The newest calls to raise the minimum wage in NYC to $11/hour are a frustrating reminder that the city’s own Comptroller, Scott Stringer, has a total lack of understanding about how economics work.
Scott Stringer makes the argument that raising the minimum wage to $11/hour would provide an additional $2 billion in annual income to working families. While that might sound good to taxpayers — to get more money in their pockets — he completely fails to explain the other side of the equation: from where does that $2 billion come?
Stringer seemingly takes that $2 billion figure out of thin air, as there is no documented basis from which he arrived at this number. If Stringer is not utterly incompetent, then he should certainly have available his complete analysis of the financial pluses and minuses that are likely to occur as the result of the minimum wage hike; after all, that is his job.
Here’s the problem. Minimum wage hikes mean that all employers in New York City – both in the government and in the private sector – will pay more for its labor than it currently does pay, in order to produce the exact same product or services. Looked at it another way, in order to keep to the operating budget, NYC will get less goods and services than it now receives. Or, to keep its present level of operations would result in a budget deficit — because of having to spend more overall to maintain the current goods and services.
Therefore, the thought that minimum wage increases — especially a substantial one — will not have a negative effect on the city economy, is ludicrous.
The standard justification goes that the higher minimum wage puts more money into needy families and therefore strengthens the economy. This argument just happens to have a wonderful political effect for Democrats: it makes them seem sensitive to the plight of the needy, while making Republicans look like shills for those greedy Republican businessmen who are only trying to squeeze every last dollar out of their poor employees.
Just one problem —the Democratic position is nonsense, and economists know it, because of simple Economics 101: no businessman would be willing to pay an employee more than the economic value of the employee for him to perform his work.
Let’s assume that the rise in the minimum wage puts the cost of employee in excess of the value of that employee. The employer may then 1) terminate the employee (saving the excess of cost over productivity) or 2) buy equipment which, at that price, becomes cheaper than the employee.
But let’s say the employer keeps the employee, just paying him more for the same work he did before. The employer will then either a) earn a smaller return on his investment, reducing the amount he will be able to invest in the business in the future; b) he will raise his prices, which will maintain his profit margin, but will reduce his sales via you, or c) some combination of a) and b). In either case, growth of the NY economy will be hurt.
Here in New York City, a minimum wage hike would mean that New York City will pay more for its labor than it currently has calculated to pay, in order to produce the exact same product or services. Looked at it another way, to then keep to the operating budget, NYC will get less goods and services for the taxes it receives. This would result in a budget deficit — because of having to spend more overall to maintain the current goods and services.
Therefore, the thought that minimum wage increases — especially a substantial one — will not have a negative effect on the city economy, is ludicrous.
What the city is demanding with the minimum wage increase will have two effects. First, businesses in the city will have to pay their labor more, thereby raising the price of their goods to cover the wage increase. This ultimately will render New York City businesses less competitive than other businesses not located in the city. The result? Our businesses will lose business to those outside of New York City. That is not positive for the economy.
Secondly, New York City is often required to buy from the lowest bidder for many of its goods and services. Therefore, the city would likely have end up buying from outside of the city in order to get those cheaper prices — thereby not supporting the city’s own businesses.
The net effect of a minimum wage hike from $8 to $11 (a 37.5% increase) will take its toll on businesses in New York City and the economy. Stringer has publicly admitted that “the budgetary path we are on is still not sustainable.” Instead of cutting spending, his solution is to make the businesses cough up extra funds via a wage increase so that those wages can subsequently be taxed for more revenue for the city and the city’s budget — even at the expense of NYC businesses. Taxpayers too, will be affected, because their tax dollars will have less purchasing power in the city.
The minimum wage is already set to rise incrementally through 2015 to $9.00 for New York. Pushing through a faster and higher minimum wage increase will handicap New York City businesses in an already sluggish economy, and punish those companies who already endure high taxes and unending bureaucracy under the heavy hand of government.