Last week, in his fifth State of the Union address, President Obama promised to use his executive authority to raise the minimum wage for federal contractors to $10.10/hour.
It’s a small step that he hopes will stir Congress to act on a larger issue: a mandated increase across the country for all minimum wage earners.
I agree, but raising the minimum wage unfortunately won’t get them there.
As the former CEO of such large companies as Office Depot and Auto Zone, I can tell you that personally. From the business perspective, a large-scale pay increase immediately becomes a strain on payroll, and the consequences are many. To offset the wage hike, employers might take other actions like raising prices, shifting some full-time employees to part-time, or increasing automation to maintain income levels. The net result is fewer jobs, and higher costs. Remember, everyone’s IRA, 401k, and pensions depend on a company’s ability to grow profits.
Over the past few months I’ve appeared on national news to push back against this policy “fix” because I believe it will actually hurt the very people the advocates are trying to help.
Current projections claim that raising the minimum wage could impact up to 28 million people—but most of these are middle class teens. In fact, according to a new report out of the Brookings Institution, 30 percent of minimum-wage earners live in households earning above $60,000. Only 11 percent of workers affected by the minimum wage come from poor households. Consider the multitudes of teenage workers who are still supported by their parents, or the spouses who work part-time to supplement the family income. Or, the employees in the sales force who, in addition to a base minimum wage salary, are supplemented by commission.
Those people aren’t ones that need help the most.
Ultimately, fixing America’s wage inequality needs to have a more tailored approach. Perhaps we might make more headway by setting wages locally. In SeaTac Washington, a city-wide increase for employees of the airport and related industries is now serving as a model elsewhere. Countless scholars have also harkened to the Earned Income Tax Credit (EITC) as a possible solution.
We need to address inequality, social mobility, and unemployment for some. But raising the federal minimum wage will only set us back in those areas.
Odland is CEO of the Committee for Economic Development