When the Democrats took back over the congress in 2006, new House Speaker Nancy Pelosi promised a long list of things they would pass within the first ‘hundred hours.’ They were only successful at getting one thing passed in that time frame: a minimum wage hike. It went into affect July 24th, 2007, and now, almost one year later, I’d like to explore the consequences of that one act that was supposed to help all of us little people.
One year later, an economy that was humming along swimmingly is in a heavy slowdown. One year later, gas prices have risen another dollar. One year later, unemployment is inching up. One year later, the US Dollar is quickly losing value and credibility around the world.
Now, I know that most people would tie this squarely on a combination of the housing market, ‘predatory’ lending, and oil… and to be certain, those factors didn’t help. But my contention is that it was the minimum wage hike that was the proverbial straw that broke the camel’s back. Let’s look at some graphs, shall we?
Note: I took these graphs from Yahoo! Finance. I then marked a vertical red line on July 2007, approximately the time the minimum wage hike went into affect.
The above graph is the DOW Jones composite from June 2006 to June 2008 (2 years). Notice that it was on a slight but steady climb until July 2006, when it peaked, platuaed, and started slowly falling.
This graph is even more shocking when you stretch it to five years:
What changed in July 2006?
Let’s look further. How has the US Dollar performed around the world over the past few years?
The above graph is a valuation of the US Dollar in comparison to the Euro over 5 years. I will grant you that it is a downward slope throughout, but if you really look, between 2005 and 2007, there was a slight gain, then a loss again, for just a very slight net loss of value through about March ’07. Then July ’07 hits, and the downward slope increases and there have been no significant gains since.
The Euro is strong anyway, so that is somewhat to be expected. How about the US Dollar vs Yen?
Now that is a bit more striking. Up through July ’07, the US Dollar had been gaining value in comparison to the Yen… then something changed. Granted, after a plummet, it has made some gains again, but it’s still down compared to where it was.
What caused all this downturn? I’ll tell you… On May 25, 2007, Democrats tied a minimum wage hike to a supplemental spending bill for the Iraq War, something they knew Republicans wouldn’t vote against and Bush would sign, and the rest is history. The bill required that on July 24, 2007 the federal minimum wage increase from $5.15 to $5.85. “Great… that’s a good thing, right?” No.
The wages business pay workers, in a market sense, must line up with what the labor is worth. A minimum wage increase doesn’t change that. The labor is still only worth what it was worth to begin with. No outside force can change what a day’s work is worth, only the worker can. That didn’t stop congress from trying through… By raising the minimum wage, rather than increasing the value of a day’s work, they devalued the US Dollar. They’re trying to dictate market forces they can’t control.
You may think to yourself, “But surely only a small percentage of Americans actually earn minimum wage, so why does this effect us all?” You would be correct on the first part. Only a small percentage of American’s earn the minimum, and a large part of that is students who aren’t supporting anybody. BUT, at several unions across the nation, and other positions, pay is determined as percentage above minimum wage. That means that not only did those earning minimum wage get the hike, thousands other did as well… but what about you and me who don’t have salaries calculated like that? We now earn a less than what we did in two ways: A, we earn less as a percentage above minimum wage. B, we earn a devalued Dollar. I once earned just more than twice minimum wage, I now cannot say that. You and I essentially got a pay cut.
Beyond getting the shaft on our paycheck, prices in everything increased. This, too, can be tied to the minimum wage. Yes, even gasoline really started to rise after July ’07:
As you can see in the graph, gas had a tendency to raise in summer months and fall in winter for a fews years, but after the summer of 2007, it just continued to rise… Why? Because businesses at every level had to pay their employees more and thereby had to charge more for their product to make up the difference, even oil companies. I admit that it is not the only factor contributing to gas’s rise, but it is a factor.
And with the added cost to businesses, guess what else come along? That’s right, unemployment, since employers can no longer afford to hire as many people.
Look, I don’t have a problem with people earning more money, but the key word in that statement is ‘earning’. When the government dictates that businesses must pay them more money without them earning it, it ends up hurting us all, even those it was supposed to help. Sure, they’re getting a few more bucks, but it comes in the form of a devalued dollar and the added bonus of higher prices and more unemployment.
Our economy isn’t in the can yet, and I don’t think it has to be. That said, it’s not looking all that great either, and it all seemed to start about the same time: Summer ’07, just after the minimum wage hike… and you know what? It’s about to happen again. Yes, the bill passed called for three minimum increases. In a few weeks, on July 24th of this year, it will jump to $6.55. And finally, on July 24th 2009, it makes it’s final leap to $7.25… at least that is until they pass another hike.
Democrats have always tried to control the economy, and the results always ends up backfiring. When salary cost is not directly tied to labor market value, the entire economy must adjust, and that takes time. We’ll get through this, too, but the next few years may be a bit bumpy. So the next time you hear your congressman promising minimum wage increases, think about the consequences before jumping on the bandwagon.