Circular Reasoning and Minimum Wage

For most of us, our entry into the working world started at minimum wage. We knew it wasn’t a way of life but an opportunity to learn and experience the real world.

Unfortunately, some command and control politicians paint a picture that minimum wage workers are in a perpetual state and only government control of the economy will save them.

Some states have created their own minimum wage that is set higher than the federal wage. Other states try to offset inflation by linking their minimum wage to the Consumer Price Index. As the CPI rises, the state’s minimum wage goes up accordingly.

This year Tennessee Democrats are offering a similar minimum wage bill liked to CPI. The idea is to aid minimum wage workers in keeping up with inflation and give employers predictability for wage increases.

It sounds reasonable but the fact is that mandated wage hikes actually hurt the very people they are trying to aid; low-skilled and entry-level employees. Such hikes force employers to make strategic decisions to overcome the increased cost the wage presents. Low-skilled and entry-level employees lose out on-the-job training opportunities as employers seek new ways to require fewer employees and higher skilled workers; they may leave jobs vacant, reduce hours, forgo raises, and if possible raise prices in order to pay the higher wage. All of these effects make jobs either more competitive or life more expensive.

If that’s not bad enough, the idea of indexing the wage to CPI uses circular reasoning and creates inflation in the economy. The problem lies with the CPI indicator itself. CPI is a measure of the rise or fall in prices of commonly used goods and services as compared to a benchmark year.

CPI is not an index that is unaffected by increased wages - in fact, it can be seen as a measure of the effect of such inflation.

If the bill passes, any increase in CPI translates into higher wages, which produces higher costs, which translates into higher prices, thus a higher CPI results, and thereby triggering another increase in minimum wage - this effect is circular and compounding.

The truth is two thirds (2/3) of all who start a job at minimum wage make more money inside of a year. Most are students, retired persons or second income earners who are perfectly capable of earning their way to a higher wage.

Yes, a portion are poorly educated, low-skilled workers who truly struggle to get by. And we do several things to help the truly poor and none of them ask any one individual employer to make the sacrifice. The earned income tax credit multiplies the earnings of the poor while providing an incentive to work. Food stamps allow the seller of food to get their price while increasing the buying power of the poor. Private charitable organizations supply food and clothing to those in need. Homeownership is the number one way to build personal wealth. The state of Tennessee and groups like Habitat for Humanity help low income workers become home owners. Medical helps like TennCare and county health departments also lend assistance.

However, above all other helps, education is the very best way to ensure escape from a lifetime of poverty and increase earning power. GED programs, career colleges, technical schools and traditional colleges are the best way to ensure that the earning power of a poorly educated, low skilled worker is tangibly increased.

America has a rich history of people who started with very little and through hard work, motivation and opportunity, carved out a piece of the American dream. We don’t need to build inflation into our economy and make that dream more difficult to achieve.