that they either don’t know or plainly choose to deny math.

And from this mathematical illiteracy spawns much of the economic myths the headlines of the national media swim in every day.

Never mind the minimum wage myth (for those who want to learn more about it, I’ve posted the link to the 1989 Sentinel article in the online version of this Commentary). I’ll add one thing, though, since it’s reflective of some of the current discussion (and I’m being charitable when I call it that).

Before I go any further, allow me a blunt caveat. What I’m about to say applies only to a mandated minimum wage. Wages can quickly exceed any mandated minimum wage when employers find there aren’t enough workers to fill the available job slots. That is a very different situation (and one that may exist in portions of our community) than the one that arises from a mandatory minimum wage.

Recently, the president of the Western New York Chapter of the New York State Restaurant Association was interviewed on a local TV station. He complained that, while could understand paying adults $15 an hour, he could not see why it was necessary to pay unskilled teenagers the same minimum wage. Regardless of what Albany says, his view faithfully represents those in his line of work.

Needless to say, there was a vicious partisan response to the claim of this businessman. Among the more telling was that “teenagers need to make a living wage, too” (this person then went on to explain why because of college, etc…).

The point is important, because it opens up the question as to what is a “living wage.” Is it the same for the parent as it is for the child? If this is the case, does that mean the parent’s “living wage” is less if the child also works? And what if both parents work? Does that mean their individual “living wages” are less than that of a household where only one parent works?

All interesting questions. They’re easy to answer if you depend only on math, but a lot harder to determine if you try to answer as a philosopher would (and, don’t forget, the definition of a bad economist is one who doesn’t realize he’s an applied mathematician and instead falsely believes he’s a philosopher).

If you want an economic exercise that eliminates the philosophy, you need simply turn to income inequality. This is related to the minimum wage issue in a very real sense (but totally unrelated to the concept of wealth inequality, which we will ignore here because it lacks any semblance of definitive causality).

Income inequality exists because people who provide greater value get paid more. For example, you willingly pay your doctor more than your auto mechanic. And you pay your auto mechanic more than you pay the neighbor’s kid who mows your lawn. Actually, because you have a kind heart, you may actually pay your neighbor’s kid more. But you won’t pay a generic lawn service company more.

In its most basic form, income inequality is desirable because you want to get good service. That’s all there is to it. To think otherwise would admit to a lack of fundamental understanding of the free markets that have made you the person you are today. And that’s a sad place to be. So don’t admit it unless you know for sure the other person doesn’t know any better either.

Now, here comes the brutal bluntness of math.

The other reality of income inequality is this: as the standard of living grows, so too will income inequality. In other words, the greater the income inequality within a given population, the greater the economic success of that population.

Here’s an example. Start with these three people: Dick, Jane, and Sally. Dick doesn’t have a job, so his income is $0. Jane has an average job, so her salary is $50K a year. Sally is an entrepreneur and she earns $100K annually. We all agree these are fair and equitable salaries given the value each worker provides.

Let’s say the economy expands by 100% (because the math is easier) and that everyone’s income doubles as a result. That’s fair, right? Everyone increases at the same percentage rate. You can’t be more equal than that.

Here are the new numbers. Sally now makes $200K/year, Jane makes $100K/year, and poor Dick, well, he’s still poor. His income remains $0.

But, wait. Sally, the highest earner, received two-thirds of the new earnings. Jane only got a third and, poor Dick stayed poor (or did he get poorer?) got nothing.

This is how income inequality successfully measures a growing economy, which in turn causes an increase in the standard of living.

Is this income inequality unfair? No. The relative standard of living of Sally and Jane increased dramatically. The only one left out was Dick. But you can’t say he got poorer. Sure, he went from earning $50K less than Jane to earning $100K less than Jane, but in both cases, he still earns the same as he did before.

There is one thing that can make Dick poorer: inflation. If the cost of living goes up, Dick drops further below the poverty line. There may be various “safety nets” to help him get along, but, based on the pure unforgiving mathematics of it, he is poorer in a sense.

Here’s the real bad news: Raising the minimum wage has the combined effect of inflating both salaries and the cost of living.

In the first case, increasing the minimum wage has a tendency to raise wages across the board (because supervisors want to earn more than the people they supervise, otherwise, why would they take on the added work of supervising). While this impacts wages in the same way economic growth does, it does so without necessarily having economic growth).

In the second case, raising wages raises the cost of doing business. When the cost of doing business rises, businesses will raise the costs of the goods and services they sell. This raises the cost of living for everyone consuming those goods and services.

You might say, “Why wouldn’t the business simply cut employees to keep costs low?” That’s a good question but the answer is the same. Fewer employees will lead to fewer widgets being made. And the Law of Supply and Demand tells you when the supply of widgets goes down, the price of buying one goes up.

In either case, the result is still the same: Dick gets poorer because the poverty line moves higher.

And when you don’t have economic growth with inflation, your end up with “stagflation,” something we last experienced during the Carter presidency in the 1970s. That means you don’t experience an increase in the standard of living commensurate with an increase in the cost of living.

Nobody wants that because it makes poor people poorer.

So, the next time you hear someone say we need to raise the minimum wage to a “living wage,” turn to them and ask, “Why do you hate the poor?”

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