It’s campaign season, and President Obama has been on the road selling his proposed 40 percent hike in the federal minimum wage. His argument in favor of the policy closely matches a line favored by wage hike advocates: “No one who works full-time should have to live in poverty.”
It’s a time-tested appeal to morality that frames the minimum wage issue. It might be stale, but it’s also effective — which means it’s high time for opponents to take back the moral high ground. After all, when the average family income of a minimum wage employee is over $50,000 a year, a mandated wage hike to address poverty is an inefficient policy.
The 1938 law establishing a federal minimum wage focused on higher-skilled sectors like manufacturing and transportation. This body of law was expanded in the late 1960s to low-skilled service jobs. Employers in these labor-intensive businesses reacted to the new costs when consumers balked at higher prices for service. The availability of entry-level work for less-skilled employees began to give way to self-service.
The economics are simple. Take the restaurant industry, which employs a large portion of the minimum wage workforce. People don’t go to restaurants for food — they can get it in a grocery store for less money. Rather, they go out to eat for the experience and the convenience, where someone has already done the shopping and the cooking, and will clean up after the meal.
That experience comes at a price. And studies show that lower cost trumps service for most customers. As prices go up, people choose to eat out (or go shopping) less often. Consequently, employers have an incentive to hold down prices.
This shift from service to self-service was documented in a seven-volume report from Congress’ Minimum Wage Study Commission released in 1981. The authors found that every 10 percent increase in the minimum wage reduces employment for young jobseekers by as much as three percent. The forty percent hike being flacked by the president would be devastating. And his 230 percent suggested hike for tipped employees is even worse.
Today, following two decades of successive increases in state and federal minimum wage levels, labor force participation for young adults is near historic lows. The unemployment rate for the 16-19 year-old demographic has been above 20 percent for more than five years; for black teens, that figure is over 30 percent.
Addressing the plight of this “lost generation” is a moral imperative. Opponents of wage mandates have all the evidence they need to condemn a higher wage policy in a weak economy.
Big box retailers (think: Costco) hold down prices by having fewer sales people on the floor. Gas stations enticed people to pump their own gas by knocking a few cents off the price of a gallon. Today, restaurants can invest in tabletop video screens to provide self-service ordering and payment options.
It’s this same dynamic that’s been documented time and again over the last two decades. An Employment Policies Institute (a think tank I helped to establish) report from economists at Miami and Trinity Universities found that the last hike in the minimum wage put more than 100,000 teens out of work. Today, the nonpartisan Congressional Budget Office predicts that up to one million jobs may be lost if the federal wage floor goes up another 40 percent.
In an era of sky-high unemployment for young adults, we need bold leadership and morally-charged arguments from public figures opposed to a higher minimum wage. To paraphrase Bill Clinton, “It’s the customer, stupid” — and if consumers are unwilling to pay for the good intentions of Democratic legislators, employers will be forced to make up that cost elsewhere. And the millions of employees who want a job will be left footing the bill. Someone needs to speak up for them.
Rick Berman is President of Berman and Company. He worked at minimum wage jobs all through high school, college, and law school.