Recently New Jersey Gov. Phil Murphy signed landmark legislation that will raise the minimum wage in state to $15 per hour. New Jersey becomes the fourth state to adopt the $15 per hour minimum wage. Murphy says this is the right thing to do for the citizens of New Jersey.
“Today we make our economy both fairer and stronger,” Murphy said as he signed the bill. Is he right?
The governor’s intentions are good and well-placed. He said, “This is a huge step forward for more than a million workers to more capably provide for themselves and their families.” The bill raises the minimum wage to $10 per hour starting in July and then increases by $1 per hour every year until 2024 when it reaches $15.
Unskilled workers who are paid the minimum wage are rejoicing. Many say that they simply cannot survive on an $8.85 hourly wage. Many say that even with food stamps, rental subsidies and other government income transfer programs, their cupboards are bare.
Small business owners have a different view. They say that at the current $8.85 wage, an employee working 40 hours per week will cost the employer about $19,500 annually. This includes the wages paid plus the 6.2 percent Social Security Tax the employer pays for the employee. At this cost the business owner determines how many workers she can hire to profitably run her business.
At a wage of $15 per hour the annual labor cost jumps to just over $33,000. If a business owner employees five minimum wage workers, the labor cost increases by more than $67,000 annually. Most small business people simply can’t afford this and likely cannot pass the increased cost onto consumers by raising prices.
The most likely outcome is that he will eliminate two of the jobs. He reasons if I am paying someone 70 percent higher wages, shouldn’t I expect them to work a bit hard and be more productive?
The business owner is also worried about a rippling effect. That means if there is a worker currently earning $13 per hour (more than $4 above the current minimum wage), would she demand a $19 wage when the unskilled worker is raised to $15?
Regardless of what proponents of an increased minimum wage argue, artificially higher wages always reduce the number of jobs available. That’s why in virtually every year, teenage unemployment is always three to five times higher than the national average. A higher minimum wage increase will raise teenage unemployment even more.
There is a more important negative impact of raising the minimum wage. The way our economic system works, an individual is paid according to the value of the contribution that the individual makes to the economy.
Those who make large, valuable contributions receive large incomes. Those who make small contributions receive small incomes. Those who make no contribution receive no income. It is for that reason that individuals strive to get more education or to learn new skills. This allows for greater contribution and greater income.
By raising the minimum wage from $8.85 per hour to $15, workers see that they can get higher wages without doing anything to increase their value to their employers. This is not an incentive for workers to improve their skills. This will stagnate both the worker and the economy.
In the end, the completely unskilled workers who are to retain their jobs will see great benefits from the increased minimum wage. But for the tens of thousands of New Jersey residents who will not be able to find a job or will lose their job, the higher minimum wage will be a disaster.
While New Jerseyans are very compassionate people and want to see all workers receive livable wages, paying a worker more than the value of their contribution does more harm than good.
Murphy says he wants to make New Jersey more business friendly. Since he already raised the corporate income tax rate from 9 percent to 12 percent, raising the minimum wage will simply make New Jersey less business friendly.
That doesn’t help anyone.
Michael Busler is a professor of finance at Stockton University.