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The Capitalist's Case For A $15 Minimum Wage: Bloomberg View

Bloomberg View | By Nick Hanauer

Posted: 06/20/2013 10:13 am EDT

BLOOMBERG VIEW:

The fundamental law of capitalism is that if workers have no money, businesses have no customers. That’s why the extreme, and widening, wealth gap in our economy presents not just a moral challenge, but an economic one, too. In a capitalist system, rising inequality creates a death spiral of falling demand that ultimately takes everyone down.

Low-wage jobs are fast replacing middle-class ones in the U.S. economy. Sixty percent of the jobs lost in the last recession were middle-income, while 59 percent of the new positions during the past two years of recovery were in low-wage industries that continue to expand such as retail, food services, cleaning and health-care support. By 2020, 48 percent of jobs will be in those service sectors.

Policy makers debate incremental changes for arresting this vicious cycle. But perhaps the most powerful and elegant antidote is sitting right before us: a spike in the federal minimum wage to $15 an hour.

True, that sounds like a lot. When President Barack Obama called in February for an increase to $9 an hour from $7.25, he was accused of being a dangerous redistributionist. Yet consider this: If the minimum wage had simply tracked U.S. productivity gains since 1968, it would be $21.72 an hour -- three times what it is now.

Cultivating Consumers

Traditionally, arguments for big minimum-wage increases come from labor unions and advocates for the poor. I make the case as a businessman and entrepreneur who sees our millions of low-paid workers as customers to be cultivated and not as costs to be cut.

Here’s a bottom-line example: My investment portfolio includes Pacific Coast Feather Co., one of the largest U.S. manufacturers of bed pillows. Like many other manufacturers, pillow-makers are struggling because of weak demand. The problem comes down to this: My annual earnings equal about 1,000 times the U.S. median wage, but I don’t consume 1,000 times more pillows than the average American. Even the richest among us only need one or two to rest their heads at night.

An economy such as ours that increasingly concentrates wealth in the top 1 percent, and where most workers must rely on stagnant or falling wages, isn’t a place to build much of a pillow business, or any other business for that matter.

Raising the minimum wage to $15 an hour would inject about $450 billion into the economy each year. That would give more purchasing power to millions of poor and lower-middle-class Americans, and would stimulate buying, production and hiring.

Studies by the Economic Policy Institute show that a $15 minimum wage would directly affect 51 million workers and indirectly benefit an additional 30 million. That’s 81 million people, or about 64 percent of the workforce, and their families who would be more able to buy cars, clothing and food from our nation’s businesses.

This virtuous cycle effect is described in the research of economists David Card and Alan Krueger (the current chairman of the White House Council of Economic Advisers) showing that, contrary to conventional economic orthodoxy, increases in the minimum wage increase employment. In 60 percent of the states that raised the minimum wage during periods of high unemployment, job growth was faster than the national average.

Some business people oppose an increase in the minimum wage as needless government interference in the workings of the market. In fact, a big increase would substantially reduce government intervention and dependency on public assistance programs.

Federal Benefits

No one earning the current minimum wage of about $15,000 per year can aspire to live decently, much less raise a family. As a result, almost all workers subsisting on those low earnings need panoply of taxpayer-supported benefits, including the earned income tax credit, food stamps, Medicaid or housing subsidies. According to the Congressional Budget Office, the federal government spent $316 billion on programs designed to help the poor in 2012.

That means the current $7.25 minimum wage forces taxpayers to subsidize Wal-Mart Stores Inc. (WMT) and other large employers, effectively socializing their labor costs. This is great for Wal-Mart and its shareholders, but terrible for America. It is both unjust and inefficient.

A higher minimum wage would also make low-income families less dependent on government programs: The CBO report shows that the federal government gives about $8,800 in annual assistance to the lowest-income households but only $4,000 to households earning $35,500, which would be about the level of earnings of a worker making $15 an hour.

An objection to a significant wage increase is that it would force employers to shed workers. Yet the evidence points the other way: Workers earn more and spend more, increasing demand and helping businesses grow.

Critics of raising the minimum wage also say it will lead to more outsourcing and job loss. Yet virtually all of these low-wage jobs are service jobs that can neither be outsourced nor automated.

Raising the earnings of all American workers would provide all businesses with more customers with more to spend. Seeing the economy as Henry Ford did would redirect our country toward a high-growth future that works for all.

(Nick Hanauer is a founder of Second Avenue Partners, a venture capital company in Seattle specializing in early-stage startups and emerging technology. He has founded or financed dozens of companies, including aQuantive Inc. and Amazon.com, and is the co-author of two books, “The True Patriot” and “The Gardens of Democracy.”)

To contact the writer of this article: Nick Hanauer at Nick@secondave.com.

To contact the editor responsible for this article: Max Berley at mberley@bloomberg.net.

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All that fairy tale economics, and not one comment about the impact to pricing that would proportionally occur and thus drain this new found purchasing power? If the panacea to the economy is a significant raise in the minimum wage that it will spur all this new demand, why not raise it to $50 an hour?

Also, not one mention of the employer burdens on top of the wages, from FICA tax, to unemployment tax, to worker's compensation, etc that make this really a $17 - $20 an hour proposition.

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Give the average person making minimum wage 15 dollars per hour and they will cut their own hours in half by missing 3 days a week because they have a couple hundred in their pocket.

Just a sad fact.

Maybe they could spend time finishing up their homework since half of min wage workers are under 25, and about half of that group is teenagers (23% of all min wage workers).

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Give the average person making minimum wage 15 dollars per hour and they will cut their own hours in half by missing 3 days a week because they have a couple hundred in their pocket.

Just a sad fact.

And by "fact", you mean baseless speculation with no evidence supporting it whatsoever.

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And by "fact", you mean baseless speculation with no evidence supporting it whatsoever.

No I mean fact as it is normally used, something that is true in nature. Make all the excuses you want though.

Why do you think so many minimum wage workers seem content to remain at minimum wage jobs?

Instead of *****ing about minimum wage, educate or train yourself for better wages.

There will ALWAYS be minimum wage jobs and a need for them. But it doesnt have to be the same fools willing to make a career out of it.

You want 15 dollar minimum wage? fine. Enjoy your 8 dollar cheeseburger and your 6 dollar loaves of bread then.

Because if you agree with the article, you are not the brightest bulb.

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I've always looked at the minumum wage as a 'landing zone' for two types of individuals: One is the teenager who is at minimum wage temporarily (assuming they graduate from HS and progress on with additional education/training). The other is the individual who made choices/faced circumstances where they did not get education/training; subsequently, these individuals stay at minimum wage until such time that they change their skill sets.

Per the Bureau of Labor Statistics, updated in March 2012, regarding the charactistics of minimum wage earners in the US at the end of 2011. http://www.bls.gov/cps/minwage2011.htm

Characteristics of Minimum Wage Workers: 2011

In 2011, 73.9 million American workers age 16 and over were paid at hourly rates, representing 59.1 percent of all wage and salary workers.1 Among those paid by the hour, 1.7 million earned exactly the prevailing Federal minimum wage of $7.25 per hour. About 2.2 million had wages below the minimum.2 Together, these 3.8 million workers with wages at or below the Federal minimum made up 5.2 percent of all hourly-paid workers. Tables 1 through 10 present data on a wide array of demographic and socioeconomic characteristics for hourly-paid workers earning at or below the Federal minimum wage. The following are some highlights from the 2011 data.

  • Minimum wage workers tend to be young. Although workers under age 25 represented only about one-fifth of hourly-paid workers, they made up about half of those paid the Federal minimum wage or less. Among employed teenagers paid by the hour, about 23 percent earned the minimum wage or less, compared with about 3 percent of workers age 25 and over. (See table 1 and table 7.)

  • About 6 percent of women paid hourly rates had wages at or below the prevailing Federal minimum, compared with about 4 percent of men. (See table 1.)
  • About 5 percent of White hourly-paid workers earned the Federal minimum wage or less, compared with about 6 percent of Blacks and about 3 percent of Asians. Among hourly-paid workers of Hispanic ethnicity, about 5 percent earned the minimum wage or less. (See table 1.)
  • Among hourly-paid workers age 16 and over, about 11 percent of those who had less than a high school diploma earned the Federal minimum wage or less, compared with about 5 percent of those who had a high school diploma (with no college) and about 2 percent of college graduates. (See table 6.)
  • Never-married workers, who tend to be young, were more likely than married workers to earn the Federal minimum wage or less (about 9 percent versus about 2 percent). (See table 8.)
  • Part-time workers (persons who usually work less than 35 hours per week) were more likely than full-time workers to be paid the Federal minimum wage or less (about 13 percent versus about 2 percent). (See table 1 and table 9.)
  • By major occupational group, the highest proportion of hourly-paid workers earning at or below the Federal minimum wage was in service occupations, at 13 percent. About 6 in 10 workers earning the minimum wage or less in 2011 were employed in service occupations, mostly in food preparation and serving related jobs. (See table 4.)
  • The industry with the highest proportion of workers with hourly wages at or below the Federal minimum wage was leisure and hospitality (22 percent). About one-half of all workers paid at or below the Federal minimum wage were employed in this industry, primarily in restaurants and other food services. For many of these workers, tips and commissions supplement the hourly wages received. (See table 5.)
  • The states with the highest proportions of hourly-paid workers earning at or below the Federal minimum wage were Georgia, Mississippi, and Texas (all between 8 and 10 percent). The states with the lowest percentage of workers earning at or below the Federal minimum wage were Oregon, California, Washington, and Alaska (all under 2 percent). It should be noted that some states have minimum wage laws establishing standards that exceed the Federal minimum wage. (See table 2 and table 3.)
  • The proportion of hourly-paid workers earning the prevailing Federal minimum wage or less declined from 6.0 percent in 2010 to 5.2 percent in 2011. This remains well below the figure of 13.4 percent in 1979, when data were first collected on a regular basis. (See table 10.)

Source: U.S. Department of Labor, Bureau of Labor Statistics (BLS). These data on minimum wage earners are derived from the Current Population Survey (CPS), a monthly nationwide survey of households. Data in this summary are 2011 annual averages.

1 Data are for wage and salary workers age 16 and over and refer to earnings on a person's sole or principal job. Hourly earnings for hourly-paid workers do not include overtime pay, commissions, or tips received. All self-employed persons are excluded whether or not their businesses are incorporated.

2 The presence of a sizable number of workers with wages below the Federal minimum does not necessarily indicate violations of the Fair Labor Standards Act, as there are exemptions to the minimum wage provisions of the law. The estimates of the numbers of minimum and subminimum wage workers presented in the accompanying tables pertain to workers paid at hourly rates; salaried and other non-hourly workers are excluded. As such, the actual number of workers with earnings at or below the prevailing Federal minimum is undoubtedly understated. Research has shown that a relatively small number and share of salaried workers and others not paid by the hour have earnings that, when translated into hourly rates, are at or below the minimum wage. However, BLS does not routinely estimate hourly earnings for non-hourly workers because of data concerns that arise in producing these estimates.

Characteristics of Minimum Wage Workers: 2011, Tables 1 - 10

Characteristics of Minimum Wage Workers: 2011 (PDF)

Last Modified Date: March 2, 2012

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As wages increase, so do the costs of products and services. Businesses are in the business of making profit, and that profit margin is affected by the largest expense in any business: PAYROLL. Businesses seek to maintain a certain profit margin, and if that profit margin is "eaten up", businesses start cutting expenses and raising the prices on the goods and services they offer. If the minimum wage is increased drastically to $15 per hour, then you can expect short-term inflation to skyrocket. This short-term inflation will maintain as a result of increased payroll expenses and eventually become long term. I am all for increasing the minimum wage. $7.25 per hour is buffoonery when businesses have the resources to start their employees higher wages without increasing the prices of their goods and services. I do not, however, believe raising the minimum wage to $15 per hour is sound. I do not know how much it should rise, but $15 seems too high based on what I know.

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As wages increase, so do the costs of products and services. Businesses are in the business of making profit, and that profit margin is affected by the largest expense in any business: PAYROLL. Businesses seek to maintain a certain profit margin, and if that profit margin is "eaten up", businesses start cutting expenses and raising the prices on the goods and services they offer. If the minimum wage is increased drastically to $15 per hour, then you can expect short-term inflation to skyrocket. This short-term inflation will maintain as a result of increased payroll expenses and eventually become long term. I am all for increasing the minimum wage. $7.25 per hour is buffoonery when businesses have the resources to start their employees higher wages without increasing the prices of their goods and services. I do not, however, believe raising the minimum wage to $15 per hour is sound. I do not know how much it should rise, but $15 seems too high based on what I know.

unless someone also believes the government should be regulating the prices of goods and services as well

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Maybe they could spend time finishing up their homework since half of min wage workers are under 25, and about half of that group is teenagers (23% of all min wage workers).

I suppose that also means half of minimum wage workers are over 25 then.People who have apparently accepted it as a career.

People who use 50% arguments always end up arguing with themselves.

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As wages increase, so do the costs of products and services. Businesses are in the business of making profit, and that profit margin is affected by the largest expense in any business: PAYROLL. Businesses seek to maintain a certain profit margin, and if that profit margin is "eaten up", businesses start cutting expenses and raising the prices on the goods and services they offer. If the minimum wage is increased drastically to $15 per hour, then you can expect short-term inflation to skyrocket. This short-term inflation will maintain as a result of increased payroll expenses and eventually become long term. I am all for increasing the minimum wage. $7.25 per hour is buffoonery when businesses have the resources to start their employees higher wages without increasing the prices of their goods and services. I do not, however, believe raising the minimum wage to $15 per hour is sound. I do not know how much it should rise, but $15 seems too high based on what I know.

exactly. Tell us what happens to inflation when you raise the minimum wage to $15. I suspect here will be about $450B in immediate inflation.
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Traditionally, minimum wage was not intended for people to "earn a living". It was meant for people entering the workforce for the first time. Namely, high school students and graduates, college students, some college graduates, and transitioning young adults who benefited from these minimum wage jobs. This also benefited companies who offered positions that paid minimum wage by keeping payroll costs low. This was important because there is high attrition in minimum wage jobs. The costs of continually training, hiring, replacing, and retaining workers in these jobs would be exorbitantly high if minimum wage was set at rate where workers could "earn a living". Back in the day, people either attended a traditional four-year university, college, technical school, vocational school, joined the military, or took up a trade/craft, or enrolled in an apprenticeship program. A lot of this is lost today. You have people graduating high school and doing nothing or graduating high school only to end up in a minimum wage job with no type of plan or goal to climb the ladder OR dropping out of high school for whatever reason. This underscores another point. Do we really want to water down the labor force by paying minimum wage earners $15 per hour? The dollar will be near worthless.

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