Where is the Minimum Wage Leading Us

The CNMI is under great duress from the US to increase its minimum wage from the current $3.05 to match the Federal minimum wage of $5.15. What is the history of the minimum wage? Has it really helped the people it was intended to help? How will it affect our economy? These are several of the questions I wish to discuss so that we may better understand what the minimum wage is and its effect on us. Most of my comments are taken from an essay written by a former longtime resident and economist for the local government for many years–my good friend Bill Stewart.

The minimum wage started in 1938 and has been increased 16 times since then. It is usually used as a sort of entry level wage for beginning and unskilled workers. It was created to provide a base income over what might be considered a poverty level.
According to the “Information Please Almanac,” the U.S. poverty level in 1994 for an individual under the age of 65 was $7,710 per year. For a family of four with the head of a household 65 years of age or over, it was $15,141 per year. This is slightly higher today considering inflation and ever-spiraling price increases.

In 1994, 38.1 million people or 14.5% of the population in the United States was below the poverty level. Louisiana had a poverty level of 25.7% of its residents while Washington, D. C. had 21.2%. It appears that the minimum wage didn’t help much or those people weren’t able to find even minimum wage employment. (The problem of sufficient and insufficient jobs will be discussed in a later article to help us truly understand some of the problems associated with earning a decent living wage.)

Businesses will not employ an individual that cannot produce enough income to pay his salary whether it is in direct or indirect service.
By imposing a minimum wage on the hiring of people, an employer is faced with four alternatives.

One of the alternatives the employer faces is to hire fewer workers and strive to maintain his previous level of production. Second, he can invest more capital in labor saving automation and thereby increase efficiency and productivity. A third choice is to increase prices to cover the added cost of doing business. Thus he must increase productivity and sell more or increase prices for the same number of products previously produced.
Failing to do any one or more of the above, the employer will be forced to close his business.

As on a Ferris wheel, as one part goes up so do the others. As wages increase, prices for products soon increase also with the result that there is no real increase in purchasing power for the employee. Who finally pays for this minimum wage increase? You and I do when we go shopping. It becomes a vicious cycle.

As businesses struggle to stay liquid, the less skilled workers are laid-off first. The price of their limited skills and productivity is too expensive so they join the ranks of the unemployed dependent upon government welfare.
In a few years the cry begins again to increase the minimum wage thereby restarting the cycle. Simply stated there are some people that businesses cannot afford unless they become skilled.

We have seen this cycle in the CNMI as our minimum wage increases. I doubt that any increase of the minimum wage will produce a better living wage for anyone in the CNMI except for non-resident workers. Along with a forced increase in minimum wage will come forced higher prices.