Business Ethos Blog

Where Will The Money Come From?

Dr. David Mielke is the Retired Dean of the College of Business at Eastern Michigan University

Dr. David MielkeThe debate about raising the minimum wage is heating up.  President Obamacalled on Congress to pass an increase in the minimum wage to $10.10 in his State of the Union address and then signed an executive order raising the wage for workers on new federal contracts.  The State Board of Canvassers unanimously agreed to allow the group, “Raise Michigan” to begin collecting signatures to place a question on the November ballot to raise the minimum wage in Michigan to $10.10 an hour.  What are the implications of a move to raise the minimum wage and is the “Right Thing to do?”  Let’s look at some issues:

1. The US has had a minimum wage since 1938 and it has been adjusted 30 times.  It was last raised in 2009 to $7.25 an hour as part of a 3 step process.  Close to 20 states, including Michigan require employers to pay a higher minimum wage.  Michigan is at $7.40.

2. Roughly 3.6 million Americans were paid $7.25 an hour in 2012, according to the Labor Department, representing roughly 4.7% of hourly workers.  Women are twice as likely as men to earn the minimum wage.  Roughly half of workers earning at or less than the minimum wage were between the ages of 16 and 24.  The jobs for 16-24 are critical as first jobs and serve as the entrance point to the labor market.

3. The Congressional Budget Office released a report last week that shows a raise to $10.10 by 2016 would eliminate about 500,000 jobs, but increase pay for 16.5 million Americans.

4. The report also finds that about 900,000 Americans would be lifted out of poverty.  This is a net of those who would be lifted out of poverty and those who would fall into poverty.  It is projected that 45 million Americans will be living in poverty in 2016.

5. The benefits of the increase would be spread across a broad swath of workers with 19% of the increased wages going to Americans living below the poverty line, close to 30% would go to people in families that earned more than 3 times the poverty level as many minimum wage earners are second earners and teenagers living in middle or upper income households.

6. On net, the wage increase would raise overall real income by $2 billion the CBO said.

7. Some big trade groups and the restaurant industry in particular oppose the increase stating the cost increases cannot be absorbed.  It is expected that the fast food industry in particular will move to more automation to decrease the number of people employed.

8. In Michigan, the ballot proposal in some respects is even more radical.  Currently, the state’s tipped minimum wage is $2.65 an hour.  The proposal is to raise that to $3.50 an hour and then increase it by 85 cents each year until it hits $10.10 an hour.  If approved, Michigan would become the 8th state in the country to equalize the tipped and non-tipped minimum wage and the only state east of the Mississippi to do so.

9.  The majority of Americans support a minimum wage increase.


This sounds like the “Right Thing to do.”  There are job losses and this is always unfortunate.  However, the issues that is not raised in the discussion or given any estimates is “Where will the Money Come From?”  If the wage increase would supposed increase overall real income by $2 billion according to the CBO, where does this money come from?  The answer is from the profits of the companies or increased prices to the consumers.  What we may see is another wealth transfer, from the small business owners, especially in the restaurant and retail industries, to the minimum wage earners.  Or what we see as the dollar menu today, will become the $2 menu.  What is the “Right Thing to do?”  The minimum wage should be increased, but the $10.10 an hour is unworkable.  What we should do is adjust the $7.25 an hour (or $7.40 and $2.65 in Michigan) by the rate of inflation since 2009 which comes to $8.25 an hour.  This is a compromise that is workable and will not cause major disruptions in the market.