James P. Freeman: What is a 'living wage'?
Like the mysterious appearance of black swans and blue moons, it was bound to happen sooner or later. The Cape Cod Times recently endorsed a position held by conservative Massachusetts state rep. Randy Hunt, who agreed to an increase in the state minimum wage that became law last month. Supporters of a mandated increase in wages (which will rise to $11 an hour in the commonwealth by 2017) might reconsider their positions given today’s fragile economy and future projections of the deleterious effects of such action locally and nationally.
Hunt (R.-Sandwich) shall be forgiven for choosing, in his words, “the lesser of two evils:” one, a pesky ballot initiative—always a wildcard for passage--in this November’s elections, that called for a swift increase of $10.50 an hour and automatic increases indexed to inflation (think of the recent gasoline tax, pegged similarly in perpetuity); or two, a higher per-hour figure with a definitive cap not tied to a gyrating Consumer Price Index, to be implemented in stages. He chose the latter.
His compromise may make sense given the coercive supreme Democrat majorities in the legislature that would have thwarted more reasonable Republican proposals but it is still bad public policy. It also does little to counter assertions that Republicans are insensitive about the working poor. More so, it is just as bad as President Obama’s $10.10 federal minimum-wage proposal.
In 1938, at the end of progressivism’s first wave and during Franklin D. Roosevelt’s second term, Congress enacted a federal minimum wage. Every president since, except Ford, Reagan and Obama, has signed into law increases, the most recent being George W. Bush in 2007; the last increase set in 2009. Last autumn, The Huffington Post reported that “progressive economists” believe that if today’s wage kept with the rate of inflation it would now be above $10 an hour.
Today’s debate centers on what Roosevelt indeed described as a “living wage.” Arguments abound on the role of government creating arbitrary and artificial adjustments. What should or should not be a floor? Given today’s prettifying pulse of progressivism, why not a ceiling? In the interests of fairness and compassion, why let market conditions dictate such figures?
So public-policy experts now speak of a living wage that would remove workers from poverty. Therefore, the $10.10 figure supposedly will not only lift the working poor out of poverty, but will presumably allow for continued receipt and reliance on benefits so generously distributed in today’s welfare state.
There is a fundamental flaw in this line of reasoning.
To be elevated to a lower-middle-class income bracket, a $10.10 minimum wage presupposes an hourly worker working 40 hours a week for 52 weeks a year. According to federal statistics, however, full-time hourly laborers work an average of 34.5 hours a week; 70 percent of all minimum-wage employees work fewer than 35 hours a week. Even government statisticians must concede that working every single week is wildly ambitious for purposes of actuarial calculations.
Despite having over $2 trillion in cash reserves, corporate America is unwilling to pay wages for what was once universally defined as a 40-hour week, let alone overtime. Government’s role should be to create conditions—incentives--favorable for increasing salaries. But the government continues to create uncertainty with its tax policy, regulatory overreach and, more recently, disrupting coverage and costs for healthcare (watch Massachusetts mandate paid sick-leave for small and medium-sized businesses).
What’s next, establishing a law forcing businesses to comply with a 40-hour work week?
In 2007, David Neumark and William Wascher cleared the din above the noise with a study published for National Bureau of Economic Research. Their research determined: “A sizable majority of the studies surveyed… give a relatively consistent indication of negative employment effects of minimum wages.”
The nonpartisan Congressional Budget Office estimates that raising the federal minimum wage from its current $7.25 per hour rate to the president’s preferred wage will remove only 900,000 people (or 2 percent) out of poverty from the 45 million believed in poverty. Middle-income jobs from the last recession were replaced largely with low-wage jobs.
Of greater concern should be this potentially unintended consequence of government meddling: increased income of the poorest of workers will likely make them ineligible for the full amount of benefits, such as food and energy assistance. Not to mention higher payroll taxes. Such a twist may in fact negate extra hourly pay to the point of making the very increase negligibly beneficial, all to the detriment of domestic and state economies.
A new paradox exists today: jobless rates are generally declining -- as have labor- participation rates--while benefits to Americans are increasing. James P. Freeman, formerly in the financial-services industry, is a Cape Cod-based writer.