Wednesday, October 7, 2015

How Expensive is Raising the Minimum Wage, Anyway? (Part 5 of 13)

(Note: This is the fifth of a series of posts dealing with Bernie Sanders's platform. For the first installment, go here: Part 2 Part 3 Part 4 Part 6 Part 7)

I saw this posted on Twitter the other day, and I think it's worth taking a second look at, because it demonstrates a remarkable lack of understanding of Bernie Sanders's platform. Senator Sanders makes it very clear how we will pay for everything that he proposes, but understanding the nuance of this requires first that I disabuse you of a common misconception.

There are many in this country who decry government spending as if the government is incapable of doing anything well. But the critical issue of our times, as Robert Reich eloquently explains on a regular basis, is not how big government is. The critical issue of our times (and Bernie Sanders, more than any other Presidential candidate, understands this) is who government is working for. Whether we're talking about spending in the private sector or spending by the government, at the end of the day, everything that is spent in our economy counts as a cost for America. If Wal-Mart spends $1,000,000 improving the efficiency of the intersections near its stores, it has the same effect on our economy as if the state, local, or federal government spends $1,000,000 on an identical project.

So, with that in mind, how does America pay for Raising the Minimum Wage to $15, as described in the flyer pictured above? Let's take a look:

This is another one of those issues where the government wouldn't really have to pay anything to make this happen, since nearly 93% of all workers work for private firms, rather than for the government, and less than 1% of federal workers earn minimum wage. Still, it is worthwhile to have an idea of how much an increase in the minimum wage would affect labor costs nationwide, since I have consistently urged readers to consider issues holistically rather than focusing solely on the government itself.

Approximately 3 million people work at or below the federal minimum wage, and more than 20 million people earn less than $10.10 per hour. In fact, 42% of the workforce earns less than $15 per hour, and so would definitely see their wages increased by an increase in the minimum wage to that level (assuming they get to keep their jobs - more about that later). That's about 62.5 million people whose wages would definitely be increased by an increase in the minimum wage to $15/hour.

Let's put those numbers together, erring on the side of the most expensive effect of the increase:

3 million people go from earning $0 to earning $15/hour. Assuming they all work 40 hours a week, 52 weeks a year, that's $93.6 billion annually;

17 million people go from earning $7.26 to earning $15/hour. Assuming they all work 40 hours a week, 52 weeks a year, that's $273.7 billion annually;

42.5 million people go from earning $10,11 to earning $15/hour. Assuming they all work 40 hours a week, 52 weeks a year, that's $432.8 billion annually.

Altogether we've got $800.1 billion annually in additional labor costs. Compare that to corporate profits, after taxes, for the second quarter of 2015 ($1,844.6 billion). Paying this increased labor cost would reduce corporate profits to a mere $6 trillion annually. Now that assumes that each person in each of those three classes earns the lowest wage in the range, and it assumes that nobody who earns more than $15/hour will see an increase in their wages, and it assumes that everyone who earns less than $15/hour will see their wages increased to only $15/hour.

One of these assumptions significantly over reports the cost, while the other two under report the cost, but I believe they even out so the number above represents a good approximation of the increase in labor costs as a result of this minimum wage hike. Even if we assume this figure understates the labor cost of increasing the minimum wage by half, the entire amount could be simply paid out of corporate profits and still leave more than $5 trillion.

$800.1 billion in increased wages would increase the average wage by about $5,500/year, which represents an increase of about 12%. That's not an insignificant increase in wages, but when the share of GDP accounted for by wages (42.6%) is at its lowest point since 1929, maybe we could stand to increase that amount, anyway.

Naysayers will argue that increasing the minimum wage will increase unemployment because businesses would replace workers with automation or eliminate positions entirely in response to an increased minimum wage. Many of them like to include the argument that minimum wage increases hurt the very people they are designed to help. But unemployment, in and of itself, is not harmful to our economy. It is only harmful to the extent that it depresses wages and consumer spending. A recent Congressional Budget Office report demonstrated that an increase in the minimum wage to $10.10/hour (over the course of four years) was estimated to result in the creation of 500,000 fewer total jobs over that period, while increasing the real wages of 16.5 million people, with the benefits mostly going to the poor.

The fact of the matter is that a job that doesn't pay a living wage is no better than no job at all. Because it distracts the worker from education, entrepreneurship, and other means of self-improvement, in fact, a job that doesn't pay a living wage is in many ways worse than no job at all.

Increasing the minimum wage merely means insisting that a business that wants to use another person's labor to create its profit pay that person a living wage. Instead of worrying about the specter of decreased job creation, we should look at ways to make unemployment less economically draining on our society. Good ways to do that would be providing an adequate safety net and affordable educational opportunities. For more on the educational opportunities, see Part 2 of this series, How Expensive is Free College Tuition, Anyway?

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