In the past couple of years, a number of politicians have pushed hard for a minimum wage increase. Notable supporters include Elizabeth Warren and Bernie Sanders. Just this week, Connecticut agreed to incrementally up its minimum to $15 an hour in the next four years. Advocates of the idea claim that it will improve the quality of life for many, especially the working poor. However, they miss the fact (or don’t care) that their plan would functionally cut wages for millions of working-class Americans.
Many are quick to point out the inflationary tendency of a minimum wage increase (or, just having one in the first place). In short, it goes like this: employers pay their workers more; employers compensate by making their products more expensive; the employees then have more money to spend, but everything is also more expensive.
Admittedly, inflation is not likely to occur at the same rate as the minimum wage increase does. Labor costs are just one component of a business, but still a major one, often making up 30 or even 50% of gross revenue.
Alternatively, employers could choose to simply lay off some of their workers to cut down on costs. But this, too, is clearly not a great scenario, as it raises unemployment. And since the minimum wage is now higher, it is necessarily more difficult for laid-off workers to find a new job. After all, it’s easier to get someone to pay you $10.10 than $15 for the same work.
In either of these situations, though, it appears that a minimum wage increase is harming at least some of the workers it claims to help. But going beyond this, it is undoubtedly extremely detrimental to workers already earning the new minimum wage.
A Minimum Wage Increase Harms Successful Workers
In a sense, this plan takes the successful workers and drags them back down to the level of the less successful. Yes, a minimum wage increase actually is a pay cut for everyone making the new minimum wage (or more).
It’s important to note that a dollar is not always worth the same amount. If I held a dollar in 1900, I would be richer than if I held a dollar today. Though the number printed on it is the same, the purchasing power has changed. Over the past century, inflation has devalued the dollar nearly in its entirety; one of them today would be worth a mere four cents in 1913. Inflation is nearly always occurring (it is currently) and thus, a dollar you hold today will be worth ever so slightly less tomorrow. In a year, it may lose a few percent of its value.
So, imagine a Connecticut food service worker, Steve, currently earns $15 an hour. He started working at minimum wage but worked hard for raises and promotions. Over the course of the year, Steve works an average of 40 hours a week for 50 weeks and therefore has a gross income of $30,000. Eventually, the minimum wage in his state increases from $10.10 to $15, as it now will by 2023.
Steve’s coworker Susan, who was a poor worker, did not get any raises in that time. Though she did not earn it, she now will get a massive wage increase to Steve’s level. But Steve, for his hard work, doesn’t get any more money. After all, his employer can’t afford to pay everyone more; he already has to give more to his worst and newest and youngest workers who don’t bring in $15 an hour of value to the company.
A Loss of Value
So, Steve now makes the same amount of money that he did before. Yet, he now sees no reward for his hard work and makes the same as mediocre and even underperforming coworkers. Meanwhile, the purchasing power of his dollar is decreasing.
As stated above, a dollar held today will be worth a little bit less tomorrow if inflation occurs. Moreover, a minimum wage increase can spur inflation. So, Steve’s $15 an hour simply is not worth the same as it once was. Now, he’s just another minimum wage worker, even though he worked hard to avoid that fate. With a reduced purchasing power, he is unable to see many of the benefits of his hard work. Instead, he faces a bitter reward for his efforts: he is now back to being a minimum wage worker.
If Steve’s employer wanted to keep him above minimum wage, he may have to lay off Susan for her work. Though it was worth $10.10 an hour, he couldn’t justify paying her $15. In this scenario, Steve’s job is safe, and his purchasing power is not harmed. But as a result, Susan loses all of her income and is in a tough spot: with labor worth less than the minimum wage, she may have to work under the table and risk legal penalties or remain unemployed, making nothing.
America is filled with millions of Steves and Susans. Productive workers recoil at the thought of going back to the same paygrade as their slacker buddies, while those barely clinging to a job just might not have it anymore. Though intentions are good, a minimum wage increase has disastrous unintended consequences; it is a reduction in purchasing power (an effective pay cut) for everyone earning more than minimum that won’t see a raise next year.
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