Jonathan Hansen – Don't Raise Houston's Minimum Wage

This is the first in a series of white papers I will be releasing on what I believe to be important issues facing the city of Houston that will also have the benefit of illustrating my approach to policymaking. 

David —

While I certainly desire all Houstonians increase their earnings, I am opposed to Houston following the lead of many cities nationwide in increasing its minimum wage above what is already required by federal law. This is because the detriments to the many – most of all to society’s most economically vulnerable – and to the overall Houston economy would clearly outweigh the benefits that would accrue to the very few. That is why I would not only be a vote against such a proposal should it come before Houston City Council – but I would use my economics background to help build a sound and reasoned case against it if I were elected. 

Labor costs in a healthy service business are approximately 30{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} of revenues, which means that an employee that earns $15 per hour – as certain activists are lobbying for – would need to produce $50 of revenue per hour.

If an employer doesn’t believe a job applicant can produce $50 of revenue per hour the employer isn’t going to hire that applicant. Many applicants will then never get the opportunity to gain work experience and related skills, prove their value, and start climbing the income latter to higher wages in the future. Instead, they may very well be stuck in an endless cycle of unemployment and dependency completely of the government’s making, however well intentioned its motives may have been.  

At the very least, many will find their first job comes later in life, and thus the accumulated benefits of work will accrue tardily.

Critics of the minimum wage who want to see it raised claim that it is not a “living wage” – by which they basically mean a wage on which one can provide a middle class lifestyle for oneself and one’s family. That is absolutely true. The minimum wage should not be considered a living wage nor should it become a living wage.

It is best to think of the minimum wage as a training wage – an entry-level wage that one earns until one has accumulated enough work experience and a track record to either earn an internal or external promotion.

As a teacher, anecdotally I have seen many a student start out with a less than desirable job that paid minimum wage at the beginning of the year and gone on to parlay their work experience and newfound skills into successively better positions throughout the school year (basically in a matter of months) that paid more and that they enjoyed more. However, if that first employer with that less than desirable job paying minimum wage weren’t there to take a chance on the student in the first place at the beginning of the year, those successive positions throughout the year likely would never have materialized.

As a result of that first job at a wage an employer was willing to take a risk – the current minimum wage of $7.25 per hour – those students gained extremely valuable work experience and skills that will serve them well in their future endeavors as they learn the expectations of the working world. It also forced them to think about what type of career they would like to have in the future and motivated them to make the academic progress required in order to achieve that goal.

The evidence goes beyond anecdotes, however – it is born out by economic research.

To begin with, very few people actually earn the minimum wage. According to the Bureau of Labor Statistics data published by Pew Research, only 2.6{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} of the nation’s workforce – approximately 3.3 million workers – earned the minimum wage or less in the case of those who fell into exemption categories such as tipped employees (whose tips may have actually bumped them well above the minimum wage,) full-time students, and disabled workers.

According to data compiled by the Heritage Foundation from the U.S. Census Bureau, Current Population Survey (CPS) 77{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} of those earning the minimum wage live in households above the poverty line with an average annual family income in excess of $65,000, and over half of minimum wage earners are 16-24 years old – not the age group of typical breadwinners.

That means that of the 3.3 million workers who earn the minimum wage or less, only 759,000 – just over one half of one percent of the nation’s workforce – live in impoverished households.

The good news is that this means that one’s likelihood of both working and being impoverished simultaneously are very slim. This leads me to the conclusion that it is more important for us to enact policies that promote employment than policies that trade artificially inflated incomes for some at the expense of employment opportunities for others – which is what increasing the minimum wage would do.

According to the U.S. Census Bureau, Current Population Reports Research Supplemental Poverty Measure, 2012 almost exactly 8{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} of the nation’s impoverished live in Texas, in spite of accounting for 8.6{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} of the nation’s population. Therefore, if we distributed these minimum wage earners in impoverished households proportionately, that would mean there would be approximately 60,720 Texans earning minimum wage and living in an impoverished household. If we then distributed those impoverished Texans earning the minimum wage evenly across the state according to population, only 4,918 would live in the city of Houston since it represents 8.1{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} of the state’s population.

That means that only 0.2{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} of Houstonians are impoverished and have a job that pays minimum wage or less. From this statistic, we can infer that efforts to increase the minimum wage in Houston would do little to alleviate poverty while posing a significant risk to the overall number of minimum wage job opportunities that exist in the city limits. This is because employers will have to work assiduously to keep their labor costs proportionate to their other costs – again, typically approximately 30{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} of revenues – in order to sustain a healthy and economically competitive business model.

If one worked 40 hours a week all year long earning minimum wage, one would earn $15,000 per year, and welfare benefits that many of these workers would certainly qualify for average $18,037 per year in Texas according to the Cato Institute’s Work Versus Welfare Trade-off: 2013.

If we raised the minimum wage to $15 per hour, it is likely that many labor-intensive businesses would close, relocate beyond the Houston city limits, begin applying minimum wage surcharges to customer receipts (thus increasing the overall price level and diminishing one’s purchasing power over the long term,) or laying off workers and increasing the workloads of remaining employees as many employers in Oakland (which raised their minimum wage to $12.25 per hour) have indicated that they intend to do.

This would increase the likelihood that these 4,918 impoverished Houstonians with minimum wage jobs would lose their job completely instead of benefitting from the increased minimum wage. This would be a travesty to those who, like me, agree with the sentiment that the best social program is a job. For those who remain unconvinced on this point, I would just refer one back to the statistic that approximately one half of one percent of those earning minimum wage or less in a job are impoverished.

If Houston were to significantly increase the minimum wage we would probably also see labor unions who have generally lobbied for minimum wage increases turn around and ask that union-represented laborers be exempt from the city’s new minimum wage laws as Los Angeles unions have requested.

One might understand someone exercising their First Amendment right to freedom of association to join a union in order to collectively bargain for higher wages, but nothing illustrates the perverse effects of increasing the minimum wage more than the fact that some people may be willing to pay dues to a union in order to be able to earn less than the minimum wage just so they can have a job.

This would effectively nullify Texas’ right-to-work laws in the case of lower-wage employment opportunities, and make low-wage employers effectively closed shops because in order to get a job that pays below the minimum wage one would have no choice but to join a union.

To help blunt the use of these illustrations against them, proponents in Houston may lobby for a minimum wage increase that is not quite as steep as those that have passed in other cities – but that’s not the point, either. Fundamentally, the city of Houston should not be involving itself in a private employment contract in which an employer and an employee have freely negotiated a wage in exchange for labor.

The city of Houston is already struggling to fulfill its core municipal duties to the public such as providing for adequate public safety and providing well-maintained infrastructure for a growing city – so I see no reason to add to the city’s responsibilities the duty to involve itself in matters of private employment contracts.

We should trust that our city’s employers know how to operate their own affairs and thus know what wages they need to pay in order to enter the labor market and obtain the labor resources they need. Likewise, we must trust that our city’s workforce will know when they have enough skills and experience to find a higher paying job within their organization or with another employer when the time comes.

In the field of economics, it is well known that price floors (of which the minimum wage is an example) always cause surpluses when they are set above market equilibrium. Since so few people actually earn minimum wages, as illustrated above, there are some who suggest there is no harm to raising minimum wages and that, contrary to how every other market operates, this particular price floor is somehow immune from the traditional laws of economics. They are wrong.

Emerging research by Jonathan Meer (Texas A&M University, National Bureau of Economic Research) and Jeremy West (Massachusetts Institute of Technology) has found that “the minimum wage reduces job growth over a period of several years. These effects are most pronounced for younger workers and in industries with a higher proportion of low-wage workers.” (Effects of the Minimum Wage on Employment Dynamics, January 2015.)

When a society has surplus labor we call that unemployment, and I am against the city of Houston artificially increasing the city’s unemployment by even one person by increasing the price floor for labor within our city limits. It matters little that it would be doing so in service of good intentions because we must judge the actions of our government on their results.

Work is healthy and people deserve a shot at gaining on-the-job experience and proving their worth – which is why I would oppose any effort to increase the minimum wage in Houston if I were elected to council.

I believe that a Houston that works is a greater Houston. If you agree, I ask that you please join my campaign. Forward this with your recommendation to your fiscally prudent friends and neighbors, ask them to sign up on my website so I can stay in contact with them regarding campaign developments, endorse my campaign, and – as the June 30 fundraising deadline approaches – any donation large or small is of course always greatly appreciated.

Sincerely,

Jonathan Hansen
For a Greater Houston
Houston City Council At-Large Position 4, candidate

HansenForHouston.com

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