A Predictable Economic Event

Wall Street Journal senior economic writer Editorial Board member Steve Moore, whose face time seemed to explode since I visited with him last fall, discusses how the recent raise in the minimum wage has been a major contributor to the steep rise in the unemployment rate for our young workers. Take a listen:


Certainly, in what seemingly is the most significant financial downdraft in our lifetimes, the unemployment rate of all potential workers would rise to difficult levels. But the Congress, in yet another this sounds good when you say it fast move, raised the minimum wage which has had unintended consequences.

Think if you owned a pizza parlor and had five high schoolers working the dining room working for minimum wage, which for discussion is $6/hour. Your budget for dining room employees was $32 per hour. Increased traffic at the pizza parlor for eat in customers could increase your overall revenue, therefore allowing you hire an additional dining room worker. But for the time being, you have 2 cents per hour left in your budget per hour.

In the midst of a growing recession and a rising unemployment rate, Congress decides to raise the minimum wage to $7/hour. Suddenly, should the business owner retain the current staff and hold the hourly schedule, the business owner is now running a budgetary deficit with respect to payroll of 3 cents per hour. With dining room traffic decreasing due to the economic issues, this does not paint a pretty picture.

Additionally, your other staff members, who did not get a raise dictated by the government, are now in a less favorable position versus the hourly workers as the action seems to disregard the merit raises these staff members have achieved over their tenure, potentially leading to a decline in morale.

Since it would be unwise to operate this portion of your business at a deficit, you have some choices to make. How about rising prices? This would be foolish given the current environment. Reduce staff? This is the sensible thing to do, since the remaining workers, happy to be employed and with little alternative due to the economic conditions, will eagerly pick up the slack.

So, the business owner who operated within his budget spending $30 per hour originally, does not go to the government ordered $35 per hour, which exceeds his budget. The business owner drops the dining staff to 4 workers, which would fall within his budget at $28 per hour. Although the business owner has a hard working staff, service suffers with one less worker.

Additionally, the decrease in dining room traffic, coupled with the higher cost of hiring staff, causes the business owner to reduce the budgetary item for dining room workers, which leads the business to be operating with less employees in a contracting environment.

The higher minimum wage acts essentially as a tax on business operations during declining revenues. Recall, when you tax something, you get less of it. In this case, you get less service and most importantly, less jobs, which was the one thing Congress was trying to increase.

Boggles the mind!