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How politically increasing the Minimum Wage harms the Working Poor

Between 1998 and 2004 Oregon increased the minimum wage from $5.50 to $7.05. In addition, it now indexes minimum wage to the general cost of goods, and will adjust it automatically, year-to-year. The purpose of this article is truthfully demonstrate how this change actually harms the working poor, contrary to the stated intentions of those who support such efforts (including our own diocese). To do so, we will show how such changes affect a generic production factory, staffed primarily by minimum wage, part-time workers.

We will assume that this small factory has 20 production employees, each working 30 hours per week, producing bread for local and national stores. The following table shows how the company costs would bear out under the $5.50 wage. We will slightly oversimplify the line items, not to skew any figures, but to demonstrate clearly the actual effects of the wage change.

The average employee's take home pay after taxes is around $7722 per year.

Having little or no profit, the company is simply maintaining its present factory and equipment. It is producing 1,194,680 loaves of bread a year, and selling them for 50 cents each to stores (which turn around and sell the loaves for $1.00 each).

Let's see what happens to the company's costs when the state increases the minimum wage to $7.05 per hour (a 28% increase).

We have increased the wages, taxes, overhead and ingredients costs to reflect the affects of the wage increase in the services and items that the company purchases to produce its product, raising the company's production costs by $89,214 (15%). However, it is still producing the same quantity of bread, which means that it must increase its selling price to 58 cents each. The store will resell these for $1.16 each.

Some other factors come into play: This is not the only company in the country making bread. A similar company a few states away is also producing bread, but did not have the same minimum wage increase. They are still selling bread for 50 cents per loaf. The company that is able to sell for the lower price is going to experience increased sales, and the company at the higher price is going to lose sales. Unless our company can get its prices competitive again -- back to 50 cents per loaf -- it will experience a large drop in sales. Let us assume that the company wishes to stay in business, and so will make what changes are necessary to do so. What are the changes available to it?

By law it cannot reduce hourly wages. Overhead costs are usually fixed to a degree. It may be able to skimp on ingredients, but that will make things even worse to produce an inferior bread at a higher cost than its competitors. Because it cannot legally reduce the pay per hour, the company must reduce the number of hours worked, pressing the employees to increase their throughput during the hours that they do work. If the company is unable to make this happen, it will probably go out of business.

To stay in business, the company had to reduce average hours per employee from 30 per week to 19, a one third reduction. Or, it could simply lay off one third of its work force. By choosing to keep the employees on staff, the average take home pay for an employee gets reduced to $6407 per year. Increasing the minimum wage decreased the employee's take home pay, and made it more likely some or all of the employees would be laid off. Each employee also has to increase his work output by 50% over what he used to do. Chances are that this is simply impossible. The costs of food and clothing (and sometimes housing) produced in the local economy increase by about 15% due to the increased minimum wage; the gallon of milk that used to cost $2.00 at the local store now costs $2.30. In other words, using the original figures from 1998, the worker's actual purchasing power for the same production output has decreased from $7722 to $5571 (a difference of 38% against the poor).

What does it all mean?

Roughly 50% of minimum wage earners are under 25. About 30% live with their parents. For those who are in school, dependent on parents or others, the above figures might not matter much; their food, clothing and housing are, for the most part, provided for them and the earnings they get from work are 'fun money.' But for the 70% who live on their own and maybe even have children, this wage manipulation is devastating. Their ability to provide food and clothing for themselves and their children, their chances of receiving health benefits or of even keeping their jobs decrease rapidly. It is unlikely that a company in the above situation would even remain in business.

In addition to the harm to the working poor, consider those on fixed incomes; the elderly and the disabled. They receive no increase in hourly income, but experience an increase in the local costs of food, clothing and services of roughly 15% or more. They sometimes end up going without food, clothing, medication or services that they otherwise need.

As seen above, artificial increases in the minimum wage actually diminish the poor's purchasing power (the ratio of work effort exchanged to acquired goods). Though it might feel like the compassionate thing to do, artificially raising the minimum wage generally results in lost work and decreased purchasing power. People earning six-plus figures can live through such effects, but those earning minimum wage can hardly afford to do so.

Speaking of those with higher incomes: One of the arguments that sometimes arises in the above situations has to do with the company owner or manager. Usually, the owner is earning more on a monthly basis than his employees, sometimes significantly more. Some argue that the management should decrease their own wages and share the difference with the employees. The difference in incomes between some executives and those at the bottom of the chain do appear disproportionate. When we hear of large corporations laying off 2000 or 20,000 employees, then giving the CEO a two million dollar bonus, there may be justification for upset. Thankfully, such events are very rare. It is much more common for the small business owner's income to be close to -- sometimes even lower than -- his employees' when one considers compensation per hour worked. Also, most small business owners are far different from the 'greedy corporate suits' so popular in the news scandal columns. We know of many business owners, ourselves included, who personally go without payroll in months when money is tight just to make sure that the employees and vendors get paid fairly and on time.

Another suggestion that sometimes arises is that the company should just pay the employees out of its extra profits. But in the above example (and in reality for many small businesses today), profits are very hard find. In fact, we purposefully constructed the above examples with zero net profit to simulate a small company in a competitive market during a minor recession.

A last suggestion that is sometimes made is that the interstate competition problem could be solved by raising the national minimum wage instead of just the state's. This actually causes a much larger problem because the relationship of state to nation is similar to that of nation to world. There are many, many people in the world just as intelligent and hard working as any American, all willing to accept a lower wage. Artificially increasing the national minimum wage will have the same effect as increasing the state minimum wage, but on a national scale.

So what should be done?

First, do no harm: Don't artificially raise the minimum wage. It hurts the working poor.

Second, try to find ways of improving the working poor's ability to create goods and services that are desired and useful to the community. This means provide job training and educational assistance, and do what can be reasonably done to reduce burdens upon employers that cause them to hesitate to employ people. One such good program in Oregon is the JOBS plus program that supplements an employee's wages when a company creates a position for someone presently on unemployment.

Third, do not raise business or personal taxes. Doing so is effectively equivalent to raising the minimum wage insofar as how it increases the cost of goods and can reduce payrolls (if not entirely close businesses). We actually believe that personal income, payroll and business tax reductions are in order. Though most people don't realize it, for every dollar they have to spend on needs, almost another entire dollar goes to taxes of one form or another, even for people in the lowest tax brackets.

Fourth, train business leaders so that they can be as successful as possible. The more skills the company management has in terms of ethically and intelligently managing the business, the more likely it is that the company will be able to provide good employment opportunities to people who need them.