Commentary: The Obama-Shumlin Job Shrinkage Plan (March, 2014)

by John McClaughryJohn McClaughry

Returning from a meeting with President Obama in Connecticut a week ago, Gov. Peter Shumlin made a not-so-startling announcement: “I feel very strongly that it’s imperative to raise the minimum wage in Vermont to what the President has recommended.” He went on to suggest that a higher government-mandated wage would “give a boost to the state’s economy.”

The President’s proposal that won Shumlin’s enthusiastic support would raise the Federal minimum wage from the present $7.25 per hour to $10.10 in 2017. Two bills in the legislature (S.301 and H.550) propose to increase the Vermont minimum wage (now $8.73) in stages to $13.20 in 2017, when, if Obama is successful, the Federal minimum wage will have risen to $10.10. Thus, the Vermont minimum wage would go from 120% of the Federal wage to 131%.

In an interview before the state Chamber of Commerce on February 7, Shumlin also argued that an increase would boost income for minimum wage workers and thus “reduce dependence on government programs.”

At the heart of the argument for increasing the minimum wage is the proposition that low-wage employers are paying their workers so little that the taxpayers are required to augment their incomes with TANF, SNAP, LIHEAP, EITC, Sec. 8 Housing, Medicaid and other means-tested welfare programs. This, the advocates believe, is an unjustifiable subsidy to cheapskate employers.

The minimum wage law is the economic equivalent of imposing a targeted new payroll tax on these employers, so they’ll cost the employer as much as the legislature thinks the workers ought to be paid. This hidden tax – let it be noted – has nothing to do with the business’s profit.

What will inevitably happen is that employers with lots of low-skill low-wage workers will avoid most or all of that new tax by simply laying off the workers, or relocating the business to a more business-friendly state, or outsourcing as much as possible to Asia or Mexico, or investing in labor-replacing equipment.

Alternatively, the business can accept the politically-mandated wage boost, increase the price of its products, and hope consumers don’t notice. This result is not likely to continue for long. If Subway has to add a dollar to the price of a luncheon sub, somebody will notice that for the same price they can get a more upscale lunch at Applebees, where wage-free dining room automation is soon scheduled to appear.

Minimum wage advocates continually assume a moral tone – forcing employers to pay more is “the right thing to do”. The inescapable flaw in that argument is that the workers earning the new $13.20 minimum wage will not be the same workers who are now earning $8.73. Sure, an economically insupportable $4 an hour wage increase will make the survivors richer and happier – but at the same time many of their onetime fellow workers won’t have those jobs any more – and are almost certainly likely to increase, not decrease, dependence on government programs.

Who are these workers priced out of the labor market? They are the least skilled, least productive, least experienced, least English- speaking, and least white. That’s the point tirelessly made by two economic professors who grew up black and poor, Thomas Sowell (Stanford) and Walter Williams (George Mason).

Sowell has called the minimum wage “economic insanity and social callousness masquerading as compassion.” Williams has documented how the Federal minimum wage was designed by Big Labor in the 1930s to tilt the scales against black workers competing for “white jobs”.

Prof. David Neumark (Michigan State) has conducted exhaustive econometric research on the effects of the minimum wage increases. He reported that contrary to his expectations, the answer to “the question of whether minimum wage increases help poor and low-income families is a fairly resounding No. Minimum wages instead appear to increase the proportion of families that are poor or near-poor.”

So why are Obama and Shumlin beating the drum for a senseless job-shrinking anti-business economic policy? Because the militant Left demands it, the labor unions support it (as a bargaining tool to negotiate larger wage increases for their members), and their political friends can revile the opponents as heartless, greedy reactionaries in the approaching election season.

If they really believe that raising the minimum wage will “give a boost to the economy” and “reduce dependence on government programs”, they are living in a dream world – or more likely, they could cynically care less about the working poor who will pay the price.

– John McClaughry is vice president of the Ethan Allen Institute.


{ 2 comments… read them below or add one }

Doug Richmond, Underhill April 1, 2014 at 12:35 pm

Now how do they figure it? The lady at McD gets a big raise, now she can afford day care for her baby while she works. But the day care worker gets a big raise, so now she can afford to have a nice meal at McD’s for herself and her child.
So what do you have. Day care goes up 20% to cover wages, Burgers go up $1.50 to cover the new wage.


Doug Richmond, Underhill April 1, 2014 at 12:42 pm

The McD worker gets a big raise. Now she can afford day care for her child.
The day care worker gets a big raise, now she can treat herself to a nice McD meal.
Price of day care goes up. Price of McD’s menu goes up.
McD worker still can’t afford day care. Day Care worker still can’t afford a Nice meal.
All we get is more inflation.
Eyewash and bullcrap.
Entry level jobs are the first rungs on the ladder. Take away the first 3 rungs of the ladder and folks walk away with no beginning of the Job and Wage ladder.


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