The minimum wage debate

President Obama’s State of the Union address included a call to raise the federal minimum age rate to $9 per hour from its current $7.25 level. Democrats appeal to the social benefit of ensuring all full-time employees earn more than the official rate of poverty in this country.

The U.S. Census Bureau calculates the official poverty threshold, which as of 2012 is about $11,000 per year for an individual and $23,000 annually for a family of four and the kids are 18 or over. If that family had two parents working full-time at today’s minimum wage, they would bring in about $30,000 per year at the current minimum wage. With a bump up to $9 per hour, their combined income would be about $36,000 annually.

I know a young woman of 32, 10 years into her career after successfully completing her self-funded college education. She works as a preschool director and makes about $32,000 per year, $16 per hour.

I don’t know how my young friend makes it on her salary, let alone a family of four making only 13 percent more than she does. After tax withholding, rent, food, gas for commuting, car insurance, telephone, electricity, paying back her student loans and toothpaste, she has about $1.98 in monthly savings. Unless the car needs tires.

While the president’s figures weren’t exactly matching the definition of the poverty threshold (i.e., the federal minimum wage rate is technically a tad higher than the individual poverty rate for full-time employment), his point is still valid. His proposed raise of $1.75 an hour would reportedly affect 15 million working Americans.

The increase in income due to the higher minimum wage, assuming nobody lost their jobs because of the increased cost of labor, would result in $62.4 billion in additional income to affected workers, as well as operating costs to employers. The associated taxes (federal income tax, social security, state disability, unemployment insurance, etc.) would improve the revenues to Washington, D.C., and the spending power of those millions of minimum-wage workers would increase.

Who pays for this raise? We do. All of those goods and services that come to us by employees working for minimum wage will now cost more. You can calculate it pretty closely. Since minimum wage positions are largely in low-skilled service jobs (restaurants and fast food, landscaping, warehousing, janitorial, car washing, window washing, clothes cleaning, etc.), those will be the affected industries. About half the operating costs for these types of industries come from labor. So if a business of these types charges $1 for a unit of sale, with a 10 percent EBITDA rate, about 45 percent, or 45 cents, goes to labor. With the proposed minimum wage increase of about 24 percent, that means the cost of labor will force an increase in pricing of about 11 percent to produce the same EBITDA.

Thus, a hamburger from one of the fast food chains that currently costs $3, will now cost $3.33. The home cleaning service that costs $100 per visit, will now cost $111. The car wash that cost $20 will now cost $22.20. The $4 latte will now cost $4.44.

With roughly 150 million people in the workforce, the minimum wage raise will affect 10 percent of that, and about .06 percent of our $15 trillion in GDP which should show up in an increase in GDP, if the price increase does not reduce purchasing.

My prediction is that, if the minimum wage rate increase goes through, there will be no decrease in employment. There will be an 11 percent price pass-through, and the consuming public will simply adjust because that level of price increase will be insufficient to deter their purchasing of the services or products created by a minimum wage workforce. And the minimum wage raise will have no impact on other wage earners because there is not a strong career path linkage between minimum wage jobs and those which earn much higher incomes, except through colleges and universities where students support themselves during school with such jobs.

Republicans would say that forcing a higher labor rate through legislative edict will hurt businesses who will hire fewer people in order to maintain profitability. That depends on whether the increased labor cost can be passed on to customers. What most industries have seen is that when every provider of a good or service is affected uniformly by direct cost increases, whether for labor or materials, the consuming public experiences uniform price increases across all competitors and therefore adjusts to the new pricing. Remember when gasoline was 25 cents a gallon? (Oh, I forgot most of you are younger than I am.)

We have faced this debate every time a minimum wage increase is proposed, and the debate is useful. But an analysis of the actual impact of raising the minimum wage to $9 shows it to be a wise choice. Tying it from this point forward to the consumer price index is, however, a mistake. That would accelerate inflation in an escalating feedback loop, because every time the CPI increased, 15 million jobs would get a pay raise, which would be passed on to consumer pricing, which would increase the CPI, which would result in a wage increase, etc.

So I think Obama got it half right. The minimum wage should go to $9, but every time the issue comes up, we should wrangle about it, not put it on automatic.

Sewitch is an entrepreneur and business psychologist. He serves as the vice president of global organization development for WD-40 Company. Sewitch can be reached at sewitch1@cox.net.