A Recipe for Catastrophe

Maryland elected officials continue to live in a vacuum where artificial wage hikes don’t hurt the economy. Baltimore City Delegate are moving toward killing off the state economy once and for all by seeking to perpetually raise the minimum wage:

Baltimore’s delegation leaders said Thursday that raising the state’s minimum wage by nearly $3 an hour will be the city’s top issue of next General Assembly session.

“This is going to be our new strongest priority,” said Del. Curt Anderson, chairman of the city’s delegation at a news conference at City Hall. 

The state’s minimum wage has been set at $7.25 per hour since 2009. That means minimum-wage workers earn about $15,000 a year for full-time, year-round work.

It isn’t just Delegates who are on board with this, either:

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State Senate President Thomas V. “Mike” Miller said Thursday that “it’s time” to raise the state’s minimum wage. He said the measure might be tied to a cut in the corporate income tax rate. 

Mayor Stephanie Rawlings-Blake said she, Gov. Martin O’Malley and leading Democrat contenders for governor back the hike.

Maryland’s economy has already seen an inability to create new jobs and an inability to improve the economy, particularly for younger and less-skilled workers. We’ve already seen time and time again businesses forego settling or staying in Maryland due to the high cost of doing business in this state, between higher personal and income taxes, previous minimum and living wage efforts, and the general cost of doing business in this state due to red tape and over regulation. The fact that Delegates from Baltimore are pushing this wage hike is equally damning considering the dire economic situation there and the already difficult time city officials have in attracting new business with growth potential between the myriad of city and state taxes and regulations that business owners face, to say nothing of the desperate crime situation, shaky schools, and public corruption. And while we all know big business loves big government higher minimum wage requirements make it doubly hard for small business to be cultivated in these areas, the kind of businesses that allow for a true sense of ownership and community responsibility in the relationship between business and customer.

It isn’t just the loss of jobs that would hurt, particularly in Baltimore. If one of the goals of a higher minimum wage is to get more people out of poverty, than proponents are taking a very ineffective way of doing so. Studies have shown that increasing the minimum wage does nothing to reduce the poverty level because of the economic equalization of higher paid workers who will make the higher minimum wage as compared to those workers who were making minimum wage and lost their jobs due to the economic due to the wage increase.

Using data drawn from the March Current Population Survey, we find that state and federal minimum wage increases between 2003 and 2007 had no effect on state poverty rates. When we then simulate the effects of a proposed federal minimum wage increase from $7.25 to $9.50 per hour, we find that such an increase will be even more poorly targeted to the working poor than was the last federal increase from $5.15 to $7.25 per hour. Assuming no negative employment effects, only 11.3% of workers who will gain live in poor households, compared to 15.8% from the last increase. When we allow for negative employment effects, we find that the working poor face a disproportionate share of the job losses.

That study doesn’t even take into account the inflationary impact of artificially higher wages and the impact of higher prices passed along to consumers to adjust for the higher wages.

A further issue with raising the minimum wage is what’s called wage compression:

Simply put, wage compression occurs within a company when the newer (or lesser skilled) workers’ wages rise and the wages of existing (or more experienced) workers don’t. The result is newer (or lesser skilled) workers being paid as much, or nearly as much, as existing or more skilled workers–creating wage compression and what kind of problems a 24% increase at the bottom will cause within a companies’ compensation plans throughout the U.S. 

In some cases, if newer (or lesser skilled) workers’ wages are raised above existing (or more skilled) workers, then there is wage inequity. 

In either of the above cases–wage compression or wage inequity–when they occur, it creates tremendous problems within a company. 

In most cases, it reduces morale, making existing (or more skilled) employees angry that newer or lower-skilled workers are making nearly as much or, in some cases, more than they are.

The net result of wage compression, for employees is going to create a higher expectation of productivity for lower-skilled workers, while higher-skilled but higher paid workers will be let go from the company in order to stabilize revenues and maintain profits. And that exposes the minimum wage proposal as a political tool; creating higher wages for lower-paid workers who are more likely to vote Democrat at the expense of higher-earning workers more likely to vote Republican.

This doesn’t even take into account the cost to state and local governments. Preliminary research shows that the number of state and local government employees who make minimum wage is hard to come by, but the state of Maryland maintains a list of positions that falls under this requirement and it wouldn’t take much imagination to realize that the number of interns and seasonal employees employed by state and local governments at below the proposed new wage would be significant.

The most damaging piece of this legislation long-term will be the indexing of the wage to inflation. Much like the indexing of the gas tax to inflation, elected officials are attempting to index the minimum wage to inflation in order to avoid hard votes on the subject in the future. The current proposal sees a graduated rate hike through 2016, then the rate being indexed to inflation after that. This, naturally, has a compounding effect of seeing higher minimum wages cause inflation, leading to additional inflation that causes higher minimum wages. The entire vicious cycle will repeat itself, reducing the number of entry-level jobs available to folks and diminishing the purchasing power of all middle and working class Marylanders.

Once again Maryland elected officials are going out of their way to propose policies that will do little, if anything, to help the economic plight of middle and working class Marylanders. It should be a surprise to nobody that years and years of tax increases and regulation implementation would lead to a situation that saw fewer job opportunities for younger and lower-skilled workers. Yet once again, instead of invoking basic free-market economic principles to create a job climate that is attractive to workers and will put people the work, Maryland leaders want to implement policies that depress the economic environment, scare off employers, and create inflation. Until Maryland can get off of this vicious cycle we will continue to see the degradation of our economic climate and a situation where welfare increases and taxpayers flee.

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