It’s Time to Try “Trickle-Up” Economics to Help Solve Minimum Wage Crisis

Employers are shortsighted when they short-shrift their employees.

Once again the politicos, business lobby and the labor movement are tangled in a heated partisan battle over increasing the federal minimum wage: this time from the current $7.25 to $10.10 per hour. The absurd part of the debate is not the conflict between those who propose to increase the minimum wage and those opposed to it, but that there is even a need to have laws requiring employers to pay a minimum wage. As incongruous as this may seem, an increase in the minimum wage will actually benefit the employer even more than it does the worker, but most of the low-wage employers are too greedy and short-sighted to recognize this economic fact of life.

Many corporate business types have this misguided idea that they can substantially increase their profits by paying as little as possible to their lowest paid workers. Then they can’t figure out why they’re bludgeoned with high turnover rates (that increase their recruiting and training costs) and only get minimum effort from their minimum wage employees.

Of course, we shouldn’t be surprised by this debate. The squabble over the minimum wage and what level it should be pegged at has raged periodically since the 1938 passage of the Fair Labor Standards Act that established the first national minimum wage (initially set at 25 cents an hour.) And the debate continues today, with arguments that have changed little since 1938. Even if the proposed to $10.10 per hour is adopted, the minimum wage will still be well below the level of what is considered a living income. And when adjusted for inflation, the purchasing power of the new minimum wage would be lower than it was in 1974.minimum-wage-erosion-1974-2009-graphicThose who oppose the minimum wage increase always see nothing but economic catastrophe with its passage. Theirs is a dire warning that any increase would irreparably damage the economy by driving thousands of small businesses – those with less than 100 employees – into extinction, throwing as many as a million workers out of a job. Listening to the bleats of the opponents of an increase in minimum wage one can hear the death-knell of the restaurant and hotel industries, along with the crippling of such large minimum wage employers as Wal-Mart. (The University of California Berkeley Center for Labor Research has calculated that an increase in the minimum wage to $10.10 would raise Wal-Mart’s labor costs by about 1 percent or $200 million. If Wal-Mart wanted to pass on this increased labor cost to customers, it would be the equivalent of adding one cent per $16 item.)

The Unequivocal Bottom Line

These arguments can go back and forth – and they will – forever. After all, true to the old saying, “Figures don’t lie, but liars do figure.” But there is one incontrovertible truth when it comes to the impact of an increase in the minimum wage. Since its inception in 1938 the minimum wage has been increased 12 times and after each increase both the economy and employment have expanded – without exception.

  • Twelve times the restaurant industry has issued dire warnings that any increase in the minimum wage would escalate the cost of service and decimate the industry.
  • Twelve times the hotel industry has admonished travelers that the increased cost to pick up their towels and make their beds would drive the industry to ruin.
  • Twelve times the large corporations have claimed that a requirement to pay their lowest paid workers a little more would eviscerate their profits.

And they all were all wrong twelve times.

Maybe it’s time to look at the minimum wage debate from a different perspective. Let’s call an increase in the minimum wage a dose of “trickle-up” economics. After all, for 35 years now the big corporations and those at the top-end of the income pyramid have argued for tax cuts, tax loop-holes, subsidies and bailouts on the basis that the benefits will “trickle-down” to those lower on the income scale. Well, if that’s true, why won’t the benefits of an increase in the minimum wage “trickle-up” to the wealthy?

After all, the non-partisan Congressional Budget Office (CBO) has estimated that the proposed increase in the minimum wage to $10.10 will put over $30 billion of income into the hands of 16.5 million low-income workers by 2016. (For some perspective, recall that GM received $50 billion and AIG $85 billion in bailout funds.)

So what will these 16.5 million low-income workers do with their share of this $30 billion bonanza? Will they invest it in hedge funds, vacations in Rome, second homes in Aspen, diamonds from Tiffany’s or to pay their dues at two or three country clubs?

Likely not.

Those who will benefit from an increase in the minimum wage are in “survival mode.” They will use any increase in income to buy food, pay for housing, buy clothes for their kids at Wal-Mart or maybe splurge on a family night out at Buffalo Wild Wings (whose workers are at minimum wage). Or maybe as the CBO calculates, one million of these workers will use the money to rise above the official poverty level.

In short, those 16.5 million who receive an increase in the minimum wage will pour these funds directly back into the economy. And who will benefit from this? The very corporations and political interests that are opposed to an increase in the minimum wage. Especially those companies that cater to the low-income markets such as Wal-Mart, Sears and DollarDays. If you believe that increased benefits for the rich “trickle-down” to the poor, then you have to believe, even more strongly, that increased benefits for the poor will “trickle-up” to the rich.

Still the best specific example of the effectiveness of “trickle-up” economics – the idea that paying more to those who fordhave less is the best way for those who have more to get more – was offered by Henry Ford 100 years ago. In 1914 the average factory worker’s pay was about $2.50 per day, then Henry Ford announced that he was increasing his worker’s pay to $5.00 a day. From all but the workers, the reaction to Ford’s action was vitriolic. He was accused of being an enemy of capitalism, that his actions would hurt other companies (who had to match it to compete for the best workers) and that his company would go bankrupt.

Of course we now know that Ford’s actions were the epitome of enlightened “trickle-up” economics. To the surprise of his critics, Ford’s decision to double his workers’ minimum pay not only stimulated the auto industry (the workers now had the money to buy the very cars they toiled to make), but also was the beginning of the American middle class. Increasing the pay of his workers benefited Ford’s profits in other ways as well. By offering $5 a day Ford was able to attract the best workers and turnover – the bane of any company – declined significantly. Both of these reactions to the $5 a day pay scale increased efficiency, actually reduced costs and multiplied the profits of his company.

Just as the critics of Ford’s $5 a day wage offer focused on the perceived “cost” of his generosity while failing to see the ultimate benefits, those who oppose an increase in the minimum wage today are only thinking cost and fail to see the benefit for the entire economy. There is an ever-widening economic chasm in America between those who have and those who don’t. The economic recovery of the past five years has clearly favored the former, not the latter. Those companies that cater to the moneyed – auto companies, electronics, energy, travel – are reporting record profits. While those companies that cater to lower income consumers – Wal-Mart, Sears, Kohl’s and fast-food restaurants – have struggled to grow.

An increase in the minimum wage – as paltry as it might be – will start at the bottom, but trickle its way all the way up to the top. Nice idea.

And the Moral of the Story …

The last legislation increasing the federal minimum wage was the Fair Minimum Wage Act of 2007 that resulted in the current minimum wage of $7.25 per hour. Since that time – despite the Great Recession – corporate profits have more than quadrupled and are now at their highest levels in history. At the same time the income and wealth of those at the top of the economic scale of more than doubled; resulting in an even wider gulf between the haves and the have-nots. But this does not seem to be enough for the corporations and the wealthy, so maybe we should help them out. It appears the best way to do that would be to increase the minimum wage to a whopping $10.10 per hour, pumping $30 billion dollars of consumer spending by low-income families into the economy so it can “trickle-up.”


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