[This proposed minimum wage increase would cost apartment owners big!  If you have a manager or if you use a handyman to do repairs – prices will be going up!]

President Obama is calling for a huge hike in the minimum wage to $10.10 per hour, up from the current wage floor of $7.25 in most states. That’s an increase of 39%, although it will be phased in over three years at 95 cents annually.  Plus, once we get to $10.10 per hour, the president wants to index the minimum wage to inflation, thereby insuring that it goes up every year.

You may recall that Mr. Obama called for raising the minimum wage to $9 in his State of the Union address in February. Now he’s upped the ante to $10.10. The White House confirmed last month that the president has decided to throw his weight behind legislation introduced earlier this year by Sen. Tom Harkin (D-Iowa) and Rep. George Miller (D-Calif.) to raise the minimum wage to $10.10 by 2015. The White House released the following statement: “The President has long supported raising the minimum wage so hardworking Americans can have a decent wage for a day’s works to support their families and make ends meet, and he supports the Harkin/Miller bill that accomplishes this important goal.”

Harkin and Miller have said that a minimum wage hike to $9 would be insufficient. The president’s support of the $10.10 proposal may help more Democrats rally around the bill as the Senate takes it up. A spokesman for Rep. Miller added: “We are very pleased President Obama endorsed a $10 an hour minimum wage bill. This action unites all Democrats and minimum wage advocates behind one proposal that addresses income inequality in a powerful way. Congress must move to raise the minimum wage now.”

While the federal minimum wage has held steady since it was last raised to $7.25 in 2009, many states and municipalities have continued to raise or implement their own minimum wages. Last month,New Jerseyvoters approved a minimum wage bump to $8.25 per hour andCalifornialawmakers raised theirs to $10, making it the highest state minimum wage in the nation. Now the Democrats and the president want the federal minimum wage even higher thanCalifornia’s.

The congressional Democrats’ proposal would raise the minimum wage to $10.10 through a series of increases over the next three years, and after 2015 it would be increased each year according to inflation.

The minimum wage would also soar for restaurant servers and other tipped workers whose employers can pay them as little as $2.13 before tips. The minimum wage for those workers would be set at 70% of the federal minimum wage. At $10.10 per hour, 70% would be $7.07 by 2015, or an increase of 232%. Wow! Imagine how many jobs will be lost in this industry if the Harkin/Miller bill is passed. Imagine the price of meals! Remember, ALL costs are passed along to the consumer, especially in this industry.

It is worth noting that this monster change in the food services industry will force tipped workers to pay taxes on most of their income, unlike tips which are not always declared. Instead of declaring and paying taxes on $2.13 per hour, it will go to $7.07 per hour. As a result of sharply higher food costs, tips could well become a thing of the past!

The $10.10 figure in the Harkin/Miller proposal isn’t arbitrary. Progressive economists like to point out that if the minimum wage had kept pace with inflation since its high in the late 1960s, it would now be above $10. It is true that if you use a common inflation calculator, the $1.60 minimum wage in 1968 adjusted for inflation would be over $10 per hour in 2013.

Still, opponents argue that a 39% increase in the minimum wage – even spread over three years – is just too large of an increase in a relatively short time, and that will be a serious drag on the still-weak economy.

Of course, it’s possible the president’s $9 proposal in February could weaken Democrats’ bargaining position with the House GOP. Republicans will argue that the president felt that $9 was sufficient back February, so why not now? I fully expect them to seek a smaller minimum wage hike, if they agree to one at all. Republican leaders have already called the Harkin/Miller bill a job-killer. But is it really? 

An Objective Look at the Minimum Wage Debate

As a free-market conservative, I have never been a big fan of the minimum wage, but it has been around in one form or another in the USsince 1938. Like many other federal mandates that I also don’t care for, the minimum wage is not going to go away. As such, I try to look at it objectively.

There are valid arguments on both sides of this polarizing issue. Very generally speaking, those in favor of the minimum wage argue that it lifts people out of poverty and helps low-skilled workers earn a living wage. Those who oppose the minimum wage argue that the requirement to pay higher and higher wages eliminates jobs, as employers find ways to reduce the number of employees, and thus job creation suffers. Nothing wrong with having different opinions.

But regardless of your opinion, there are some basic givens that don’t change. The first is that companies must earn more than they spend. Second, workers must produce more than they are paid. Third, increasing the minimum wage encourages companies to automate and switch to fewer higher-skilled, more productive workers who are worth the higher rate.

Assuming that minimum wage increases are going to happen from time to time – whether we agree or not – the question is, how much of an increase is too much?

Let’s say that a certain job can be done by one higher-skilled person who makes $18 per hour. Yet that same job could be done by two lower-skilled workers who make $7.25 per hour. In that case, it would make more sense to have the two lower-skilled workers do the job, with the benefit of one extra job added to the economy.

But what happens when the minimum wage is raised to $10.10 per hour as President Obama and Congress are now proposing? In that case, it makes sense to employ the one higher-skilled worker at $18 per hour because the two lower-skilled workers will have to be paid a combined $20.20 per hour.

And that’s before we even factor in Obamacare’s employer healthcare mandate.

The point is, if the minimum wage is hiked from $7.25 to $10.10 – an increase of 39% for most workers, and a whopping 232% for those who are paid mostly from tips – it will have a negative effect on the economy that is still weak.

Will it throw the economy back into a recession? Probably not, since it is to be phased-in over three years. But then again, with fourth quarter GDP expected to be less than 2%, it doesn’t take much to move the economy into negative territory.

The minimum wage is a federal law; thus, it has to pass in both houses of Congress. You can already see how this is going to play out. The Dems will pass the Harkin/Miller bill in the Senate, while the Republicans in the House are likely to block it. The Dems will chastise the GOP as a bunch of rich folks who want the poor to stay that way. The GOP will argue that the increase is a job killer that will hurt the economy. What else is new?

Gary D. Halbert is the president and chairman of Profutures, Inc.  Subscription rates for Forecasts & Trends is $197 for 12 issues and may be obtained by visiting his website at www.profutures.com.

 

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