The Minimum Wage Myth

I could have sworn that I had written about this but, having searched my posts, I can only find indirect references to the subject.

The subject came up in a Facebook comment thread started by Alison and continued by my childhood pal Ned.

The myth is that raising the minimum wage benefits low-wage earners.

The reality it that it really doesn't and here's why.

An excellent article in, of all places, the NY Times does a good job explaining what it does to employment and other wages. Essentially, raising the bottom wage causes all other wages to rise since not doing so would be an affront to those higher on the ladder.

In addition, these increased wages must be recouped so manufacturers and service providers must raise prices to account for the higher costs. Don't forget that prices reflect both costs and profit so prices increase (inflation) at a parallel but higher rate than costs. On top of that, there's the 15.3% FICA tax on wages.

The never-ending consequences include;

• Loss of competitiveness between states and countries.
• Contracts made by government on behalf of employers who foot the bill.
• Increased tax revenue due to conflict of interest in government.
• Decreasing employment.

To show the relationship, I plot inflation against the minimum wage. I normalized wages ($1.40/hr) and inflation to the year 1967 near the end of LBJs socialist blitz, the Great Society programs.

You can clearly see that the rate of rise of inflation was the greatest when the increases in the minimum wage were most frequent (1973-1982).  You can also see that it took a while for industry to catch on to the lost-profit problems of the early years. You can also see that the inflation rate decreases (in 1982) after the last minimum wage increase in 1981.

Interestingly, the direct correlation between minimum wage increase and inflation disappears around 1991 until the final boost in 2009. I tried to explain it with interest rates, deficit spending and printing of money but all to no avail.

What I found to correlate was the market; it was strong during those years. The uncorrelated upticks in the inflation curve (2002 and 2009) correspond to downticks in the market.

So, the market is up by a factor of 12, inflation up by a factor of 7 and minimum wage up by a factor of 5 in 2012 as compared to 1967; profit, income and costs, respectively.

Prior to 1991, increases in the minimum wage correlate directly to increases in inflation because the market was weak as also measured by the unemployment rate.

Of interest here is the correlation between increases to the minimum wage and increases in unemployment; 1975, 1982, 1991, 1996, 2007. We all know what happened in 2001.

As I've said, if we want to improve the lot of the poor then let them (and the rest of us) keep more of what they earn by abolishing regressive taxation by the federal government, states and municipalities.

Get rid of sales, sin, fuel and property taxes.

Milestone
Thank you readers; I'm up over 2,000 page-reads in 10 countries on my blog.

Question
In discussion about the Wealth Gap, a curious question came up.

The above graph is the approximate income distribution in the USA by percentile of earners.

Question: Where is the "Middle Class"?

Please leave a comment with your thoughts on this.