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Lincoln Institute


Negative Impact of Minimum Wage

by Frank Ryan
 

During a recent run for the Pennsylvania state legislature, I was asked by a very dear friend after Mass to answer two questions with either a yes or no answer. The questions had to do with the minimum wage.

The first question was "Do you support raising the minimum wage?" and the second question was "If you do not support raising the minimum wage, would you feel the same way if that is what you were earning?"

Trying to give a yes or no answer to these two questions proved challenging to put it mildly.

In responding to the questions, I indicated that I did not support raising the minimum wage. I mentioned that my reasons for not supporting the minimum wage were numerous and not conducive to just a yes or no answer.

The "feel good" aspect of minimum wage is almost irresistible but at the same time the public policy aspect of it can be unbelievably damaging to the very people you are attempting to help.

In the discussion that followed it became obvious that the economics of how employers make employment decisions was not clear.

In my consulting practice of helping companies avoid bankruptcy, the companies which lost sight of their costs and what the market will bear eventually failed. The marketplace determines minimum wage, not the government.

Governments can dictate a minimum wage but the marketplace will determine whether or not it will be paid. The unintended consequences of feel-good legislation are frequently devastating.

First, the basic building block of whether or not any wages can be paid to anyone is dependent upon whether or not the customer is willing to pay it. The customer ultimately determines how much anyone will be paid.

Once past the customer decision, the marketplace, whether you believe in the free market or not, will determine whether or not the pay scale you offer is sustainable. "Black Markets" flourish when governments attempt to assert their will over the will of the marketplace.

Many of the unintended consequences of minimum wage legislation can be destructive to both the employee and the community.

For instance, an increase in the minimum wage may cause an employer to determine if the employee's value is worth the cost. This sounds cold but it is unfortunately an economic reality.

If what you are paid is not offset by the value to the customer of what you are doing, your job will go away.

I have seen untold cases in which machinery or productivity enhancing processes replaced workers due to the high cost of labor. The employer is incentivized to replace workers when cost of that worker increases beyond that which the consumer is willing to pay.

It is difficult at times to equate a person's value to what they contribute but when that value proposition becomes distorted the employee is being subsidized. The danger of this subsidy is that the subsidy may one day be ended by society.

Recently when delivering a conference to a group of CPA's, a student was lamenting that his industry, the solar industry, was decimated in his state when the state government ended the subsidy due to fiscal concerns. He indicated that his entire company was forced into bankruptcy because the subsidy ended.

Not accepting the value concept leads to tremendous dislocations for employees once society indicates it is no longer willing to continue the subsidy. The subsidy in this case is minimum wage so that the very thing that was designed to protect the employee may actually hurt them.

On a larger scale, minimum wage also significantly adversely affects rural communities over urban communities. Quite simply, $10 per hour in a rural area is significantly different than $10 per hour in Philadelphia or New York.

Attempting to establish a national standard penalizes lower-cost communities such as rural communities compared to their urban counterparts. In effect, minimum wage legislation harms employees and employers in less populated areas even though their cost of living is significantly less.

Minimum-wage legislation is also tremendously discriminatory to younger workers. It increases the cost to a prospective employer to hire someone with little to no experience such that the employer is significantly less willing to risk hiring a person with little to no experience. Labor force participation for those from age 16 to 19 has dropped from 52.7% in 1994 to 34% in 2014. The consequences of this dramatic reduction will be felt in the workforce and in their lives for decades to come.

Many employers that I deal with lament the fact that younger people who have not had the benefit of working part-time jobs while in high school are coming into the workforce with little to no job skills making them almost unemployable by the time they are in their mid-20's. An entry-level job is designed to give experience not just income.

The net result is that many employers are now offering unpaid "internships" to prospective employees rather than paying jobs because of minimum-wage legislation which increases cost with little apparent increase in value.

Finally, minimum-wage legislation inadvertently negatively impacts smaller companies who can little afford such pay scales while at the same time they have been historically the primary job creators in our nation.

The danger with feel-good legislation is that it does not feel good it backfires. The intent is very solid but the results are mixed.

The greatest gift we can give to a new worker is to give them skills that will last them a lifetime not just a paycheck that will last a weekend.

Col. Frank Ryan, CPA, USMCR (Ret) and served in Iraq and briefly in Afghanistan and specializes in corporate restructuring and lectures on ethics for the state CPA societies. He has served on numerous boards of publicly traded and non-profit organizations. He can be reached at FRYAN1951@aol.com and twitter at @fryan1951.


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