What goes up, brings the economy down

by Jordan Utley-Thomson, Staff Writer

California’s miniscule recovery has convinced Gov. Jerry Brown that the economy needs a good kick to the face. Job growth is slowing down, but that did not stop him from signing a bill that increases the state minimum wage to $10 an hour by 2016. One can imagine how excited the legislature is about those extra tax dollars.

Increasing the minimum wage has many downsides. Wages will go up, but skills in the labor force will not. Businesses will respond by raising prices and cutting employment. A $10 minimum wage is great for people who keep their jobs, but what about the unemployed? California’s minimum wage is currently $8 an hour, and if it is difficult to find a job in this economy with that, it will not be any better with an increase.

Even those who keep their jobs will be aggravated by shorter shift times and added responsibility. Suppose a fast-food restaurant employs three people to operate their respective registers for six hour shifts. After a minimum wage increase, the fast-food restaurant will likely employ two people to work five hour shifts in order to offset the wage increase. Company growth will go down, employees will be overburdened by shift shortages and customers will be angry about longer wait times. Everyone loses.

Having said that, what if the extra pay covers the cuts in employee hours? At least they will have extra cash to spend, thus stimulating the economy, right?

If that were true, we could legislate to prosperity with $50 an hour wages. More money, more problems.

So why do politicians continue to push for a higher minimum wage? While it is a bad idea, it is a popular bad idea.

Congresswoman Nancy Pelosi told the Washington Post that “[Democrats] want to raise the minimum wage, and [Republicans] don’t. Why not?” Well, many Republicans backed the minimum-wage increase when George Bush was president. In 2007, Bush signed a law that raised the federal minimum wage to its current rate. The fact that the party of “small” government did this shows how hard it is to resist pressures from the public to do the wrong thing.

However, the status quo is not any better. A better choice is to increase the earned income tax credit.

The EITC is a refundable tax credit that supports living standards of the poor without reducing incentive to work. Working families with minimum wage jobs benefit greatly as the number of children in a household result in a larger EITC. Economists are in wide agreement over its effectiveness. Unlike the minimum wage, the EITC is indexed annually for inflation. This is one of America’s greatest anti-poverty tools, and it would be a shame to forgo it in favor of policy that has been tried repeatedly and failed to meet expectations every time.

Politicians will price the labor force out of their jobs with good intentions, but good intentions are not enough. Increasing the minimum wage is a poor policy for the poor.

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