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3 Reasons Raising the Minimum Wage Won't Fix the Economy

By Sean Williams – Mar 23, 2014 at 11:05AM

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Although raising the minimum wage could benefit millions of low-wage workers' pocketbooks, it doesn't represent a long-term fix for the economy for three specific reasons.

During the State of the Union address in January, President Obama announced that he would be using his executive power in the coming weeks to enact a sizable jump in pay for low-wage workers under federal contracts to $10.10 per hour. Furthermore, only contracts signed after the executive order would be affected.

The move was made to signal to Congress that the federally mandated minimum wage across the country should be boosted from its current level of $7.25 per hour to help bring American individuals and families out of poverty and help them to keep up with inflation.

President Obama delivering State of the Union. Source: White House on Flickr.

There are a number of positives that could come out of boosting the minimum wage. For one, a Congressional Budget Office report released in February noted that 16.5 million low-wage workers would see an increase in their weekly paychecks. Also, higher paychecks could get consumers to spend more, which is important, since roughly 70% of our GDP is built upon consumer spending. Finally, higher pay should yield a happier worker -- and a happy workforce tends to be more productive, with less turnover yielding a more cohesive and efficient business.

Of course, there have been plenty of reasons given for why boosting the minimum wage isn't in America's best interest. That same CBO report I referenced also points out that 500,000 low-wage workers would be set to lose their job as businesses look to absorb the higher costs of a boost in the minimum wage.

Needless to say, it's not a simple cut-and-dried issue. In fact, it's my firm belief that raising the minimum wage may have little effect on the economy at all because of three key reasons. Note that this doesn't mean I'm against boosting the minimum wage, but I simply don't see much economic benefit from raising the minimum wage significantly from its current level.

Ballooning health-care expenses
The first reason a minimum-wage boost would be a moot point is that businesses, whether you realize it or not, have been boosting worker pay by covering part or all of their rising health care premiums for years. Based on data from the Bureau of Economic Analysis and USA Today, health-care benefits as a percentage of total workers' compensation has risen from less than 10% in the 1960s to nearly 20% as of the early part of this decade.

Complicating matters even more was the rollout of the Patient Protection and Affordable Care Act on Jan. 1, which you may know best by its shorthand, Obamacare. Obamacare's employer mandate, which will be fully enacted on Jan. 1, 2016, is the actionable portion of the law that will require businesses with 50 or more full-time employees to offer health insurance options to their employees. In addition, those businesses may possibly need to subsidize health-care premiums for some workers to ensure that their premium costs fall below the 8.5% of adjusted-gross-income threshold that would otherwise get that business fined on a per-employee basis. In other words, workers' health-care compensation was already on the rise, and Obamacare will likely boost it even more.

But if you tack on what amounts to a 39% increase in the minimum wage, you could very well coerce these businesses, especially mid-sized businesses, out of expanding their health-care benefits by reducing hours in order to get below the 50-full-time-worker threshold. The point is that benefits have gone up substantially from a health-care standpoint for workers over the past five decades, and advocates of a rise in the minimum wage have failed to see that. If the minimum wage is raised 39%, health-care benefits will probably suffer.

Source: Tax Credits, Flickr.

Send it overseas
The second major problem with raising the minimum wage above $10 per hour is that it will encourage low-margin and commoditized businesses to look overseas for cheaper sources of labor.

Engine manufacturer Briggs & Stratton (BGGS.Q), which designs engines for outdoor power equipment such as riding lawnmowers and standby generators, chose to cut its costs by outsourcing a good chunk of its manufacturing to China. For Briggs & Stratton, China offers it rapidly growing scale potential and significantly lower labor costs than it would find in the United States. 

More recently, Advanced Micro Devices (AMD 1.62%) announced that it would be moving its desktop PC operations from the U.S. to China, presumably to be closer to its top customers such as Lenovo. The move also makes sense in that other components of its PCs come from Taiwan and other parts of Asia, which may actually speed up its supply chain process and boost efficiency. The end result, though, is that it will help save AMD money because wages in China are significantly lower than in the United States.

Of course, not all lower-margin companies are fleeing the United States. Tech giant Apple (AAPL 1.98%) offered a pleasant surprise in late 2012, when it announced that it would return some Mac production to the U.S. from China in an effort to bolster the U.S. manufacturing industry. Still, a move like this is far from the norm, and having $158.8 billion in cash affords Apple the ability to take on more risks than most businesses.

The point is that an increase in the minimum wage is only going to encourage low-margin businesses to look overseas for cheaper labor, which may negate any benefit witnessed by those who do see their wages jump in the United States.

A de-emphasis on skill
Finally, my contention is that a dramatic boost in the minimum wage may reduce the emphasis on a worker's skill level, which could actually harm wages moving forward.

In a perfect world, people who go to school and demonstrate a differentiable skill or set of skills should be paid more. A 39% increase in the federal minimum wage would more than likely blur those lines and bring the gap between non-skilled workers and skilled workers closer. While that's good news for the non-skilled laborer, it's potentially bad news for those who are skilled laborers, as it could reduce an employer's incentive to boost their wages.

Ultimately, this creates a bit of a Catch-22. Workers need to go to school or gain a skill to be paid more, but the more people who go to school, the less skill differentiation there is. So the working class is either forced to accept a more blurred line between low-wage non-skilled laborers and lower-wage workers with a skill that ultimately disincentives going to school, or a widening gap between skilled laborers and non-skilled labor that results in the income gap we're witnessing today.

Again, I'm not saying that raising the minimum wage to $10.10 would be a bad move for America, but people should realize it's also not going to be the end-all, be-all solution that some optimists expect it to be.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of, and recommends Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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