Private Profits, Social Costs and The Minimum Wage

The concept of Private Profits and Social Costs is implicitly easy to understand.  It is far more difficult to recognize.  Simply put, there are areas of economic activity where profits accrue to a few in the private sector but produce significant social costs that are paid by taxpayers. Currently, there is a political effort to raise the minimum wage to $15/hour over a 4-year period from the existing $7.25 minimum wage enacted in 2009.  This debate normally encompasses whether jobs will be lost and whether the minimum wage should be a “livable” wage.  However, there are also social costs involved in the context of expenditures, both private and public, for food security as well as medical care.  Moreover, there is the ever-increasing disparity in the distribution of income and wealth.  I will address the pure economic issues as well as the social costs.  This debate needs to be broadened.

The Minimum Wage

The current minimum wage, fixed since 2009, is $7.25.  On a 40-hour week and 50 weeks a year, this comes to $14,700.  No one can live on that.  It is around $10,000 below the poverty line for a family of 4.  The legislation being proposed would increase the minimum wage to $15 by 2025.  It is phased in so that businesses can adjust.  Now the worker above would earn $30,000.  Therefore, the $15/hour minimum wage is viewed by its proponents as a “livable wage.”  Middle class, a purely arbitrary number, is commonly viewed as households with a minimum income of $45,000.

Employers are incentivized to be against any increase in the minimum wage.  In industries where the minimum wage is prevalent (retail, restaurants, some health care workers), labor costs count for a significant percentage of operating costs.  If wages can be constrained, profits will go up by definition.  With an increased minimum wage to $15 even phased in over four years, employers may well decide to automate if possible and reduce the number of low skilled jobs.  But how can employers justify paying full-time workers just $14,700/year?  They really cannot.  However, they can point to the so-called “safety net” which aids households with low incomes.  This would include housing assistance, food programs (SNAP), and Medicaid (CHIP).  In other words, employers have the incentive to minimize wages.  By suppressing wages, their profits go up.  Of course, there are costs to doing this.  One example is rapid turnover of employees.

But the only way that they can really get away with this is because of social programs, taxpayer funded.  This is a scam.  Yes, increasing the minimum wage will likely result in lower employment, but the evidence here is mixed.  Some of the increase may be passed on to the buyers.  However, it is clear that a $15/hour wage will significantly boost household income.  One full-time and one half-time worker in a household would make the minimum for the “middle class”.  There will be savings on social programs.  But the most important thing is that employers would not be able to engage in suppressing wages and throwing the burden on taxpayers.

It should be no surprise that the two largest employers engaged in this practice are Walmart and McDonalds.  It should be noted that the six top executives at Walmart received $112 million in bonuses last year, and Walmart announced a $20 billion stock buy-back program. It appears that they could afford to pay their employees $15 an hour.

However, it is obvious that a $15 minimum wage in Mississippi is not comparable to one in New York.  In fact, a $15 wage is the median household income in Mississippi.

A Proposed Solution

It seems to me that there is a reasonable solution.  Index the minimum wage to a state’s median family income.  For example, make it two-thirds of median family income.  In Mississippi, that would be $10.  The $15 cap would remain in place for the beginning of the program.  As median family income rises, the minimum wage would as well.  Employers would know and be able to plan for annual increases (potential declines) in median family income.  A household with one full-time and one half-time worker would be able to earn the median income.  Note that boosting lower income has no effect on the median index.  It is not the average.  The median is where half are above a certain level of income and half are below.

This proposal does not have the rallying-cry panache of $15 for all.  But it is certainly reasonable and would be easy to implement.  The point is that the social cost of a ridiculously low minimum wage would be reduced.  “Safety net” expenditures should go down, and income inequality would be marginally reduced.  The politics of increasing the minimum wage would be eliminated.

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