Economy / Regulation / U.S. Domestic Policy

At Minimum, a Call for Reform

During his State of the Union, President Obama’s call to raise the minimum wage generated enough buzz that congressional Republicans were barely to the steps of the capital building before they were voicing concern. Despite the surging popularity of this proposition, new research suggests that minimum wage increases may not benefit employees as matter-of-factly as the administration would suggest and instead a revision of the nation’s regulatory apparatus will more directly benefit the lives of low wage earners.

In an interview minutes after the speech, Rep. Paul Ryan immediately cautioned restraint for an administration eager to pander to public support, and the numbers are certainly appealing. A recent Gallup study places public attitudes at 71% in favor of raising the minimum wage to $9 an hour, up from the current rate of $7.25. This increase seems small and easily absorbed, but what are the consequences?

The answer appears less certain than advocates would suggest. The most common argument for a wage increase is that it would put more money in the pockets of low-income populations, stimulating the economy. That may be so; a recent study suggests a correlation between at $1 increase in wage and an extra $700 in spending for low income earners each quarter.

The concern, however, is that it is unclear how employers will respond. Economists disagree in their estimations of whether the increase would force employers to cut payroll, either by reductions in hours or ultimately staff. It is further hypothesized that consumers will endure these increases by paying for them in the rising costs of goods and services as companies account for the adjustments.  The trouble is that each firm is different and their choices unique, making the impacts difficult to estimate.

Amid this confusion, the tempering reality for proponents is that minimum wage increases may not actually benefit the nation’s poorest Americans. In truth, the standard minimum wage earner is not actually impoverished; rather the earner lives in a family making over $50,000 a year because a disproportionate number of these earners are students and teenagers. The Heritage Foundation concludes that only one-ninth of the minimum wage workforce lives in poverty. For those American adults who do support themselves with minimum wage positions, an increase may limit their access to vital federal agency support services, ultimately depriving them of the benefit of an increase.

To counter the cloud of uncertainly swirling around the minimum wage proposal, the Mercatus Institute at George Mason University has put forth an alternative suggestion; reform the regulators.

Mark Adams, a Research Fellow at Mercatus explains in his new research that regulations disproportionately burden low-income earners. Regulations require these earners to expend valuable resources in support of public risk mitigation, which the earner could independently secure for one fifth of the cost.

Adams cites fellow Mercatus researcher and Utah State economics professor Diane Thomas who explains that in effect a robust regulatory apparatus is tantamount to a regressive tax on low income earners because regulations cost these individuals six to eight times more as a percentage of their income than higher earners.

Critically, the Small Business Administration opines that regulatory burdens are directly damaging the ability of growing businesses to hire new workers. For minimum wage workers the resulting impact is drastic; despite accounting for 65% of job creation and employing more than 50% of all workers, small businesses spend 36% more per employee to comply with regulation as compared to large firms.

The Mercatus Institute proposes, therefore, that the debate must be re-focused on ensuring regulatory agencies take account of their impact by adequately measuring costs and benefits of new rules, while conducting retrospective review and potentially retirement of existing regulations. This proposal may not be novel, but it cannot be denied given the above stated regulatory impact on low income Americans.

Rather than expend valuable political capital arguing over $1.75 wage increase with cloudy and potentially devastating consequences, Republicans and Democrats must re-focus their efforts to ensure that the expanding regulatory regime is curtailed and that regulations take the form of efficient, smart rules that are mindful of the burden they impose on low wage earners.