POINT-COUNTERPOINT Should the Federal Minimum Wage Be Raised?

HR Magazine asked two experts for their perspectives on this important question.

By David Cooper and James Sherk Sep 1, 2014
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David Cooper: Yes. Raising the minimum wage would strengthen the workforce and the economy.

0914cover.jpgIn 1934, Henry Ford wrote “Low wages are the most costly any employer can pay. It is like using low-grade material—the waste makes it very expensive in the end.” Ford’s observation is as right today as it was then.

When workers struggle to make ends meet, productivity sags, absenteeism increases, morale suffers and turnover rises because workers are constantly hunting for better opportunities.

At the same time, as employees’ pay stagnates or declines, fewer households have money to spend, meaning businesses see fewer customers. Consumer spending—which makes up 70 percent of the U.S. economy—is weakened, and more people go into debt or turn to government assistance just to get by.

Sadly, millions of Americans are facing this situation. Over the past 45 years, average worker productivity has more than doubled, while pay for middle- and low-income workers has either flatlined or fallen after being adjusted for inflation. This is due, in part, to our failure to raise the minimum wage.

The minimum wage is the floor upon which the entire wage structure is built. Unless it is periodically raised, a larger and larger segment of the population sees its living standards decline, in spite of a growing economy.

Today’s minimum of $7.25 an hour is worth 25 percent less than the minimum in the late 1960s. A full-time, minimum-wage worker earns about $15,000 per year, which is below the federal poverty line for a worker with just one child.

When there’s a significant gap between the wage floor and what it actually takes to live, not only do workers suffer, but good employers are penalized. Businesses that may want to pay a livable wage fear being undercut by “low-road” employers who pay dismal wages for even the slightest price advantage.

We need to raise the minimum wage to the point where the lowest-paid worker can afford their basic needs. An increase to $10.10 an hour as proposed by President Barack Obama would restore the wage floor to the same value it had in the 1960s. In doing so, it would lift earnings for nearly 28 million workers nationwide—roughly 1 in 5 U.S. workers.

Opponents claim that raising the wage floor will do more harm than good, forcing businesses to reduce staff, cut hours or hike prices. But research has shown that modest increases—like the proposed raise to $10.10—have little to no effect on employment and that affected businesses can absorb them with negligible price adjustments.

As the country struggled to pull itself out of the Great Depression, America’s business leaders saw what many employers are coming to recognize today—that paying dismally low wages has significant costs for businesses. To build a thriving economy, workers need to be paid wages upon which they can build a life.

--David Cooper, economic analyst, Economic Policy Institute

James SherkNo. Increasing the minimum wage would make it harder for unskilled workers to enter the job market.

No one criticizes the salaries at Google, where the average employee makes more than $140,000 a year. Yet many complain about what McDonald’s pays. Average wages in the fast-food sector run around $9 an hour. Many Americans think this makes Google a “good” employer and McDonald’s a “bad” one. They propose fixing this through a minimum-wage hike. They seldom notice how this would hurt McDonald’s workers.

Google employs very skilled and educated workers—usually diligent, motivated self-starters. They come to the job with the skills necessary to succeed. By contrast, McDonald’s employees often lack work experience and the soft skills needed on the job: grit, motivation, reliability and teamwork. Google would not hire them.

McDonald’s teaches its workers how to function on the job, breaking down the work into tasks they can easily perform. This enables them to gain those soft skills. Their time at McDonald’s makes them more employable; most leave shortly for higher-paying jobs. The average McDonald’s employee leaves within a year.

Google does none of these things. The company pays a premium to hire workers who are already highly skilled.

McDonald’s could pay like Google if it transformed its business model. It could replace its cashiers with touch pads and its cooks with mechanized burger cookers. Inventors recently came up with a machine that cooks almost 400 gourmet hamburgers an hour with no human intervention. McDonald’s could install these devices, fire its line workers and hire a few skilled engineers at “good” salaries to keep the machines running. Would such a transformation benefit low-income workers? Or would it deprive them of entry-level job opportunities?

In fact, most Americans started off working within a dollar of the minimum wage. Few stayed there long. Two-thirds of minimum-wage workers earn raises within a year, typically of about 24 percent. Minimum-wage jobs provide a gateway to higher-paying work.

Raising the minimum wage will price less productive workers out of such jobs. Companies pay for productivity. Neither McDonald’s nor Google nor any other firm will pay its employees more than the value they create. Higher minimum wages make it harder for unskilled workers to get started in the job market.

The U.S. Bureau of Labor Statistics reports that most minimum-wage workers have not yet turned 25. Three-fifths have no more than a high school diploma. Many of these young adults cannot yet produce $10 an hour of value for prospective employers. Raising the minimum wage effectively saws off the bottom rung of their career ladders. It prevents them from gaining the skills that would qualify them for higher-paying jobs. That hardly helps their prospects.

Higher minimum wages change who companies hire and how they structure their businesses. They do not cause businesses to pay workers more than the value they produce. McDonald’s could operate like Google, but that would hurt the low-income workers minimum-wage advocates want to help.

--James Sherk, senior policy analyst, labor economics, The Heritage Foundation

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