BASIC ECONOMIC REALITY

Governor Andrew Cuomo delivered his 2016 “State of the State” Address earlier this month. Much of it was exactly what was expected. However, he made several specific proposals that could have devastating consequences for individuals, businesses, taxpayers and local governments across the State. He proposed increasing the minimum wage to $15/hour, and providing up to 12 weeks of paid family leave per year for all employees. These proposals sound attractive, but the long-term consequences would be disastrous. This article will look at the economic impact of the proposed increase in minimum wages. A future article will look at the paid family leave proposal.

 

At first glance it would seem logical that raising someone’s hourly rate of pay would increase his/her standard of living. However, time and again that viewpoint has been proven wrong. Experience has shown that every time minimum wages are increased there are numerous negative consequences for individuals, businesses and taxpayers. Consider the following:

  • Wages(1). If a person being paid a current minimum wage of about $8/hour gets an increase to $15/hour his/her income would almost double. However, since everyone else’s wages also go up, the cost of almost all goods and services would increase dramatically. That means that there wouldn’t be any actual improvement in an employee’s standard of living or “purchasing power.” The increase in minimum wage inflates prices, so there would be no improvement in an employee’s standard of living.
  • Wages(2). When wages go up employers become motivated to reduce operating costs by eliminating jobs. Studies show that every increase in minimum wages generates significant lay-offs and firings. So, if you keep your job you might be slightly better off, but there is a good chance that you will lose your job.
  • Wages(3). If New York raises its minimum wage, but other neighboring states do not, New York businesses will be placed at a competitive disadvantage. NYS employers will have higher operating costs than similar businesses in other states. Businesses that can re-locate will be motivated to move. This has already been happening, and will only accelerate if the minimum wage rate increases.
  • Innovation and Robotics. Recent articles have predicted that the American economy will lose over 5 million jobs by 2020 as a result of technology and robotics. Increasing wages will accelerate that process.
  • Loss of Better-Paying Jobs. If entry-level positions are paid $15/hour, what will more skilled and experienced workers expect (and deserve) to get paid? There will be an inevitable “ripple effect” on wage levels from such a huge increase in minimum wages. That only aggravates the problems identified in paragraphs 1, 2 and 3 above. Companies with better-paying jobs will be even more motivated to move their operations out of NYS. That leaves only lower-paying jobs, government jobs, or public benefits for those individuals left behind.
  • Immigration Issues. If NYS’s minimum wage rates are increased we will become more attractive to immigrants, both legal and illegal. That will create even more competition for entry-level jobs. It is unlikely that this will really improve the lives of local residents.
  • Tax-Cap Implications. Local governments will have to increase wages to comply with the new minimum wage law. That will drive up local government operating costs. In the past that would have meant increased taxes. However, the “geniuses” in Albany have passed a “Tax Cap” law that says local governments can’t raise taxes. That means that we must cut services. Don’t be surprised if important government services and programs get cut or eliminated.

 

Economists know that the only valid basis for increasing wages is increased productivity. Wage increases unrelated to higher productivity cause inflation. The only true way to improve the standard of living is through job and career training that translates into higher productivity. The short-term political “fix” proposed by Governor Cuomo and his political advisors will result in an economic disaster for our State and community. Maybe they should be forced to go back to school to study economics!

 

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2 Responses to BASIC ECONOMIC REALITY

  1. jspear1957 says:

    Great post. The other issue is displacement. As wages increase, some who are retired or who have a well paid spouse will consider a return to the workforce. These better educated individuals will displace young workers particularly. So, the $15 wage you are demanding may just be the incentive for your someone more qualified to bump you. It is thus possible for a higher wage to benefit the bette off more than those who are struggling. Be careful what you wish for.

    • dtpullen says:

      Thanks for the comments. I agree that there are many implications that most people either don’t realize, or choose to ignore. Interestingly, I was in Albany this past week for County matters, and went to the Capital Building. There was an organized demonstration at the Capital with lots of posters, banners and T-shirts for hundreds of young people. They were “demanding” immediate adoption of the $15/hr minimum wage proposal. Most of the people walking past the demonstration were making comments about how naive and ill-informed those demonstrators were. However, the media was there in force to cover the event. Unfortunately, it appears that there is strong support from down-state for this proposal. Fortunately, we can be confident that God is still sovereign and not subject to public opinion on most issues.

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