1/30/2007

Is a Minimum Wage Increase Beneficial?

I recently read an article in the USA Today (please see the link to the article below) which confirmed that the increase in minimum wage is still being debated by the House and the Senate. However, it seems that it is no longer a question of the $2.10 raise in wages for entry level workers, although that concerns many about price inflation due to employers transferring costs to end consumers, but the debate lies in the uncovering of tax cuts and breaks for small businesses while larger businesses are being stiffled in their ability to make tax deductions. These breaks were apparently put in the bill to draw more Republican votes. Simultaneously the new Democratic platform of paying for tax breaks with someone else's money in order to keep the deficit low is also satisfied. Apparently the purchaser of the recent benefits for small businesses are the large US corporations. I would like to pose a couple of questions about these tax cut policies. First of all if large businesses are pitted against smaller businesses for favor of tax cuts, who will eventually pay for the loss in large business tax deductions? If small businesses are going to pass the increase in wages to the final customer, possibly causing inflation, then how is the large business going to recoupe some of their lost profits? Wouldn't the large businesses try to do the same in passing the buck to end consumers - whether B2B sales or B2C? In the end aren't we all going to pay more for the products we need to resume business, life, etc.? Are these tax breaks and minmum wage increases all an illusion for quality of living and economic benefits? Don't the markets eventually correct and we just end up with an inflated economy? What do you think?
http://www.usatoday.com/money/economy/income/2007-01-30-minwage-taxes_x.htm

7 comments:

mason said...

I am not sure what exactly you are asking, but a company that is running efficiently and treats their employees well shouldn't have to worry about an increase in minimum wage. They should all ready be taking upon themselves to find the best hard working employee they can, and compensate them greatly for their efforts. Efficiency is the key. Whether it is a large company or a small one, the same method applies to both. Don't go out and hire large amounts of people. Executives need to focus on using what is all ready there, and do what can help them as a company be more productive. This should cut down on cost and make more of a profit in the end.

Dr. Tufte said...

-1 on Mason for spelling and grammatical errors.

I don't agree with everything here, but it does provide a nice opportunity to point out another facet of a minimum wage increase.

How would you feel if Congress legislated that you have to work harder? And that your boss would have to come down on you harder if they caught you slacking off?

If you think about it, neither of these is independent of a minimum wage increase.

What Congress is really offering is a bundled good, but they are only telling you about the beneficial parts.

So ... if you have issues with Microsoft and the way that they bundle together bad things with the good, then perhaps you should be more dubious about minimum wage increases.

Aaliyah said...

This is exactly what I am asking! Isn't the minimum wage legislation just a form of bundling to take away some of the profit surplus of businesses, especially the larger corporations? Also, aren't the larger corporations just going to make up for their losses by charging more to end consumers- both B2B and B2C? Is this just a way for the government to suck more taxes from large businesses on the front end and then take it from small businesses in the form of sales tax for higher priced items at the back end?

Jada said...

I agree that a hike in minimum wage alone is an imperfect and/or and incomplete answer. Thomas Freedman (Senior Advisor to President Bill Clinton) wrote in an article Friday in the Washington Post about earned income tax credit reform and needed crucial actions taken against the current built in marriage penalty. These two steps are just a couple of items that need to be addressed along with the hike in minimum wage. If the only reason to raise the minimum wage is to help the poor then deeper commitments need to be made. If raising minimum wage is going to cause an increase in the cost of goods and services for everyone then we really did not help the poor class and possibly we even hurt the middle class by not increasing their wages and yet they will also pay the increase in prices for good and services.

Kate said...

Besides passing the increase in minimum wage to the consumer, it is possible that lower level workers will have a harder time finding employment. When the cost of a worker is lower, there is greater incentive to an employer to hire someone and train them. A dental assistant is an example. There is a certification for dental assisting, but some dentists are willing to train if workers start at a lower wage.
As the cost of a worker increases, there will be a greater need to hire skilled workers. So instead of training a dental assistant, the dentist will require a certification before hiring. Therefore before being able to attain a job more education will have to occur for lower level jobs. The negative effects to low skilled workers will increase dramatically by an increase in minimum wage.

Madeline said...

I think Aaliyah is correct that costs will be passed along in one form or another. However, in some industries, intense price competition will prohibit these increases from being passed along to the consumer. For some companies, increased costs will simply cut into profitability - the shareholders will pay. What I think raising the minimum wage really does is decrease the quantity of labor demanded by businesses. Businesses simply will not be able to afford as much. As Kate said, it will come down to lower skilled workers being impacted the most.

Dr. Tufte said...

-1 on Jada for grammatical errors.

Aaliyah - if the government was that smart, they wouldn't get into this sort of situation in the first place. They're just cobbling together whatever mess they can get enough votes for.

Jada - it's kind of funny that the Democrats want to increase the earned income tax credit (which was Milton Friedman's idea to get the non-working poor into some sort of job).

Kate - this is a standard textbook explanation (which is fine), however, it turns out that the evidence is surprisingly weak in this area.

Madeline - this is a good point, but a business can get around it by requiring more work.