President Barack Obama this week in his State of the Union Address asked Congress to raise the hourly minimum wage from $7.25 to $9 to help fight poverty. While Obama said Thursday that raising the minimum wage as he has proposed could trim corporate profits, some argue the impact would be felt beyond companies’ bottom lines.
Amity Shlaes, author of the new Calvin Coolidge biography Coolidge, argues unemployment tends to go up with a minimum wage increase and says Coolidge’s legacy as president during the 1920s supplies us with a different approach.
She tells The Daily Ticker Coolidge’s administration “believed the market should supply higher wages, and following their policies wages went up and the unemployment was very low. That’s a less government approach, the Coolidge approach.”
According to Shlaes, during that period productivity gains drove wages up, and corporations invested in things that created jobs instead of parking their money in reserve. She cites the story of automaker Henry Ford, who famously decided to pay his workers more than he had to, realizing more of his cards could be sold if his workers could afford to buy them. She argues employers were freer to increase wages because they were burdened with fewer government mandates.
While we hear examples similar to Ford’s today in a company like Costco (COST), known for compensating employees with wages and benefits above the average for retail workers in the U.S., these cases seem to be in the minority.
Shlaes argues today, cash is sitting on corporate balance sheets or parked in excess reserves at the Federal Reserve instead of being paid out to employees in the form of higher wages because of government regulations.
“If you have a bunch of rules about all the things you have to do in the way you hire, you get very cautious and you might cut the wage because you’re paying for other costs,” she says. “In many cases companies now have extreme costs whether it’s compliance with Dodd-Frank or it’s compliance with Obamacare. They’re not going to hire and they’re not going to raise wages because they’re keeping money in reserve for the unexpected mandates and the expected ones.”
In terms of government “mandating” some of that corporate cash be spent on paying workers a higher minimum wage, the modern research on how that impacts employment is mixed.
An often-cited 1994 study by labor economists David Card and Alan Krueger found a rise in New Jersey’s minimum wage did not reduce employment in the fast-food industry. Bloomberg reports the findings are at odds with other research, notably the findings of Federal Reserve economist William Wascher and David Neumark, director of the University of California’s Center for Economics and Public Policy in Irvine. They found in a 2007 a review of academic studies found that almost all of them point to negative employment effects.
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