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Artificial wage inflation is bad for everyone

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Unread 08.04.15, 04:54 PM
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Artificial wage inflation is bad for everyone

08.04.15 12:52 PM

Economic justice is one of the hottest political issues right now for the American left. And by the looks of it, all of the calls for minimum wage increases and lectures about wealth gaps are paying off for wage warriors in the form of both legislatively mandated and private sector wage hikes. For businesses and the wage earners the hikes most affect, however, the future doesn’t look so bright.

Democratic presidential hopefuls Bernie Sanders and Hillary Clinton are running two very different campaigns, but they share a platform promise to hike the nation’s minimum wage to $15 per hour.

And the idea certainly does have populist appeal. After all, who doesn’t want to make more money?

That’s why Seattle has already moved to hike minimum wage in the city to $15 an hour and New York City is on track to follow suit.

But some economists are warning that such a drastic minimum wage hike could have dire circumstances for the American workers who need the money most.

Among the opponents of a $15 minimum wage mandate is economist Harry Holzer, who served as chief Labor Department economist under former President Bill Clinton.

While Holzer agrees that a higher minimum wage could benefit shift workers and the like in cities with already inflated living costs, a nationally mandated $15 for an hour of work is an “extremely risky” economic proposition for other areas.

According to Holzer, who supported President Barack Obama’s proposal of $10 per hour, economic analysis about minimum-wage increases should focus on how it would affect the least-skilled workers in the nation’s economy.

From a recent opinion piece Holzer wrote for Brookings:
Some credible studies find moderate negative effects while others find none; our best guess is that moderate minimum wage increases will lead to modest job losses. In a Congressional Budget Office report last year, policy analysts predicted that Obama’s proposal to raise the federal minimum wage to $10 an hour would raise wages for 16 to 24 million people while eliminating about half a million jobs – a reasonable tradeoff worth embracing, in my view.

But I have much more serious worries about a $15 an hour minimum wage, which constitutes a wage increase of 50% to 100% in most places (even after adjusting for inflation). In cities like Seattle, with a relatively more educated workforce and dynamic labor market, it might be a gamble worth taking. But in other cities, such as L.A. and Washington, D.C. — with their large populations of less-educated workers, including unskilled immigrants — such increases are extremely risky.

In job markets where young or less-educated workers already have difficulty finding jobs and gaining important work experience, such mandates will likely make it much harder.

Holzer argues that in cities like Washington, D.C., where unemployment is especially high among the lowest-skilled workers, employers “will be very reluctant to pay high wages to workers” who lack the skills of more educated people also looking for work.

Barring a national mandate, minimum-wage hikes on the state and city levels could also have negative economic impacts for workers in an area.

Holzer wrote:
[S]tate and especially local increases of this magnitude will generate big incentives for employers to move across local borders, especially from central cities to suburbs. For instance, if Washington, D.C. raises its minimum to $15 (after it is already scheduled to rise to $11.50 in 2016) while Arlington, Virginia remains at $7.25, the incentives for employers with many low-wage workers to shift places of business from the former to the latter will be quite strong. This wage increase might be the straw that breaks the camel’s back for many D.C. businesses, who are now also faced with new hiring regulations, such as mandated paid leave and prohibitions on criminal record checking in applications, or marijuana screening, and perhaps on credit checks.

While the veracity of Holzer’s predictions for the fate of the least-skilled workers following artificial wage inflation are yet to be seen, there is at least one excellent private-sector example of the problems associated with divorcing wages from skill and productivity.

Dan Price, CEO of credit card processing company Gravity Payments, announced earlier this year that he would begin paying all of his employees a minimum annual salary of $70,000.

The New York Times detailed the backlash:
Two of Mr. Price’s most valued employees quit, spurred in part by their view that it was unfair to double the pay of some new hires while the longest-serving staff members got small or no raises. Some friends and associates in Seattle’s close-knit entrepreneurial network were also piqued that Mr. Price’s action made them look stingy in front of their own employees.

Based on these opinions and examples, it seems the main problem with hiking the minimum wage for reasons more emotional than economic is simply human nature. People forced to pay more want better work and more skill; and people who have worked to acquire skills aren’t willing to work for minimum wage or in firms where they earn similarly the lowest man on the totem pole.

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