ICYMI – Economics of minimum wage
By: John J. Faso
Monday, Dec. 17, 2012
The new political alignment in the Senate likely will break the stalemate concerning whether to raise the minimum wage from $7.25 to $8.50 per hour. Polls show that New Yorkers, when asked about raising the minimum wage, are strongly in favor.
Besides raising the minimum wage, proponents also want to annually increase the level based on the consumer price index.
While the idea may be popular, is it really a good idea?
Small businesses are mostly opposed, arguing that the slow economy will force them to actually reduce employment if they are forced to pay higher wages. Essentially, the state increases the cost of labor and passes those increases along to employers. Laws of economics dictate that anytime the price of something increases, some people will decline to purchase that good or service. Increasing the cost of labor surely will make each worker more expensive to maintain on the payroll, invariably causing some employers to question whether the additional cost is worth keeping that extra person employed.
The other problem in New York is that the issue affects various regions of the state differently. The economics of running a small business in the North Country or Central New York are highly different than those of New York City, Westchester or Long Island.
The higher wage surely will have less impact on employment decisions downstate, where most workers already earn more than the minimum. But upstate employers, especially those running retail or tourist-related businesses, likely are to curtail employment if the state government forces higher costs upon them.
Completely ignored in this debate is the impact upon youth employment, particularly among rural and minority young people. According to the federal government, the teenage unemployment rate hovers around 25 percent. Raising the cost of labor surely will discourage hiring.
The discussion on raising the minimum wage rarely considers the fact that most heads of households with children are eligible for federal and state earned income tax credits, which greatly increase their take-home pay. It is doubtful that most New Yorkers responding to polls are even aware of the beneficial impact of these tax credits upon low-wage workers. The state tax credits alone cost our taxpayers almost $1 billion per year. The federal tax credits cost taxpayers an additional $3.5 billion. It all goes to boost incomes of low-wage families in New York.
Minimum-wage earners who are heads of households are actually receiving far more than $7.25 per hour. According to the Empire Center on New York State Policy, federal and state tax credits increase the take home pay of a typical minimum-wage worker by approximately $3,000, or 44 percent. For instance, a single mother with two children, working full-time at minimum wage, is actually receiving the cash equivalent of almost $10.50 per hour. This amount also doesn’t count the cash benefits received in food stamps, or certain non-cash assistance such as housing and Medicaid benefits.
If New York raises the minimum wage, it should lessen the impact upon small business and youth. A training wage for teenagers could be instituted, which would allow inexperienced youth to be hired for a period of time at 85 percent of the minimum wage. This would allow employers to take the risk on a teenage worker. We should also recognize that the economics of the state vary by region and allow slightly lower minimum wages in hard-pressed upstate regions.
Politics, not economics, seems to dictate that a higher minimum wage is likely for New York. However, state government should not make job prospects for some less certain in the process.
John J. Faso is the former minority leader of the state Assembly. He was the Republican candidate for governor in 2006. He is now an attorney in Albany.