Fri 13 Jan 2006 @ 11:01 AM


Minimum Wage vs Living Wage

An article in today's Deseret News tells of a group of Utah religious leaders who have all signed a letter to the state senate president urging the legislature to raise the state's minimum wage. This is a bad idea! The minimum wage is just that: a minimum wage. It is not and should not be a living wage. One could even go so far as to say there should not be a minimum wage, but that's not the point of this commentary.

Let's look at two American states: Utah and Oregon. In November 2005, Utah had a minimum wage of $5.15 per hour (the unadjusted federal minimum wage) and an unemployment rate of 4.0%. By contrast, Oregon workers enjoyed a minimum wage of $7.50 per hour ($2.35 an hour more than their Utah counterparts). Unfortunately, the Oregon unemployment rate was 5.8%. In essense, the state of Oregon was willing to trade a 45% increase in minimum wage for a 45% increase in unemployment! In December 2004, the unemployment rate of Salt Lake City was 3.9%; in Portland, 6.1%. Finally, if you look at Germany, it had a 2004 estimated unemployment rate of 10.6% (no national minimum wage there, but they have some large welfare benefits to ensure families have a minimum income and in many cases subsidized housing, according to my admittedly quick research). Compare that to American 2004 average unemployment rate of about 5.5%.

I know that economics is not this simple, and there are many more factors that contribute to the higher unemployment rate of one area over another, perhaps many of which I have no clue about. The reality is that when the minimum wage is increased, it has (at least) some or all of the following effects:

  • Employer costs increase, which are passed on to customers (perhaps not all at first, but over time they will be).
  • In situations where the employer is breaking even, they have the choice of either reducing their workforce or (if that is not possible) closing their doors completely (adding to the unemployment rolls as illustrated above).
  • There are many contracts in place out there that are tied to the minimum wage. In the case of a minimum wage increase, other costs associated with doing business will automatically go up in lock step.
  • Employees might get a raise, but their effective tax rate increases (as tax rates rarely, if ever, are tied to the minimum wage). This is a great boon to government who gets more per dollar earned.

I know there are things I'm missing here, but I think this illustrates in a small way that because there are so many unintended consequences, a minimum wage increase is usually ill advised. I feel for those who are trying to survive on minimum wage, but that does not mean that the ends justify the means.

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