Living wage great in theory, poor in practice
Published: Monday, August 26, 2013
Updated: Monday, August 26, 2013 18:08
As the economy remains in a sluggish state, many dissatisfied Americans join together in one accord to demand a higher minimum wage.
Much of the dissatisfaction comes from large corporations growing ever richer as the lower class slowly becomes a “peasant class.”
At an attempt to serve as a great equalizer the concept of a “living wage” has been born boasting several dollars higher than the current minimum wage of $7.25.
However, as we will see, this is not the problem-free solution that many have dreamed of.
The minimum wage has been around since the Great Depression. When the federal government enacted a minimum wage in the late 1930s it was set at a meager $0.25/hour.
Proponents of the increase argue that money was worth a lot more back then, but this does not have as much warrant as you may think.
After adjusting for inflation, the minimum wage in the 1930s would be equivalent to about $4.10 in 2012 dollars, less than 60% of the minimum wage now.
The truth is, minimum wage was never intended to be a living wage, but fair compensation for unskilled labor.
A higher minimum wage will also have very minimal effects on reducing income inequality.
A 2010 study in the Southern Economic Journal found that only 11.3% of a $2.25 increase in minimum wage would go to poor households.
The main reason is that a majority of those who earn minimum wage are second or third income earners in their household. Of those households that gain from an increase in minimum wage, 42.3% have an income of at least $61,950.
If anything, raising the minimum wage will create greater inequality among the middle and lower classes.
Raising minimum wage will also hurt small businesses without phasing corporate giants.
For example, we will use the ever popular fast food restaurant, a job where many earn minimum wage. Nearly every fast food restaurant is set up in a franchise format; a local owner pays the corporation a monthly fee to put a set of golden arches or purple bell on the side of his building.
The corporation will receive a cut regardless of the profitability of the restaurant. Food service margins are very small meaning you have to sell a lot of food to make any money.
When a company sells a burger and fries, only about 2% of the price of the meal is kept as profit. If the business owner has to start paying his workforce an additional 30%, assuming no increase in the price of food, it is very likely any profit will turn to loss.
In this instance raising minimum wage will not hurt giant corporations, but the local business owners.
While an increase in the minimum wage may be a good political platform to run on for popular support, it is a very dangerous action.
There is substantial evidence that raising the minimum wage would have negative effects on income inequality and would be a detriment to local business owners.
At this point in the American economy, we simply can’t afford to raise the minimum wage.