Tag Archives: cleveland

Undermining the Fed Through Minimum Wage

While reading The Wall Street Journal yesterday, I actually laughed at the content of one particular article.  The title was both intriguing and promising: “Just One Large City Saw Unemployment Rise From Last Year.”  Upon opening the article, I saw the graph shown below, with the title “Not Always Hot in Cleveland.”  As a Michigan fan, I laughed – just another reason why Ohio is an awful place.

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But while my biases made this article funny, the content of the article was actually quite inspiring.  On a national scale, unemployment fell over 1% from January 2013 to January 2014.  And in bustling metropolitan areas like Charlotte, unemployment dropped by more than 2.5%.  This data seems to suggest that while the Fed’s easy money policy has been slow, it is indeed working.  Slowly but surely Bernanke, and now Yellen, are pulling America out of its hole.

Unfortunately, I believe the federal government is on track to undermine all the hard work that the Federal Reserve has put in since 2008.  By raising minimum wage to $10.10 from its current rate of $7.25, the federal government will likely slam the brakes on the Fed’s steady progress.  A recent survey by Express Employment professionals shows that of the businesses currently paying minimum wage, more than 50% would slow hiring in the event of a minimum wage hike.  Furthermore, 38% of these businesses would lay off currently employed workers.  According to the Congressional Budget Office, the proposed $2.85 minimum wage hike will cost the United States 500,000 jobs by Q3 2013.  At a time when employment is really starting to recover (except for in Cleveland), I am fearful that an increase in minimum wage will cause the economy to stagnate, thereby undoing the Fed’s hard work.

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It is true that the Congressional Budget Office also predicts that an increase in minimum wage will help pull 900,000 Americans out of poverty by boosting income levels.  And certainly, reducing poverty is an extremely important goal.  However, I believe there are alternative ways to address income inequality that are less likely to undermine the stimulus enacted by the Federal Reserve.

I have already written numerous posts on addressing income inequality, and what I believe is a more important issue – income mobility.  (See “Using Skilled-Trade and Manufacturing to Rebuild the Middle Class,” “Drill Baby Drill: Addressing Income Mobility With Energy Production,” “Forget Minimum Wage – Let’s Talk about Wage Subsidies,” and “How New Immigration Policy Can Save America’s Economy“)

The majority of these posts focus on increasing the economic mobility of the poor so that they can have access to higher paying jobs.  I believe this type of policy is significantly better for the US economy because it avoids the level of deadweight loss that raising minimum wage will have.  Indeed, a boost to minimum wage is very similar to a tax, and the policies proposed in the articles above behave much more like subsidies.  While it is true that a subsidy, by definition, will cost the federal government more money than a tax, it is also true that a subsidy results in significantly less deadweight loss.  And at a time when the economy is just beginning to see the light of day, leaving any economic value on the table seems like a terrible idea to me.  For this reason, I strongly oppose raising minimum wage, at least currently, as doing so will undermine the efforts of the Fed, cause stagnation in employment rates, and hinder this country’s economic recovery.