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Wage Compression & Job Losses: The Crushing Impact Of A 24% Minimum Wage Hike

Unemployed - Le Haricot

Having spent nearly a decade in the union movement and the last two decades dealing with companies and their employees with labor issues, it sometimes affords me the opportunity to see both sides of a particular issue. Such was case when Barack Obama, during his State of the Union speech, declared that he wanted to raise the minimum wage to raise the minimum wage from $7.25 to $9 per hour.

It was obviously written into his speech to garner applause from the Democrats in attendance and, no doubt, resonated with many low-income workers who might have been watching.

It is also a good bet that those Democrats and many others who think raising the minimum wage is a good idea have never run a business, as they do not understand (or care?) about the compensation problems of wage compression.

Simply put, wage compression occurs within a company when the newer (or lesser skilled) workers’ wages rise and the wages of existing (or more experienced) workers don’t. The result is newer (or lesser skilled) workers being paid as much, or nearly as much, as existing or more skilled workers–creating wage compression and what kind of problems a 24% increase at the bottom will cause within a companies’ compensation plans throughout the U.S.

In some cases, if newer (or lesser skilled) workers’ wages are raised above existing (or more skilled) workers, then there is wage inequity.

In either of the above cases–wage compression or wage inequity–when they occur, it creates tremendous problems within a company.

In most cases, it reduces morale, making existing (or more skilled) employees angry that newer or lower-skilled workers are making nearly as much or, in some cases, more than they are.

In some cases, compression (or inequity) increases the risk of a fight or flee phenomonon–disgruntlement culminating in union organizing campaigns or, in the case of flee, higher turnover as the result of employees quitting.

As a result of wage compression or inequity, all too often, companies are forced to address the problem by adjusting their entire compensation systems–usually upward and across-the-board.

While wage adjustments may sound good for those who do not have to worry about profits and losses, the real impact for a company typically means it must either increase productivity or lay people off.

In a recession, if productivity has already been maximized and there is very little profits from which to give increases, companies–especially smaller companies–may close.

For those companies that can pass along a pay increase, the results will be some inflation. How much is unknown.

Obviously, by stating the dollar amount ($9), Obama chose how to frame the debate wisely. By stating the dollar amount, and not the fact that a $1.75 increase is a 24% increase in the minimum wage, Obama was–as he did with ObamaCare–once again appealing a portion of the electorate that does not think through the ramifications of a particular policy or decision.

To be clear, Obama and the Democrats know precisely what they are doing. It’s not about doing what makes good common sense. Rather, Obama and the Democrats’ push to raise the minimum wage is all about politics.

Dems in charge of the party’s strategy for retaking the House next year are planning to campaign aggressively on not just tax fairness and defending entitlements, as in the last two elections, but on issues like gun control and the minimum wage, too.

And, of course, Nancy Pelosi has already declared her intention of using the minimum wage as an issue for 2014 as well.

Democrats plan to make raising the minimum wage an issue in the 2014 campaign, U.S. House Minority Leader Nancy Pelosi, D-Calif., said.

Pelosi said Democrats will use the same message as they did in 2006, when they took control of the House after 12 years of Republican control, The Washington Post reported Friday.

“Just keep it simple,” Pelosi said in an interview with the Post. “We want to raise the minimum wage, and you don’t. Why not?”

Currently, the majority of Americans support a minimum wage increase. However, according to a Reason-Rupe poll, those numbers shift dramatically if a minimum wage increase results in job losses.

Reason - minimum wage poll

Like ObamaCare, Democrats plan on passing a bill based on feel-good rhetoric. As a result, most Americans won’t realize (until after the fact) the ramifications of what a 24% minimum wage increase will do the economy until it’s too late.

Unfortunately for Republicans, while a minimum wage increase is bad for business and jobs, they have been boxed into a corner. With little leadership and poor messaging, and lousy negotiating skills, unless they come up with a some kind of creative counter proposal, they will lose more seats in 2014.

For the rest of the country, on minimum wage–as with ObamaCare–we’ll just have to pass the bill to see what it’s effects are…even though we already know.
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“Truth isn’t mean. It’s truth.”
Andrew Breitbart (1969-2012)

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