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Minimum Wage Hike: What it Means

Written By Briton Ryle

Posted January 29, 2014

Obama State of the Union

If there is only one takeaway from President Obama’s State of the Union Address last night it might be that he is fed up with having one initiative after another blocked by a divided Congress. He is more determined than ever to get things done – even if it means going around Congress and doing them all by himself.

Last night, the President fired a warning shot across Congress’ bow, announcing a minimum wage increase for federally contracted workers from $7.25 to $10.10 per hour. It was a rather light shot, however, since it will affect barely a few hundred thousand contracted workers out of the national total of 17 million minimum wage workers.

But it isn’t so much the scope of the decision that has unnerved the President’s opponents. It’s not what he did but how he did it – by executive order. And it leaves them wondering what other issues he is willing to take his pen to.

Keeping the Order in Perspective

Naturally, whenever a single person – whether in a government, in a corporation, in a military, or in any other position of authority – starts to wield their power unilaterally, it makes people nervous. When it comes to executive orders, however, we need to keep things in perspective.

Availing themselves of the authority to issue executive orders is quite the common occurrence for U.S. presents. Of the last four two-term presidents, Reagan signed 381 executive orders, Clinton signed 364, G.W. Bush signed 291, while Obama has signed the least of them all so far at just 167. Make that 168.

As for scope, this latest order to raise the minimum wage will affect a mere 2 to 3% of the nation’s total number of minimum wage earners.

What is more, it is the first such raise in five years. And it was over-due a reset, according to the historical average as shown in the graph below comparing the national minimum wage (blue) to its relative purchasing power (red) adjusted to 2012 dollars.

Unemployment and Purchasing Power

Click Here to Enlarge

As noted by the black arrows, during periods of no wage raises (flat blue), inflation gradually eroded the purchasing power of the wage (declining red) as expressed in 2012 dollars.

Minimum wage raises after 1980 were not able to restore the buying power of the 1960’s and 70’s. The current raise to $10.10 would reclaim that average purchasing power for the first time in 46 years since 1968.

Keeping the Economic Impact in Perspective

Critics, however, will see the wage increase as cramming a foot in the door that ultimately leads to higher wages for all 17 million minimum wage earners across the entire workforce, something which businesses cannot afford right now. After all, that’s a hefty 39.3 percent hike to labor costs!

Multiplying that $2.85 per hour increase by an average of 30 hours per week by 50 weeks per year by 17 million minimum wage workers equals $72.675 billion in extra labor costs nationwide each year. Can companies really afford to pay that much more right now?

Supporters of the wage hike believe so, including Democratic Representative Keith Ellison of Minnesota who expressed his confidence to the Huffington Post, “If you look at the economics here, corporate profitability is very high now. They can afford it.”

But in a period when unemployment is still exceptionally high, increasing the cost of labor will hurt the creation of new jobs, and will only end up giving more money to those who already have jobs.

On the other side of the debate, however, a minimum wage hike could theoretically lead to job creation when we consider where that extra money will be spent. That extra $72 billion in wages will generally be spent in places frequented by low income earners, such as Walmart (NYSE: WMT), Costco (NASDAQ: COST) and McDonald’s (NYSE: MCD) – not at all intended to be derogatory.

In turn, those extra $72 billion will enable these companies to hire more workers. And who do they generally hire most? Minimum wage, unskilled labor.

So in a roundabout way, raising the minimum wage would ultimately end up creating more unskilled jobs – which is precisely the segment of the labor force that is lacking jobs right now. While there are plenty of skilled jobs available, it’s the low income jobs that are lacking.

A minimum wage increase, therefore, sends money to the lower income segment of the population, boosting consumer spending, corporate profits, and job opportunities within that segment.

Keeping the Political Ramifications in Perspective

Yet the uneasy feeling permeating through Congress doesn’t really stem from an economic concern, but from a political one. It all goes back to how the President is passing this law – by executive order, a unilateral decision taken by one person alone.

The American people elected an entire body of hundreds of state and federal representatives to prevent one person from running wild with a pen in his hand. Critics see it as yet another case of taxation without representation.

And not just in hyperbole, either. In this case it really is another tax. Of those $72 billion a year in extra wages, the federal government would collect on average some 15% – or $11 billion a year – in income tax. Ultimately it is a tax on corporations and small businesses that has been diverted around Congress, and that has not been agreed to by the whole of the people’s elected representatives.

“America does not stand still,” President Obama noted in last night’s address, “and neither will I. Wherever and whenever I can take steps without legislation to expand opportunity for more American families, that’s what I’m going to do.”

Opponents are left to wonder. It’s minimum wage hikes now. But what’s next?

Yet here too, keeping it in perspective is the order of the day. The provision of executive order was put in place by law for those times when Congress is so gridlocked that nothing would get done without it.

“I’m eager to work with all of you,” Obama prefaced his “I can take steps without legislation” line. Executive orders are usually issued after an attempt at compromise has been made in good faith. What is more, all executive orders have the backing of a good cross-section of Congress, so it isn’t as though the power is being used dictatorially.

Executive order is a legal provision to prevent gridlock, preventing the other side from blocking the functioning of entire elected body. While some would argue that when it comes to divisive issues, gridlock is a sign that the elected body really is functioning as it was intended – balancing and distributing power evenly. Others would argue that gridlock is a sign that the elected body has broken down. Reasoning and compromise is how the body was designed to function.

Any time it gets to the point where an executive order has to be issued to get something through Congress is a sad time for the nation, a time when both sides should hang their heads in shame for having failed their citizenry. Resorting to such orders is a symbol of more than just dysfunction, but of outright contempt by both sides for their responsibilities.

It is a sign that neither side was able nor willing to do their job as they promised they would.

Joseph Cafariello