Mar. 17: A case study for agents on some issues with raising the minimum wage

Rob Chrisman

Rob Chrisman began his career in mortgage banking – primarily capital markets – 31 years ago in 1985 with First California Mortgage, assisting in Secondary Marketing until 1988, when he joined Tuttle & Co., a leading mortgage pipeline risk management firm. He was an account manager and partner at Tuttle & Co. until 1996, when he moved to Scotland with his family for 9 months. See more

Wages, inflation and worries, oh my.

 

Sometimes folks think that we’ll all be better off if everyone made more money. There are problems with that idea, of course. Different jobs lead to different compensation, for example, and where does the money come from to pay them? One interesting case study to give real estate agents a better idea of this comes from Oregon.

 

The state of Oregon made the headlines recently as The Oregon House of Representatives approved landmark legislation that not only raises the state’s minimum wage for all workers to the highest level in the country, but does so through an unprecedented three-tiered system that sets different rates by geographic region.

 

The bill will increase wages gradually over six years. By 2022, the state’s current $9.25 an hour minimum – already one of the highest in the nation – would climb to $14.75 in metro Portland, $13.50 in smaller cities such as Salem and Eugene (as well as Deschutes County), and $12.50 in rural communities (including Jefferson and Crook counties).

 

Although Oregon’s three-tiered system is a new concept, 14 states began the New Year with higher minimum wages. Of those, 12 states increased their rates through legislation passed in the 2014 or 2015 sessions, while two states automatically increased their rates based on the cost of living as reported by the National Conference of State Legislatures (NCSL). In 2015, seven major U.S. cities implemented minimum wage increases that include Chicago, Louisville, Seattle, Washington, Oakland, San Francisco, and San Jose. Most of these minimum wage increases are the beginning of much larger minimum wage hikes.

 

Congress sets the Federal minimum wage, which is currently set at $7.25 per hour, but it doesn’t keep pace with inflation. Because the cost of living is always rising, the value of a new minimum wage begins to fall from the moment it is set. Since 1938, the federal minimum wage has been increased 22 times. For more than 75 years, real GDP per capita has steadily increased, even when the minimum wage has been raised. Some say debating the effectiveness of raising the minimum wage is almost a moot point. It’s happening, whether people like it not. But, debating is what we do as there are usually opposing viewpoints on any given topic.

 

One of the prevalent concerns on topic is the idea people will lose their jobs with a wage increase. According to the United States Department of Labor, more than 600 economists, including 7 Nobel Prize winners wrote, “In recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market.” Research suggests that a minimum-wage increase could have a small stimulating effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front.

 

Huffington post reiterated this sentiment stating that over the longer term, as incomes rise, consumption will increase leading, ultimately, to higher profits. In fact, as businesses experience greater demand and sales, they are likely to hire more workers over time. This would serve as a stimulus that could help workers, firms, and the economy as a whole.

 

On the other hand, an article in informationstation.org weighed in with the opposite opinion. According to the article, most minimum wage employees work in industries with very low profit margins. The restaurant industry, which employs close to half of the nation’s minimum wage workers, has an average profit margin of only 2.4 percent. This means that on a $100 restaurant bill, the company only gets to keep $2.40–the rest goes to pay for food costs, rent, labor, etc. This also means that when these employers’ costs increase, like when the minimum wage is hiked, they must raise prices or cut other costs to stay profitable. In practice, this means layoffs, reduced hours, and hiring freezes.

 

Another touchy topic surrounds small business’s ability to pay their workers an increased wage.

The U.S. Department of Labor states that a July 2015 survey found that 3 out of 5 small business owners with employees support a gradual increase in the minimum wage to $12. The survey reports that small business owners say an increase “would immediately put more money in the pocket of low-wage workers who will then spend the money on things like housing, food, and gas. This boost in demand for goods and services will help stimulate the economy and help create opportunities.”

 

The American Action Forum (AAF) website referenced an article written by Boston Globe columnist Jeff Jacoby  which stated “When legislators raise the price of low- and unskilled labor, it’s usually low- and unskilled laborers who end up paying the price.” A higher minimum wage, they claim, would be too heavy a burden on employers, especially small business owners. And those employers, in turn, would be unable to hire as many people, an undesirable result when unemployment continues to hover at about 8 percent. There is a great deal of speculation, admittedly distressing, as to how small business owners would be able to keep people employed as their profit margins are normally slim and the cost of living continues to rise.

 

Another focal point in Oregon’s push toward the minimum wage hike is the overwhelming numbers of families who live in poverty. The increase which will reach its highest 6 years from now is not sitting well with some of the supporters of the bill. The wage increase with a phase in that is too long to be of any significant value in terms of ending poverty wages and ensuring that working families are self-sufficient. According to studies the hourly wage needed for a single parent with one child to be able to afford fair market rate, small home-based childcare without being cost burdened is $15 per hour or more in all but four of Oregon’s counties.

 

By failing to ensure the minimum wage keeps pace with the cost of living and worker productivity, policymakers have created a situation where full-time workers earning the minimum wage have to rely on public assistance to make ends meet according to the Huffington Post. Programs such as the Earned Income Tax Credit, Medicaid, Supplemental Nutrition Assistance, and Temporary Assistance to Needy Families cost taxpayers billions of dollars each year. Half of this spending goes to working people earning less than $10.10 per hour. Raising the minimum wage to this amount would lower welfare rolls by 1.7 million people and reduce government spending on welfare programs by $7.6 billion per year.

 

Now here is the “but” side of the argument, increasing the minimum wage has not proven to be effective at lowering the poverty rate, according to the business-backed nonprofit Employment Policies Institute. “Multiple studies have demonstrated little to no relationship between a higher minimum wage and reductions in poverty,” the institute says, in a policy brief.  Minimum wages are not a cure for poverty. In consumer economies and capitalistic societies, businesses tend to react to minimum wage increases by raising the prices of the goods and services they provide. Some economists believe that minimum wages prevent equilibrium wages from developing. The equilibrium wage rate is reached when the number of workers is adequate to meet job demand; this is an ideal situation insofar as economic stability, but it requires an effective social contract provided by the government. Many commentators still say, however, that lost jobs are a small price to pay for lifting other workers out of poverty through higher wages. However, there is little evidence showing that increasing the minimum wage reduces poverty. Economists at Cornell and American University studied states that raised their minimum wages and found no evidence that the wage hikes reduced poverty.

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Rob

 

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