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American Magazine: November 2013

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expert<br />

3 MINUTES ON . . . The Minimum Wage<br />

David Kautter<br />

Managing director, Kogod Tax Center, and<br />

executive in residence, Department of Accounting<br />

and Taxation, Kogod School of Business<br />

The minimum wage was enacted<br />

in 1938 as part of the Fair Labor<br />

Standards Act. It<br />

was 25 cents.<br />

Congress tried to<br />

enact one once before, but it was<br />

ruled unconstitutional in the<br />

early ’30s.<br />

Its primary<br />

purpose was<br />

to prevent<br />

employers from taking<br />

advantage of employees.<br />

Over time, other arguments<br />

have been made, including<br />

fairness. Some say<br />

it’s not fair for people<br />

who work hard<br />

to not get paid at<br />

least a “reasonable amount” of<br />

money. Another argument is<br />

redistribution:<br />

essentially, if the employees don’t<br />

get the money, it will go to the<br />

business owners in the form<br />

of higher<br />

profits.<br />

A critical question<br />

has always been whether by<br />

increasing the federal minimum<br />

wage, which must be done by<br />

Congress, you raise the cost<br />

of labor,<br />

so that<br />

employers<br />

can afford less labor. Therefore<br />

businesses just don’t hire as<br />

many people, because they can’t,<br />

make enough money at the<br />

higher rate.<br />

The idea of a living<br />

wage—a higher minimum<br />

wage instituted by states,<br />

counties, or cities—emerged as a<br />

major issue in the late<br />

’90s. The highest at the moment<br />

is in San Francisco. The issue<br />

there is that the minimum wage<br />

is not what<br />

most would<br />

consider a<br />

living wage,<br />

and so while it sets<br />

a floor on what employers can<br />

pay, it’s not enough to live on.<br />

One of the challenges<br />

D.C., has been that<br />

it has focused on a<br />

particular segment<br />

of employers—like Walmart—as<br />

opposed to all employers. The key<br />

challenge for cities, in particular,<br />

is that businesses can move out to<br />

the suburbs,<br />

where they can<br />

keep the same<br />

customers and pay less in wages.<br />

In the District, I think the<br />

weakness in the debate was that<br />

they picked out a piece in the<br />

market, so-called “big box<br />

retailers.” If it’s good<br />

policy, isn’t it good for everybody?<br />

If you can’t afford a wage of that<br />

magnitude in your city, then<br />

you’re probably better off not<br />

having a living wage policy.<br />

It’s estimated that only about<br />

50 percent of people earning<br />

minimum wage are part of<br />

families that<br />

make less<br />

than<br />

$40,000<br />

a year. The<br />

teenagers or spouses, people<br />

who have other earners in the<br />

household making well above<br />

the minimum wage.<br />

When the minimum wage goes<br />

up, who pays? It can<br />

either be the owner of the<br />

business through smaller profits,<br />

or it can be added to<br />

the cost of the<br />

service or the good.<br />

The other issue<br />

with raising the wage is that<br />

people earning minimum wage<br />

tend to consume almost<br />

every dollar they make.<br />

What that’s going to do is create<br />

more demand in the market. You<br />

just hope that it doesn’t get so<br />

active that it<br />

doesn’t have an<br />

adverse impact on<br />

inflation.<br />

It’s a fascinating<br />

issue on which<br />

there are generally not a lot of<br />

crystal clear answers. It comes<br />

down more to philosophy than<br />

hard economics.<br />

with the debate in Washington,<br />

other half are<br />

LET’S TALK #AMERICANMAG 5

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