Sunday, February 23, 2014

President Obama Emailed Me About the Minimum Wage

President Obama Minimum Wage
The blog must be getting pretty popular, because recently I started getting emails from President Obama. Pretty cool, right? The economy must be still recovering though, because he's always asking me for money. Dude makes $400,000 a year, but mismanages his pay so badly that he has to ask me to send him money every week. Every time I send him five bucks, I think, man, this is the last time, Barack. But I've got a soft spot for him. I sent him a link to Mr. Money Mustache the other day, but I get the feeling he isn't going to start biking around D.C. or hanging his laundry out to dry on the front lawn of the White House.

So last week President Obama sent me an email about raising the minimum wage from $7.25 to $10.10. Did you know that the average age of a worker earning minimum wage is 35? Or that the minimum wage, due to inflation, only has about 80% of the purchasing power that it did during the Reagan Administration? Here's the President's Weekly Address from earlier in February:


Robert Reich, former Secretary of Labor and current Professor of Public Policy at UC Berkeley, sums up a lot of my thoughts on the matter. And here, he's only arguing to raise the minimum wage to $9.00 per hour. Let's ease you into your Monday with some easy-to-watch videos, instead of a wall of pesky words:


Externalities:
The most intriguing argument that Reich makes is that, when employers pay wages that result in workers living below the poverty line, the rest of us end up footing some of the bill for that poverty (in Medicaid, housing assistance, and food stamps). For example, an employer paying $7.25 an hour to a single parent of two, is only paying an annual wage of $15,020 (assuming 40 hours a week, for all 52 weeks a year), before any social security or Medicare taxes. (Presumably, this family would not owe any federal income tax.) More to the point, this individual is below the poverty line for a family of three, and would be eligible for various government aid programs. But the employer would not pay for these programs: taxpayers would.

This is known as an externality: when a cost or benefit affects a party who didn't intend to incur it. Raj Patel provides an example in The Value of Nothing. If McDonald's suppliers cut down forested land for cattle to graze, or if Big Macs contribute to widespread health issues, the impact could be significant and expensive. But McDonald's would not pay for any of those environmental or healthcare costs. (The issue is certainly complicated, and I am not arguing that McDonald's should be financially responsible. I am only noting that people and entities other than McDonald's would suffer the costs.) Thus, these costs never make their way into the price of a Big Mac. Since McDonald's never sees these externalities, they do not provide a financial incentive to make healthier sandwiches or to reduce their environmental impact.

A similar externality is seen with employers who pay wages that result in poverty-level incomes. The employer pays wages that often aren't high enough to get a full time worker above the poverty line, and these workers qualify for government aid. Tax payers end up footing the bill, instead of the employer paying the wage. In effect, taxpayers are subsidizing additional wages for minimum wage employees. A minimum wage high enough to bring workers above the poverty line would mean many full-time employees would no longer qualify for such aid. This would shift the burden of those employees' "additional wages" away from the taxpayer, back to the employer (and ultimately, to that company's customers). Instead of being external, both the company and its customers would then bear the costs.

Frugality Only Goes So Far
The other reason I think an increase to the minimum wage is warranted is that I believe frugality is the simplest and best way to achieve wealth. Reducing costs and proper management of one's income is the best way I know Americans can get ahead financially. And, like most personal finance bloggers, my heart aches at the financial troubles I see with my friends, family, and neighbors. I write these posts because I want to see people dramatically improve their financial lives through frugality. But there is a limit to that strategy: you can't get blood from a turnip. I can't tell a single mother who is working full time and earning $15,000 annually, pre-tax, to tighten her belt and build wealth by cutting costs. It's insulting, and it won't work, anyway.

And the argument that low-paying or minimum wage jobs are simply for teenagers working after school is becoming outdated. Increasingly, these very low paying jobs are being used to support families; the minimum wage work force is becoming older and better educated. I'm not comfortable with the idea that an American can work full time in a job, but earn a wage that doesn't allow his family to get out of poverty, let alone get ahead, even if he is living frugally.

A higher minimum wage is no silver bullet, and certainly does not address the underlying causes of poverty. But it at least provides some immediate assistance and a chance build some wealth via frugality, while the public and private sector try to address education, training, and macroeconomic issues like globalization.

But I'll get off my soap box. I'm interested in hearing what you think about the issue (while silently hoping the debate doesn't get too out of hand). Let me know what you think. Is my email pal right? Should the minimum wage be raised, left alone, or abolished all together?


*Photo is from Beth Rankin at Flickr Creative Commons.

47 comments:

  1. Bravo! Well said... I couldn't agree more.

    Having worked for a starving non-profit that paid a chunk of its workers minimum wage - at least until a group of us managed to convince the powers at be that it wasn't a good idea - I can sympathize with the "but we can't afford it" mentality. BUT, my experience was that when we had workers who were paid so little, it was actually bad for the organization in several ways.

    When people get paid so little that they literally have trouble feeding themselves, you end up with a workforce that isn't very invested in what they're doing. They can't be. They have to worry about things like paying the rent and putting food on the table - which often means that they're working multiple jobs, and using their "free time" trying to make extra cash through other means. You end up with workers who are literally in a daily panic about basic things like transportation, child care and medical expenses to name a few. How can a person in that situation possibly have any energy left to make a meaningful contribution to the organization?

    The other phenomenon that I witnessed was that when we had really low paid workers, the management tended to view them as expendable. Why invest in a decent training program when the person is just gonna quit in a few months anyhow? And why give a person any real responsibilities if they're not gonna be there very long? But this attitude became a real self-fulfilling prophecy. It also set up a horrible "upstairs vs downstairs" thing between the upper level employees who were better compensated and the "grunt workers" who held massive resentment against the former group.

    When we finally convinced our executives to start paying the staff better (and to pay for their health insurance) the organization became infinitely more stable and profitable. Suddenly a team mentality was able to form and it was like everybody was finally pulling in the same direction.

    I just can't help but think that our organization was a microcosm for the society at large, and that paying people an actual living wage would do a whole host of good things, even for those employers who will probably fight it all the way.

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    1. That's a great example of the benefits of a living wage, EcoCatLady. I neglected to talk about the benefits for the employer, entirely. But it makes sense that a certain threshold of security needs to be achieved before a worker can really commit himself to the position.

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  2. I think it's shameful how little the minimum wage is at the moment, considering the rate of unemployment and overall inflation. Big fastfood corporations make billions each year but when it comes to raising salaries, they say their businesses will suffer. What about the hundreds and thousands of min-wage workers who suffer everyday because they can't live on their paltry incomes?

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    1. I think in the case of some businesses (like the profitable ones you note), raising wages would not be a huge burden. And in the case of fast food franchises, the increase in labor costs are likely to simply be passed onto the consumer in higher prices. As Reich notes, it is unlikely (or impossible) that these businesses will outsource labor.

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  3. I'll be honest that I don't know a lot of the details of the arguments on either side, but I definitely don't think that our businesses will be crushed if we raise minimum wage. In the long run that extra cost will be largely passed on to consumers, who can choose to either buy or not buy the products. And whatever the baseline is, at the very least our minimum wage should be keeping up with inflation, so the fact that it's only 80% of what it used to be is something that almost definitely needs to be corrected (assuming that it was at a reasonable level before).

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    1. That's a great idea, Matt (and one I think my email buddy had proposed earlier). By tying the minimum wage to inflation, we could avoid the regular debates about raising it. Tie it to the CPI (or, better yet, to some fraction of the median wage) and then it keeps its purchasing power.

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    2. It's bonkers it hasn't been tied to inflation already. That's got to be the most obvious thing to do with such a policy from the get go. The way it currently works is effectively a hugely "sticky price" which tend to cause big disruption in macroeconomics as it will do things like jump from 7 to 10 which is ridiculous. I'm sure it it was increased by say 30c a year most businesses wouldn't even notice

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    3. Good point, FIREstarter. The gradual changes would be easier to plan for and accept by employers. That alone makes it a better approach than these drastic changes.

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  4. I agree with Matt on this one. We will be paying for it too, in taxes to support welfare and the like, if we don't raise the minimum wage, but at the same time, so many people pee away all of their cash, that I'm not sure a raise would help much for most of them, and then they'll just keep asking for more, more, more. How much do we continue to raise it before we say "enough"? I think we should raise it, but I also think we need to work harder, somehow, in terms of educating people about how to manage their finances.

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    1. I agree 100%, Laurie. Alone, I don't think increased wages will do much for the average minimum wage worker (or any American worker). We need to break the cycle of consumerism and teach frugality. But in the case of someone only earning $15k, I think we need to increase their wages first, and then teach the frugality/money management skills: that will at least give the lesson a chance to be applied.

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  5. Minimum wage is $10 (and change, depending on the province) in Canada. That's why I can never understand why the US wage is so low. Granted the states have 10x as many people. Perhaps it is a simplistic point of view as an outsider without a lot of economics knowledge, but it's the same thing with national health care - I just do not get the hold up.

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    1. I think our countries could learn a lot from each other. I see so much cultural similarity with Canada, but different approaches in government.

      If it weren't so cold, I would love to live in Canada. Toronto is a fantastic city.

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  6. Getting emailed by the Prez is pretty fancy!

    I have mixed feelings about raising minimum wage. On one hand, $7.25 is not a living wage at all. On the other, I wonder what people who make $12 or $14 an hour will think if the minimum wage gets pushed up to $10. Won't everyone deserve a raise? I worry about the unintended consequences of that.

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    1. I know! Obama, writing to little old me!

      I hear what you're saying, Holly. To someone currently making $10.50 an hour, this would be a bitter pill to swallow. I'm not sure how to handle that scenario, as I'm not sure it'd be possible (or advisable) for the government to force raises across the board.

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  7. I think that if a single person is making so little on minimum wage that they qualify for subsidies or government assistance of any kind, the employer should have to pay for that subsidy. Of course when you factor in these people on minimum wage having dependents things get trickier. My suggestion- boost financial education AND sex education in schools.

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    1. Interesting idea, Stefanie. I wonder if improving access to things like Planned Parenthood might also be part of that solution (free condoms and birth control, for example).

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    2. Bingo DBF. Let's start by putting an end to the Republican party's assault on women. Seriously, when you start trying to limit access to birth control you're just begging for trouble. The conspiracy theorist in me can't help but see those policies as a sinister plot to keep poor people poor - what better way to ensure that people can never get ahead but to force them to have a bunch of kids that they don't want and can't afford. Sorry... I know I'm WAY too cynical, but this topic seriously pisses me off!

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    3. I hear you, EcoCatLady. I'm not sure if this means we won't be friends anymore, but I'm actually pro life. But I'm pro contraception, too...so I'm a mixed bag with most of my liberal friends.

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  8. I agree that it should be raised, but I would argue an incremental raise over a period of years, as opposed to all at once. I remember when it was $5.15... can you believe people lived on that?

    I try to avoid shops that are known for paying their employees poorly, like Wal-Mart and McDonald's on the belief that me spending money there is only supporting them compensate for their low wages with social services that my taxes are going to. McDonald's even tried advertising using the social services to their employees! It's sickening. Plus, some franchise owners even force employees to use pre-paid debit cards for their paychecks which cuts even further into their paltry salaries. http://www.today.com/money/feds-employers-cant-force-payroll-debit-cards-workers-8C11312099

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    1. I remember that my first job paid even less than $5.15. It was $4 something, back in 1994, as a busboy. When I was promoted to waiter, I was making $2.35 or something like that, plus tips. Crazy.

      That crap with a pre-paid debit card is nonsense. I wonder how that can be legal.

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  9. Great article, but I have to say I don't know all the ramifications that might come with raising minimum wage either. It's easy for me to sit here and say, "oh yeah do it." :) It does seem awfully low though.

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    1. True. I want to believe Reich, and accept that raising the minimum wage won't have huge impacts (citing how states with higher minimum wages don't have higher unemployment). But it's tough to say.

      That said, we've increased it regularly in the past. So there's precedence for things not getting too messed up.

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  10. I have customers who pay $2 above minimum wage at $9 an hour. You add health benefits and insurance that goes to $13 and hour. Labor costs are 40% of his expenses, raising minimum wage means everyone gets a raise. They'll lay people off and only hire experienced people.
    Minorities and young people who have no experience will be affected because at a higher wage you will want better quality workers. You'll doom entire generations to having no work skills, look at Spain, Greece and European countries.

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    1. I doubt those sort of consequences await us. $10.10 per hour still has a lower purchasing power than the minimum wages in decades past. Why didn't those past minimum wages doom our economy?

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    2. A gradual minimum wage perhaps but at 10.10 that's nearly 40%. It's not going to doom our country per se but hurts those at the bottom the most. It will benefit the lower middle class and hurt the poor. CBO projected it will lift 900,000 out of poverty but will cost 500,000 jobs. Those 500,000 low paying jobs means no starting skill set. If i was starting out with no skills no one would hire me at $10, which will prevent me from obtaining the work habits I need.

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    3. The figure from the CBO report is worrisome. But we have data from states with higher minimum wages: they don't have higher rates of unemployment than states still using the lower federal minimum wage. Additionally, when accounting for inflation, this wage is not out of line with past minimum wages. Basically, I'm not entirely trustful of that 500,000 lost jobs figure.

      Agreed on the gradual approach though: tying the minimum wage to the CPI or some percentage of median wages would result in a smoother path than these big jumps we're seeing.

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  11. I'll be one of the few dissenters, but it's certainly a controversial topic that everyone needs to make their own decisions about.

    My viewpoint is driven by two things: an economic perspective and my personal experience of being one of those minimum wage earner single parents, as well as a social worker who has worked with said min. wage earners.

    On the economic side, it seems logical to me that when we artificially increase the cost of labor, we also increase the cost of products. As several people commented, the consumer can choose to buy it or not. Problem is - many will choose to pass due to higher costs. I know I do all the time. With financial losses, employers are forced to cut jobs or replace employees with automated solutions. The loss of jobs would result in a higher unemployment rate - and therefore more people who are fully depending on taxpayer programs to get by, not just supplemental assistance. From a purely frugal taxpayer point of view, I would rather help someone who working out with $400 a month food assistance than foot the bill for $1000/month food assistance, plus $700/month in cash TANF assistance, plus Medicaid. This video explains my rationale: http://youtu.be/j0c2vmFGbtk

    Bottom line (for me): I believe that the minimum wage creates increased unemployment. I value people having jobs more than I value what they get paid, because I have consistently seen the impact on overall income, self-esteem, productivity, family stability, safe housing, etc. Plus, as a taxpayer, I would really rather support those who are working, gaining experience, and have the potential to increase their income through raises, promotions, tuition reimbursement, etc.

    Loved the different perspectives and commentary. The only way to make good decisions (or at least vote for those decisions) is to engage in discourse around these issues so that we can all be a bit more aware and open-minded.

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    1. Those are all fair points, Emily. When I first moved to San Diego I cut my teeth in a WIC office, and some of my viewpoints are probably shaped by that work as well. I do see the benefit of helping those who are already working, if the alternative is simply having more people unemployed.

      I'm hopeful that, because many of these jobs cannot be outsourced internationally, that the impact on unemployment will be mitigated.

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  12. Raising the minimum wage has been a very sensitive subject. I agree that $7.25 is wage that probably can’t even cover the bare minimum living expenses. Most personal finance bloggers talk about having living expenses at $22k a year or less. The $7.25 wage will get you to $15k pre tax, meaning $13.5K a year assuming a 10% tax rate. That makes you about 40% short of a somewhat comfortable frugal living lifestyle.

    Most companies nowadays try to operate as lean as possible - meaning many workers are doing more than one person’s job, and spending overtime in the office unpaid. Increasing overhead expenses per head means either reducing workforce or moving to cheaper labor areas to stay competitive. I believe that will apply to some of the minimum wage paid jobs as well.

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    1. Your scenario is logical but I'm really hoping that isn't the case, Mrs. Y. You can't outsource a Walmart greeter, you know? But you can replace the cashier with an automated check out stand. I'll admit that as wages increase, alternatives like that do seem to be more likely.

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  13. I think the more you raise the minimum wage the more incentive companies have to outsource work to people who can do it for less and/or invest in technology that replaces minimum wage workers. I don't feel like writing a 1,000 word comment so I'll just leave it at that : )

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    1. Fair enough, DC. But per Reich's video and your post on outsourcing, a lot of these workers are in jobs that are relatively protected from competition overseas. The guy flipping burgers, the woman cleaning a hotel room, these are the kind of jobs that are likely to result in higher prices for consumers, rather than mass outsourcing to Indonesia.

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    2. I read DC's comment before you replied, and I thought it was the most compelling argument against the raise, but then I thought of the same problem as you...you're going to have a hard time outsourcing a greeter for WalMart if you want to employ people legally.
      I think ultimately this comes down to a philosophical debate and here's why: raising the minimum wage, even by that much, isn't going to change people's lives that dramatically. It's a difference of about $5300-5900 per year for a family of three, depending on if the parents are married or not, when you account for the EIC (which is essentially another way for corporations to get taxpayers to pay their lowest paid workers their wages for them.) For some that extra money may equate to a loss or decrease in benefits that they are eligible to receive such as supplemental nutrition assistance or childcare services, which may cut in to how much profit they'd actually be making off of this increase. (Not that you should game the system, but a lot of times the people who are right there on the cusp are the ones who are really working hard and end up struggling ten times harder to get by than those who work less because of their work ethic.) The optimistic six grand over the course of an entire year may be helpful, but not overwhelmingly so. THEN there's the whole problem of employers not wanting to give minimum wage worker full-time hours even as of present because doing so would mean they'd have to pay out more for benefits. So many (not all) work part-time not by volition, but by limitation.
      I would agree with a gradual increase, expect that it's been so long since we've had an increase compared to how inflation has risen that I feel like the window for that gradual option has passed.
      So I think ultimately it comes down to philosophy...should companies pay or taxpayers? And realizing that if companies pay, the ones that will be hurt the most are the smaller ones, not the large corporations.
      I have mixed feelings. Idealistically I want the companies to pay and the burden to be taken off the taxpayers. But I also know many small business owners who would have to cut staff to meet these new requirements. Do they then deserve to fail? Capitalism would say so. But I don't know what I say.

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  14. I have to admit I'm not well versed on this topic, but reading the comments has been rather enlightening. I see the points of both sides, and I have to second Holly's concern with those making lower, $10/hr wages currently. To bring minimum wage workers up to that right away might seem like a slap in the face to some. Maybe gradually is our best bet.

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    1. That's a middle ground that I think would satisfy both sides, long-term, EM. Tying the minimum wage to a gradual increase over time would keep its purchasing power and protect businesses from drastic increases to labor costs.

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  15. I think the US minimum wage is disgraceful! I can't imagine how anyone lives on it, and I think raising it is a great idea. I also think, comparatively the costs of things and services in the US are low, largely due to a low wage economy, and there is room for prices to increase in line with a minimum wage increase. I think the employers concern about viability with higher wages can be a problem, but in a small business, there's nothing stopping an owner drawing no wage (essentially living in poverty), but I don't think an owner could/should profit even 1c whilst their staff are below the poverty line - that seems completely horrible and unChristian.

    Comment above before reading others comments, comments below in response to some thoughts I read.

    Re comments above, I am personally pro life (as in, my choices) but I will let others chose abortion. Why shouldn't I? Contraception is good and well, until we look at rape, and 'rape' isn't just what's reported either, but forced sex and conception are also worthy of abortion. Again, not that I would chose this myself, I am liberal enough to allow others to.

    Re:outsourcing and automation - irrespective of wages, this is likely to happen nonetheless. It's just how it is (and I say this with a min wage in Australia hovering at at leats $18/hr I think!!)

    Lastly, job losses and unskilled labour. I ended up being paid as a florist (junior) not because I was skilled, no one at 14 is, but because I offered free labour. IN effect, I worked two weeks free and then offered my paid services. If they'd said no to pay, at least I have skills. I think no matter what the wage is, this option is viable to people. Motivation is a WHOLE other ball game. And yes, you can't volunteer your labour day in day out forever, but you can for 1-2 weeks, with savings. I mean, if you're not working, what else are you going to do, and if you are working, then you're halfway out of the problem...

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    1. Sarah, great thoughts, as always! I really like your take on the abortion issue, and will have to ponder if that's something that I might adopt. I'm in complete agreement about the ability for prices to increase here at home.

      Consumers think they are more sensitive to price than they really are. If all grocery store baggers and cashiers are paid more, and grocery prices across the board increase, will consumers really start gardening? Will they really give up fast food? Hotel stays? I doubt it.

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  16. I would agree with Laurie that education also needs to go along with raising the minimum wage (heck, at any economic level since I see people pulling high salaries just squander money away). I do think big chains can definitely afford it and treat their employees better with more livable wages.

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    1. Hey, Anna! I'm not as optimistic on the financial education front, but that's a whole nother post. ;) Agreed on the ability for some companies to increase wages; probably without drastically increasing prices, too.

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  17. I can see arguments on both sides and sometimes I flip flop as to how I feel about it. Part of me feels that the companies with record profits should pay their employees a little more. It probably is a good move as you'll probably have a happier and more productive workforce. But on the other hand, most of these jobs are low skills jobs. There is plenty of supply of low-skilled workers and they are easily replaced, so there is no need to pay more. The low-skilled worker needs to provide more value.

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    1. Agreed on both points, Andrew. Since a lot of employers don't have to compete for these unskilled laborers, the only way wages will rise to keep up with inflation is to increase the minimum wage.

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  18. I would be happy if the minimum wage were raised even higher to something like $12/hour. As you point out, there are lots of social costs associated with underpaying employees. Unfortunately, the current make-up of Congress will probably not pass this on the national scale. I am glad to see many states doing it, though. In California, the minimum wage has been increased to $9, and will go up to $10 in 2016. That's not enough, but it's better than the federal min. The city I live in has raised the minimum wage to $10.15/hour. Good for San Jose and the students at San Jose State that started the movement.

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    1. That's a great story of a grass roots movement yielding results, Bryce. I agree, it could be much higher.

      I'm partially selfish in my position, too. I just don't want to subsidize government aid to make up for poverty level wages. I much prefer the employer, and its customers, to pay. Then, the cost of our goods/services more fully reflects their true cost. Currently, there's a hidden cost with things like fast food, which is baked into our taxes.

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  19. Wow...interesting discussion here with good points on both sides. At some point I believe the whole argument of raising the minimum wage breaks down and gets real blurry. Where does the salary point end? We may say "Oh, I'd like it at $10/hr." Sure enough it goes to $10 and we all feel real good about ourselves. Then someone wants it at 12 and we feel even better. Then 15, then 20. Would we be OK with someone making $20/hr. minimum wage? I don't know. What about $50. It may sound ridiculous but whatever salary point we raise it to, it will never be enough. People will always think they deserve more. And it doesn't help them in reality. Basic economics says that when the cost of labor and doing business goes up, so does the cost of goods and services. So people may be making more but they are also spending more, so it's a wash. Great topic!

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  20. Thanks, Brian! I agree that there'd probably never a point at which everyone is satisfied with the minimum wage. There's no end to our desire for more money. But, as for it raising in the first place: it has to, due to inflation. In Raising it to $10.10 would not even give the minimum wage the purchasing power it had in decades past.

    As for when enough is enough, I'd be happy with a wage that raised full time employees above the poverty line...if only to alleviate the taxpayer subsidizing those workers' healthcare, housing, and food purchases.

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  21. We need a stronger minimum wage as there are many people that the best they can ever be is a fast food worker, or a landscape person. Jobs like this are no longer stepping stones, but careers.

    A higher minimum wage will also boost Social Security taxes.

    A higher minimum wage will allow landlords to increase rents. A great benefit!

    A higher minimum wage will boost tech spending, as companies further automate tasks that people used to do for a lower wage.

    So, a higher minimum wage is great for some, assuming you are worth what they pay you.

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    1. Great points about the ancillary benefits of a higher minimum wage. The economy likely benefits, too, as people on that end of the wage scale are likely going to spend nearly all that raise.

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