The cost of raising the minimum wage

One policy initiative President Barack Obama highlighted in his State of the Union is to increase the federal minimum wage. A fellow Democrat, our own Sen. Mark Pryor, is not echoing Obama’s proposal but rather criticizing the size of the Obama initiative while supporting a smaller state increase.

Meanwhile, a new study confirms what economists have said for years — an increase will cost American jobs.

Obama is pushing for an almost 40 percent increase in the federal minimum wage from $7.25 per hour to $10.10 per hour. He has signed an executive order setting $10.10 as the minimum wage paid to all federal contractors.

“Our economy has been growing for four years. Our businesses have created eight and a half million new jobs. But while those at the top are doing better than ever, average wages have barely budged. Too many Americans are working harder than ever just to get by, let alone get ahead. And that’s been true since long before the recession hit,” said Obama in his weekly address this weekend pushing for Congress to support the increase.

“That’s why we’ve got to build an economy that works for everybody, not just a fortunate few. We’ve got to restore opportunity for all — the notion that no matter who you are or how you started out, with hard work and responsibility, you can get ahead in America.”

The policy sounds good and strikes a certain populist tone that plays well in blue collar states like Arkansas. At least, it plays better than most of the policy ideas coming out of the White House lately. The idea of increasing the pay of hard-working laborers is certainly attractive.

A non-partisan Congressional Budget Office study outlines how the new policy will lead to job cuts.

“Increasing the minimum wage would have two principal effects on low-wage workers. Most of them would receive higher pay that would increase their family’s income, and some of those families would see their income rise above the federal poverty threshold. But some jobs for low-wage workers would probably be eliminated, the income of most workers who become jobless would fall substantially, and the share of low-wage workers who were employed would probably fall slightly,” according to the CBO study.

The study explains that any overall increase in wages likely would more than offset job losses created by the policy. Economists point out that in a global economy, labor cost is a major consideration for locating jobs. If the cost of American labor goes up, then correspondingly, moving jobs offshore will increase.

Another consideration related to raising the minimum wage is the effect on the consumer. Free market principles dictate that the increased labor costs ultimately will be passed on to the consumer. The notion that evil corporations horde huge profits on the backs of the poor workers is largely a myth.

Obamacare is a prime example. Instead of health insurance companies absorbing all the costs of the new requirements while keeping their profits stable, they have passed on the added costs to the consumer in the form of higher premiums. The same pass-down costs would occur with an increase in the minimum wage.

Pryor’s middle-ground approach is to criticize the federal minimum wage increase as too much while signing on to an initiative to gradually increase the Arkansas state minimum wage to $8.50 an hour — eventually about a 25 percent increase over the current $6.25. The change would mainly affect small businesses operating solely within the state and not subject to the federal minimum-wage standard.

“We have a lot of hard-working folks here in Arkansas making minimum wage, and it’s time these families got a raise,” Pryor said in a press conference in Little Rock. “It’s just not acceptable that our state is one of four with a minimum wage set well below the federal level, even as tens of thousands of Arkansas families struggle to get by.”

The strategy appears obvious. Pryor can oppose a policy from the unpopular president while looking out for the common low-wage worker by supporting a state-level increase.

But the same problems with the federal increase apply in Arkansas, albeit on a smaller scale. Fewer jobs and increased costs of goods will take place within the Natural State regardless of whether the idea for the increase comes from Washington or Little Rock.

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