Minimum wage has nothing to do with employment

At a press conference this week, House Speaker John Boehner said, "When you raise the price of employment, guess what happens? You get less of it. At a time when the American people are still asking the question, 'Where are the jobs?' why would we want to make it harder for small employers to hire people?"

This reminded me of my own first course in economics and lessons in supply and demand. Under a perfectly competitive market (the labor market in this case), when you raise the price, the quantity demanded goes down and that price and quantity are inversely related under a normal condition. This conclusion is flawed, however, since many studies done by different political groups have come to disputing results.

Minimum wage has nothing to do with employment. One needs to look at the employment condition of the 19 states with a higher minimum wage than the federally mandated one. What impacts employment is not the wage level; it is the total compensation level.

When General Motors filed for bankruptcy it was not because of the high wage autoworkers, it was because of the high fringe benefits, the package containing their retirement, health care and release time. Does the market for minimum wages have these benefits? Do employers of minimum wage workers pay for their medical and retirements as well? Not even full time workers in this category get any benefits.

Many minimum wage earners are students from high income families and do not need an increase. Those students are working three months of the year, during their summer break, if they are not in high priced camps sharpening their skills. What about the other nine months of the year -- where do workers come from? Look at the disturbing statistics from the Economic Policy Institute.

Eighty four percent of total affected workers are at least 20 years old; this automatically refutes the summer-job argument. Seventy percent of the benefits of the increase go to those in the bottom half of the workforce by income level; none of these recipients are entitled to fringe benefits, and forty seven percent of affected workers are full-timers and eighty three percent work at least 20 hours per week.

Medium size and small business are the main source of employment for unskilled and temporary workers, subject to the minimum wage. The average annual salary of these workers, if they continue employment for the whole year is estimated at about $15,000, much less than the amount considered as the poverty level.

This is what the Congress of the richest country in world, and envy of the rest, claims to discourage employers to hire. But what is forgotten is the fact that these workers do not cost the employers anything in fringe benefits, health insurance, retirement, or other value-added benefits, whose annual growth rate far exceeds the wage level. For example, according to the Bureau of Labor Statistics, the average wage in 2012 rose by 0.3 percent, while the rate increase for the benefits accrued to those employees rose by 0.6 percent, one hundred percent higher.

Does increasing the minimum wage raise the overall wage level? Not a chance. An increase of $2 and hour to a disadvantaged group does not transform the employment level.

Hormozi is an economist and chair of the Public Administration Department at Pace University in New York.

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