Minimum Wage, Maximum Debate.

When I was 11 years old, I had a paper route. (Remember those?) According to newspaper company policy, I was paid 10 cents for every paper delivered. The more papers I placed in mailboxes, the heavier my pockets became. I learned about time management, responsibility, as well as frugality; I saved most of my earnings, learning the benefits of delayed gratification along the way.

Some people might say it was unfair that an 11-year-old kid hauling around a 45lb bag of newspapers received only a few dollars a day in compensation.  Others consider it generous compensation for the skills and experience required. Who determined it?  The free market; in this case, the newspaper publisher and me with the help of my parents.

I share this story because it sets up the context for today’s LinkedIn topic. Determining starting wages for unskilled workers is at the heart of the national debate around raising the Federal Minimum Wage. And although the Biden administration’s proposal for an increase to $15 just hit a snag in the Senate, the fight will no doubt passionately rage on.  

Federal minimum wage origins:

The government began legislating minimum wage at the end of the 19th century from the desire to end “sweatshop labor” which had emerged in the wake of industrialization. Initially, the Supreme Court held the idea of a federal minimum wage as unconstitutional, but after 1937 the Court upheld it as law. What started as a benevolent action was, and still is perceived by many as a legal blunder that will never be undone. Others feel it was a development long overdue. Either way, society has broadly accepted the idea that government can dictate the minimum value of labor.

Currently, employers subject to the Fair Labor Standards Act must pay the current Federal minimum wage of $7.25 per hour. Thirty states have a higher minimum wage, set by their respective legislators, and several states have no minimum wage at all since the federal standard applies.

According to the Labor Department, the percentage of hourly paid workers earning the prevailing federal minimum wage or less decreased from 2.1% in 2018 to 1.9% in 2019 (last available dataset). This remains well below 13.4% recorded in 1979, when data were first collected on a regular basis. About 5% of part-time workers (people who usually work fewer than 35 hours per week) were paid the federal minimum wage or less, compared with about 1% of full-time workers.

So why the debate? The one-word answer according to many, is inflation. The one phrase would be “living wage.” Working 8 hours a day for 252 days each year, the gross pay is less than $15,000. The median household income in 2019 was $65,712.

Minimum wage amounts are fixed and static, while actual economic conditions are always dynamic and in flux. Around 2010 when the $15 minimum wage started to make waves, the median wage for all workers was about $15. This means that a $15 minimum wage represented 98% of the median national hourly wage. At no point in history has the minimum wage been anywhere near that high. It’s dropped steadily since then, to 73% today.

Consider these recent Congressional Budget Office (CBO) assessments of the administration’s plan:  

• 1.4 million workers (0.9%) would lose their jobs; and yet
• poverty would be reduced by 0.9 million people at the same time: 
• From 2021 to 2031, the cumulative pay of affected people would increase, on net, by $333 billion—an increased labor cost for firms considerably larger than the net effect on the budget deficit during that period; however
• That net increase would result from higher pay ($509 billion) for people who were employed at higher hourly wages under the bill, offset by lower pay ($175 billion) because of reduced employment under the bill.

Confusing, right? That’s because tinkering with the economy typically has both positive and negative outcomes that are clear from the beginning and many other outcomes that are only visible in hindsight.

Several weeks ago, Senators Tom Cotton (R-AR) and Mitt Romney (R-UT) proposed a new idea to gradually raise the minimum wage to $10 per hour by 2025. But it would also require all employers to use the federal government’s E-Verify program to screen out undocumented workers. Undoubtedly as this process unfolds, other ideas will emerge.

Many of my articles attempt a balanced view, listing pros and cons of any given issue. This one is no different, but in the spirit of brevity, here are some compelling highlights on either side of the debate:

Arguments for raising the minimum wage:

Proponents of boosting the minimum wage say the measure would:

1. Increase economic activity and spur job growth.
2. Reduce government welfare spending and reduce poverty.
3. Gain traction in the race to keep up with inflation, productivity, and economic growth.
4. Reduce income inequality, as well as race and gender inequalities.
5. The incomes of people who make slightly above the minimum wage would also rise, due to a ripple effect.
6. Will increase worker productivity and reduce employee turnover.
7. The current minimum wage is not high enough to allow people to afford housing or even everyday essentials.
8. Leads to a healthier population and prevent premature deaths.
9. Would increase school attendance, decrease high school drop-out rates and crime.
10. Would help reduce the federal deficit.

Arguments against raising the minimum wage:

As previously mentioned, many people feel that the free market should determine minimum wages, not the federal government. Others say boosting the minimum wage would:

1. Force businesses to lay off employees and raise unemployment levels, thereby increasing poverty.
2. Drive up the cost of consumer goods.
3. Shut out of the workforce teenagers and young adults, thereby reducing the likelihood of upward mobility.
4. Disadvantage low-skilled workers; companies may use more robots and automated processes to replace employees.
5. Disproportionately harm the poorest areas of the United States.
6. Cause housing costs to rise.
7. Lower high school enrollment rates and raise drop-out rates.
8. Encourage companies to outsource jobs to countries where costs would be lower.
9. Will not reduce crime.
10. Reduce employee benefits and increase tax payments.

It’s likely that you know someone who works for minimum wage, maybe a friend or family member; perhaps your employee, or even yourself. From my perspective as a CEO, we have instituted “profit-sharing bonuses” each quarter to increase the take-home pay of our hourly workers. Honestly, even though our average hourly wage is approaching $12, I still struggle as the leader of our firm with whether that constitutes a “living wage.” While we all want fair wages for everyone, what is right for our company is different than for other companies. Compelling arguments from both sides must be considered. If you have an opinion on this matter, I invite you to share it here. A rich debate is welcomed, and I’ll join the conversation in the comments as you challenge me with your thoughts and questions.