Like those of all modern presidents, Barack Obama’s State of the Union speech was filled with agenda-list items, long-held hobby-horse issues of his party, and inflated claims of the success of his own policies. Most of the content could have been lifted from campaign speeches in 2012, probably 2008, and arguably every Democratic campaign for the last 40 years. Kirsten Powers, the liberal analyst on Fox News, wrote in a column for USA Today that the speech made it seem that “President Obama's chief speechwriter has been replaced by a cliché-generator circa 1960.”
Among the blizzard of clichés was a surprising throwback to 2007. President Obama focused on middle-class economic issues, which came as no surprise after having taken criticism over his inaugural speech, which hardly mentioned jobs and the economy at all. The White House didn’t make that mistake on Tuesday evening, with 32 mentions of “jobs” peppered throughout the address, and a pledge to focus on economic growth and job creation. However, included with that commitment to focus on job expansion came a new proposal to raise the federal minimum wage from its current $7.25 per hour to $9 per hour.
“We know our economy’s stronger when we reward an honest day’s work with honest wages,” Obama told the joint session of Congress. “But today, a full-time worker making the minimum wage earns $14,500 a year. Even with the tax relief we’ve put in place, a family with two kids that earns the minimum wage still lives below the poverty line. That’s wrong.” The President worked in a shot at wealthy CEOs at the same time: “In fact, working folks shouldn’t have to wait year after year for the minimum wage to go up, while CEO pay has never been higher.”
This plays into Obama’s theme of “fairness,” a strategy that ended up being successful in his campaign against the wealthy Mitt Romney. It plays on very sympathetic messages; most Americans will wonder how anyone can live on their own on $14,500 a year. Voters want an economic system that generates a fair, living wage for a fair day’s work. But the framing of this issue by Obama in the State of the Union speech provides a misleading context, and masks the failure of this policy in the past to produce the desired outcome.
Let’s start with the worker end of the equation. It’s true that minimum-wage earners don’t get a lot of money, but these are usually entry-level positions and starting wages. Workers don’t “wait year after year” for wage increases, unless they aren’t progressing from entry-level status or are changing from job to job at that level. Employers don’t wait for the government to raise the minimum wage to give existing employees a raise, mainly because the accrued experience makes the employees more valuable on the job market.
And that’s the big problem with these proposals. They don’t make people more valuable on the job market, especially those with no experience or proven skills. Minimum wage hikes make it more difficult for them to find jobs, especially in the short run. The raise proposed by Obama would increase just the straight wage cost for a business by 24 percent in its entry-level positions (and probably in other positions near that level), which businesses would have to absorb in one of two ways. Either they raise prices without providing consumers with a commensurate increase in product or service value, or they have to reduce staff to cover the increase. The former is inflationary and harms their competitive edge, while the latter gives businesses less flexibility to take risks, especially on new hires. Forced to pay a higher cost for employees, businesses will stick with experience rather than look to younger workers entering the workforce.
Consider what happened when Congress last passed a minimum-wage increase in 2007. At that time, overall unemployment was 4.7 percent and the job market favored workers. Among those between 16 and 19 years of age, the jobless rate was 15.3 percent, on the lower end of the range seen during the previous four years, the highest rate of which had been 19.0 percent in June 2003 during the previous recession.
By July 2008, overall unemployment had jumped to 5.8 percent due to the then-moderate recession that had begun in December 2007, but youth unemployment rocketed upward by more than five full points to 20.7 percent. As the wage floor stepped upward to its present level by July 2009, the youth unemployment rate rose to 24.3 percent. And while the overall unemployment rate has declined from 9.5 percent at that time to 7.9 percent now (albeit with a plummeting workforce masking the true nature of chronic unemployment), youth unemployment remains at nearly the same level as in July 2009, at 23.4 percent.
Why has this been the case? When forced to pay more for labor, businesses will insist on getting more value for their money – experience and proven skills, even in entry-level positions. Younger workers never get a good chance to earn their stripes. That has long-term implications for their ability to earn in the future, as well as the social costs of high unemployment and restlessness of youth.
Worse yet, it’s the small business owners who get squeezed the most by this economic vise. The wealthy CEOs to whom Obama refers run companies large enough to dissipate the increased costs of minimum-wage hikes by balancing out cost reductions through economies of scale that aren’t available to mom-and-pop businesses. That puts smaller businesses at a competitive disadvantage that benefits the very CEOs that Obama scolded in his address.