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Minimum Wage Summer Madness

To: Kris Maher, The Wall Street Journal
From: Cedric Muhammad
Date: July 22, 2009
Re: Increasing The Minimum Wage

With great interest, I read your July 6, 2009 Outlook article, “Minimum-Wage Increase Comes at a Bad Time for Weakened Job Market,” (http://online.wsj.com/article/SB124684183990798403.html) and I just could not stop hearing the classic ‘Summer Madness,’ by Kool And The Gang, in my head. And while that track is one of the greatest instrumental arrangements ever made (it even made the score to the movie ‘Rocky’) please don’t view the association of it with your article as a compliment.

It really is not that smooth rhythm of which your article reminds me, but rather the title of the track, in particular the word, madness.

Don’t get me wrong – your article was well-written, but in 2009, after years of this debate, it fell short of what time and circumstance demands.

Every year, it seems – especially at summer time – we have this same tired debate over whether or not to raise the minimum wage. And while your article gives token acknowledgement to some of the arguments in favor of raising a minimum wage, it repeats the lame case against raising the minimum wage, more rooted in ideology than in a balanced assessment of its real costs and benefits. Worst of all, though your article shows us no way out of this debate which has reached a dangerous plateau.

With some effort, moving beyond boring Left and Right ideological positions on this matter is really not that hard to do. You, and we, just have to want to do so.

Please allow me to help.

Perhaps oversimplifying a bit, the main points of your piece and arguments against raising the minimum wage are that:

- in a time of economic contraction or recession, businesses in general, can’t afford to pay it
- low-skilled workers and teenagers will be hit hardest by it because it prices them out of the job market
- raising the minimum wage adds costs to businesses beyond those immediate workers who earn it because the wages of additional workers are tied to minimum wage increases

Perhaps oversimplifying a bit, the main points of your piece and/or arguments in favor of raising the minimum wage are:

- it will increase disposable income among the working class
- it will help wages keep pace with inflation
- it is justified by these words of President Franklin D. Roosevelt on June 16, 1933, “No business which depends for existence on paying less than living wages to its workers has any right to continue in this country. By business I mean the whole of commerce as well as the whole of industry; by workers I mean all workers – the white-collar class as well as the man in overalls; and by living wages I mean more than a bare subsistence level – I mean the wages of decent living.

First, let’s be clear, the minimum wage is being raised to only $7.25 an hour on July 24th.

Those who rest their hat on the argument that while an increase in the minimum wage is justified by inflation, the timing is not good, should be ashamed of themselves. Where were they when the minimum wage stood at $5.15 for over ten years – 1997 to 2007?

So what measurement can we use to balance two key elements of the debate – timing and purchasing power?

The best and certainly easiest way to understand when a minimum wage increase is justified is to look at it in terms of the price of gold.

In 2006 I made a table charting the price of gold; the minimum wage; and how many hours of work it takes to buy an ounce, since 1971. On June 8, 2006 with the price of one ounce of gold at 614.00 it took 119.22 hours of work to buy an ounce of gold!

Click here and scroll down to see other years:

http://www.blackelectorate.com/articles.asp?ID=1712

At the current $6.55 per hour and a price of an ounce of gold at $954, it takes 146 hours of work to buy an ounce of gold! At the new rate of $7.25 an hour, which takes effect this week, it would take 132 hours of work to buy an ounce of gold!

Of the years that I have charted, only 1980 and 1981 – the height of the Jimmy Carter stagflation era – were worse in terms of the lack of purchasing power the minimum wage secures for a laborer.

With that established, the second most important point to be made, but rarely brought up in the madness, is that raising the minimum wage can actually take individuals off of social assistance. This assertion, if true, blows a hole in the case against the minimum wage as presented by ideologues on the right who care more about donations to their think tanks than the quality of life of individuals and the integrity of the federal budget.

For example, why hasn’t any major right-leaning think tank complaining about the minimum wage and the size of the social safety, net recognized – like Mark Wilson, executive vice president of the Florida Chamber of Commerce – that when the Florida minimum wage was passed in 2004, an estimated 18,000 Florida children were taken off of health insurance because their parents made too much money to qualify for public assistance health insurance? Could it be that big government can actually be shrunk by the minimum wage? Wouldn’t that would make for a great article for the ‘Outlook’ column in the future?

The primary argument against the minimum wage from the perspective of capital is that it hurts the bottom line of employers – both small businesses and corporations. This is not hard to imagine on first glance when one can see clearly that increasing a 40-hour, 52-week minimum wage worker’s salary by $1 would cost an employer $2,080 a year. But, rather than using this fact to bash a wage increase that is surely justified, this truth should make for a wonderful opportunity for that willing soul capable of arguing that any increase in the minimum wage should be accompanied by greater access to capital, and a lessening of the tax burden on truly small business owners and those companies of all sizes that are creating jobs in distressed urban and rural areas, where the minimum wage is more likely to be paid.

Could it be that while minimum wage opponents have been whining that President Barack Obama has emerged as that willing soul, even inadvertently?

Maybe.

From elements of the emergency small business program he unveiled in the final days of the 2008 presidential election campaign (which included capital gains tax elimination for certain small businesses), incorporated in the stimulus plan, it is hard to not argue that President Obama has done things – of course inspired by the recession – that few others have to lessen the burden on small business owners. Having said that, recent developments like the health-care legislation unveiled by the Democratic House of Representatives last week which would hit all but the smallest businesses with a penalty that could equal 8% of payroll, may undermine his previous best efforts. And the decision by the administration to cut off aid to struggling small business lender CIT Group, Inc. in the face of hundreds of billions of bailout money going to other lenders is not endearing the administration to many entrepreneurs.

So, how do we move past the madness of the intellectual and partisan plateau we have reached on this issue? First, by incorporating the points of both sides into a beautiful compromise.

An easy step would be an executive order or bi-partisan legislation that would exempt those officially designated as a ‘small business’ by the Small Business Administration, from minimum wage increases. This definition varies by industry but is generally a business with less than $6 million in revenue and no more than 20 employees. This would bring relief to tens of thousands of small business owners facing the dilemma like the one featured in your article:

“Ryan Arfmann, who owns a Jamba Juice franchise in Idaho Falls, Idaho, is a case in point. He said he will have to boost pay to all of his 18 workers. The ones making less than $7.25 an hour will be raised to the new rate. But he said he will have to give raises to those currently earning more than $7.25 an hour because they have more experience.

As a result, he plans to cut hours for his part-time workers. ‘I’ll definitely have to run a tighter shift each day and watch numbers like never before,” said Mr. Arfmann, who estimates his business is down between 3% and 4% this year.”

There are a few other possibilities President Obama and Congress could propose in conjunction with future increases of the minimum wage. I offer them 1) an increase of $2,000 in the Renewal Community Employment Credit (and do the same for the Empowerment Zone Employee Credit), which languished for years at $1,500 per employee 2) a renewal and two year extension of the Work Opportunity Tax Credit that allows a tax credit of $2,400 for each employee it hires from groups with high unemployment rates or special needs, including youth aged 18 to 24 and finally 3) An increase of $2,000 annually in the two year credit against federal taxes received by businesses that hire long-term family assistance recipients (Welfare-to-Work).

Another great option best suited to balance the capital to labor ratio would be to raise the minimum wage and index it for inflation at the same time that the capital gains tax is indexed and reduced to say, 10%. This should be done while the holding period required to qualify for the favorable long term capital gains tax rate is reduced. The effect on capital formation might be even more dramatic if the holding period to qualify for favorable cap gains rates was reduced to six months while the holding period for businesses that operate in Renewal Communities, Empowerment Zones and Enterprise Communities was brought down from five years to six months.

If distressed urban and rural areas are taken care of, the only other location likely to be adversely affected by raising the minimum wage would be Puerto Rico. The Commonwealth has its own tax structure, but by law has to match the U.S. minimum wage. This burden could be resolved by suggesting to Puerto Rico that it also match adjustments in U.S. capital gains rates.

In essence, the debate really should not be whether to raise the minimum wage or not, or whether this is a bad time to do so. The price of gold and the possible benefit in reduced social spending more than suggests that the increase is justified. Rather, the discussion should now turn to how to lessen regulatory burdens, provide tax relief and increase access to capital to all businesses who pay the minimum wage.

It is clear that the electorate understands the minimum wage much more than politicians of either major party.

National polls show support for its increas in the range of 70 to 80 percent, and in elections the issue clearly transcends partisan affiliation. In 2004, a constitutional amendment to raise the minimum wage was passed and received 71% of the vote while, President Bush only earned 52%. Interestingly, John Kerry never endorsed the Florida minimum wage. It may have cost him the election. Consider that in Florida, President Bush defeated Kerry by 381,000 votes, while voters favored the minimum wage increase by 3.1 million votes (71.3 % to 28.7 %.) In Nevada, Bush beat Kerry by just 21,500 votes, but voters backed the wage increase by 293,328 votes (68.3 percent to 31.6 percent). The minimum wage ballot initiative won in every county in both states, even in the most wealthy of locales.

I hope you will agree that it is past time to end the madness on the issue of the minimum wage.

Perhaps one of these summers we will be participating in an evolved discussion on this issue.

I hope that you will contribute to that.

Sincerely,

Cedric Muhammad

http://cedricmuhammad.com/

July 21, 2009

2 Responses to “Minimum Wage Summer Madness”

  1. N/A says:

    I’m actually surprised to see an article like this since the analysis at CM/BE is usually on point. I’m use to seeing opinions that fall outside of the left/right paradigm that offer a fresh look at how to best improve the lives us as individuals and as a people. However, the logic is flawed here almost everywhere from start to finish…..

    #1: Trying to find a relationship between the minimum wage and the price of gold is like correlating the maximum allowable interest rate in North Carolina (18% per the usury laws here) to nominal appreciation of unimproved land in Charlotte. Just plain dumb.

    #2: Raising the minimum wage to $17.25 (instead of $7.25) would not eliminate poverty.

    #3: Based on your analyses of gold and the intermediation of capital within urban and rural communities (in previous articles), I can’t tell if you’re in favor of government induced bubbles or against them.

    #4: Labor is still considered an expense on most company P&L statements along with items like cost of goods, rent/occupancy, taxes, insurance, etc. Even Marxists acknowledge that price fixing does not fundamentally alter the relationship between capital and labor. It just alters the relationship between the electorate and the officials who voted for or against it.

    #5: Most closely held and/or small businesses (e.g. services, retail, restaurants, etc.) sell for a price that is a multiple of the seller’s discretionary earnings. Reducing one’s tax liability for capital gains purposes in a stock sale would diminish the value of the asset when it’s sold. As a result, capital gains exemptions are simply not relevant to the masses of entrepreneurs you are advocating upon (except those in real estate, private equity, or VC).

    #6: Paul Wall has a popular catch phrase (‘Big Bank Take Lil Bank’) which was popularized by Ice Cube back in 1991. With respect to CIT, it would have been nice if you would have at least touched on the argument as to WHY CIT was not bailed out (or should I say bailed out “again”) like some of their Wall Street cohorts. Your article almost implies that the Obama administration deliberately aimed to harm small business by allowing CIT to fail. Talk to some people in the industry about CIT.

  2. Cedric says:

    Dear N/A…I am so pleased to have your thoughtful response. The timing is perfect because I have a book coming out on entrepreneurship in a couple of months dealing with many of these issues with great depth. Let me TRY to narrow our debate to a few of my and your many points so we can bring our anecdotal, empirical and practical focus, and respective worldviews, into plain view.

    First, as for my use of gold, I simply use it as an objective way to measure purchasing power. How do you measure purchasing power over time? What is the most reliable measure?

    Second, I never mentioned that raising the minimum wage would end poverty. Nor did I suggest that price or wage ceilings or mandates can accomplish that. Therefore your reference to Marx and government induced bubbles doesnt bear on my view of the minimum wage. (I do find it humorous when people argue as if there is no role for a government or State except when it is to pursue their own interests. I’m not saying that you are of this clan or might see yourself as a Libertarian or not. But I would like to ask you what is the role of government as it relates to economic development, growth, and poverty reduction?) My focus for this piece was on whether an increase was justified and how the interests of businesses that pay it could be furthered by additional policies.

    Third, I strongly disagree with your assertion that ‘capital gains tax exemptions are simply not relevant to the masses of entrepreneurs you are advocating upon.’ I think you identify a class of that group but let me be more specific about WHO I am advocating upon and where many of them are located. Let’s start with basics. Equity investments in general are not being made in truly small businesses, as they could, particularly those owned by Blacks (which disproportionately don’t have more than a single paid employee), largely for three reasons: 1) Most entrepreneurs are culturally and politically funneled into debt as a source of capital 2) these businesses are not standardized (meaning they depend upon a particular person and not a process or system and therefore don’t even qualify for certain forms of business insurance) and 3) there are not enough incentives for investors to outweigh deploying their capital in other more rewarding ways.

    Now for actual experience: I specifically know from working with and advising businesses (and government) in Empowerment Zones and Enterprise Communities that a hang-up I heard over and over again from investors is not the sale price of the value of the asset when it is sold (let’s be honest business valuation is subjective and worked out through negotiations between the investor and business owner, not an exact science, so each has a chance to get the price they want) but rather the 5 year holding period necessary to qualify for capital gains tax exemption – which when shortened allows the investor to enjoy the benefit sooner.

    As for CIT, your point I like but that was not my purpose. I only referenced them to show the perception – very real – that small business-related concerns is not treated the same way as big business, despite the rhetoric.

    Since you come to this site (which I am honored by) you already know where I place the blame on this mess: extreme securitization, which is the real cause that access to capital and credit has dried up for small businesses.

    I must bow to you for your gangster Paul Wall and Ice Cube reference. I salute you. My favorite track of the former’s is “Just Paul Wall.”

    Thanks so much for taking the time to weigh in. I look forward to learning and sharing much…

    CM

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