A Fiscal Conservative’s Case for Raising the Minimum Wage

 

“Many people today are economically trapped in welfare. They’d like nothing better than to be out in the workaday world with the rest of us. Independence and self-sufficiency is what they want. They aren’t lazy or unwilling to work; they just don’t know how to free themselves from the Welfare security blanket.”

— Pres. Ronald Reagan’s remarks to the National Alliance of Business, October 5, 1981

 

I’m slightly left-of-center on most issues, but I lean right when it comes to finance. As a true conservative, I don’t believe in waste of any kind. This means I favor things like recycling, debt reduction, absolute advantages, and regulation, even though all of these cost a lot of money in the short term. For reasons such as this, I usually butt heads with conventional economists.

Even so, why would I ever support raising the minimum wage, something that Forbes thinks is downright absurd?

This all started when I noticed the labor shortage among bottom-tier employers like fast food restaurants, construction, manufacturing, trucking, etc. I wondered why the easiest jobs to get were the ones sitting empty.

I knew some of this labor shortage was skill-based. For instance, there might be too few people who are CDL certified, so trucking recruiters were hard pressed to fill positions. On the other hand, a lot of American workers were overqualified and undertrained, which is one reason why it’s been difficult to get manufacturing jobs back from China.

But some of the blue-collar labor shortage was wage-based. Take the restaurant industry as an example. Nobody wants to work at Subway, McDonald’s, or Dunkin’ Donuts, because they barely meet the federal minimum wage requirements. Immigrants and teenagers take those jobs, neither of whom reliably pay taxes (if at all).

Meanwhile, working-age, potential taxpayers sit around, collect welfare, and spend food stamps on lobster, lingerie, and bail. The result is a wildly unregulated welfare state that’s handing out tax revenue to people who don’t pay taxes. If the government were a restaurant, it would be paying customers to eat there.

The problem increased sharply after LBJ began the War on Poverty in 1964, but it was the Roosevelt Administration that established the federal welfare state 29 years earlier.

welfare growth

 

Today, our nation’s budgets barely pass each year, and the debt ceiling continues to climb. Meanwhile, corporate America isn’t being asked to accept the responsibility for their employees’ lives, that is, outside of exorbitantly priced health insurance and unrealistic retirement planning. ObamaCare (which is still buffering..) offers employees an option for the former, while the latter is the next hurdle in American solvency.

I think it’s time to think creatively about how to dismantle the welfare state, before it bankrupts us all.

The biggest problem is that Washington can’t (or won’t) stop funding welfare, because taking away benefits from over 100 million people would be monumentally unpopular. Measured in it’s most expansive form, 35.4% of the U.S. population receives welfare benefits. That’s a rather biased statistic, but the fact that any welfare measurement can include over a third of the country is worrying.

However, the government might be able to justify Welfare Reform: Part II if the private sector were shouldering some of the everyday responsibility (i.e. not just healthcare and retirement).

This is where raising the minimum wage comes into play.

I’m effectively proposing that Uncle Sam direct employable people back into the work force by cutting off their benefits. If that were done today, the paltry minimum wage structure would send these otherwise employable people back onto welfare (through whatever loopholes they could find) or onto the streets (more on that below). A higher minimum wage might just keep them employed.

Think of it as incentivization. The federal minimum wage was set at a mere $7.25 in 2007. Nobody can live on that, even at full time.

As of 2015, twenty-one states had their minimum wages set at the federal rate. The average of all state minimum wages was only $7.95. At that rate, a person working half-time could make about $157 a week, which is about $627 a month. That half-time minimum wage worker wouldn’t make enough to pay taxes.

A full-time worker at $7.95 an hour would make ~$16,592 a year. That’s only $4,922 over the single person household poverty line, and it’s $3,198 below the poverty line for a household of three people.

Is it any wonder people choose welfare over working? The chart below shows each state’s minimum wage compared to its average welfare benefits package.

welfare vs min wage

It’s hard to believe, but the annual potential welfare benefit per person is more than $11,500 higher than the average yearly paycheck for a minimum wage worker.

Even homelessness makes more financial sense than a minimum wage job. According to a blogger who actually panhandles on the street for a living, the average beggar can expect to make between $15-30 an hour in a major city. Even the low end of that is more than twice the income of a “sandwich artist” at Subway.

That’s right.

The average American beggar makes twice as much as a minimum wage worker.

This is a problem.

If the minimum wage were, say, $15 an hour, a full-time worker could make $31,306 a year. That’s $3,184 more than the U.S. welfare average. This might be enough to coax employable people into the work force. Even if it didn’t, such a raise would be enough for the federal government to justify aggressive welfare reform. If the minimum wage increased only to the amount needed to replace the U.S. welfare average, that wage would be $13.47.

As of July 2015, there are two places in America that pay a wage matching what you could make on the street: Seattle and Los Angeles. Both cities have some of the worst homelessness rates in the country, and big cities in both Washington and California are among the worst for unemployment. At this point, anything is worth trying.

May 2015 labor force participation data seem to suggest that Seattle’s new minimum wage had a slight impact. For example, labor force participation had declined from March to April, when the new minimum wage law was passed. Then suddenly, the participation rate stabilized, even in the face of population increases.

Now, a conservative economist would tell me I’m insane. He’d claim that labor, like any other good or service, will be in less demand as its price goes up. Theoretically, the economist would be right. Hell, in practice the economist would be right. Just look at how many Seattle restaurants closed when the minimum wage law was enacted.

Even so, a higher minimum wage can be absorbed by well-run businesses, and a case for economic natural selection could definitely be made here (albeit within an artificial wage environment). Businesses would experience lower turnover, which helps reduce the cost of learning curves. Studies also show that higher wages lead to higher worker productivity.

Additionally, the wages that businesses pay those people would filter back into the local economy by way of natural consumption, and into the federal coffers in the form of taxes. The businesses that didn’t fold under new wage pressures should see a reduction in competition, which would fuel profits even at the higher prices required to absorb their own wage increases.

Of course, the biggest argument against this idea is that most unemployed people collecting welfare would never go back to work, even if they could make more money. Unfortunately, this is probably accurate, which is why I think John Smith had a good idea at Jamestown in 1609, and China had a pretty good idea in 2008.

Alas, modern America can’t cut off food or ship people out of cities, but neither can it afford to continue bankrolling laziness. That’s not the American dream. It never was.

 

 

 

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