Keep Calm and Pay On

So LA votes to raise the minimum wage to $15 and people either punch the air or panic. Which reaction is the right one?

The facts are these. The minimum wage in the US is poverty pay. A family of four, with a sole breadwinner on the minimum wage, would be below the federal poverty line, without welfare supplements.

The minimum wage has not kept up with productivity since the late 1960s. If it had, it would have been above $21 at the end of 2012. That means we asked our workers to produce more per hour, but didn’t pay them for it.

The minimum wage leads to circular tax and spending. The federal and state governments hold down wages, which enables businesses to operate at subsidized costs. But the owners of those businesses are then taxed to fund the welfare payments required to supplement the low income of their workers.

The minimum wage does not lead to higher levels of unemployment. Some people are worried about rising operating costs and layoffs, but the experience from the US and other countries with minimum wages is that this simply hasn’t happened. If anything, it reduces turnover and cost associated with training new workers.

Higher minimum wages could be good for growth. If we pay fairer wages, this reduces the government’s welfare bill, increases tax revenue from those now earning higher incomes, reduces the need to tax individuals to fund the welfare bill, and increases demand in the economy because those on lower incomes spend more of every $1 they earn, boosting firm profitability.

So if you don’t buy the moral case for higher pay, what about the business case?

Originally published at tellingtimes.me on May 20, 2015.