An Alternative to Raising the Minimum Wage

In a speech yesterday, President Obama challenged those opposed to his proposal to raise the minimum wage to offer their solutions to the problem of growing wealth disparity.  As his story line goes, the wealthy are getting far wealthier but the poor and middle class aren’t participating in the growth in wealth.  The question then becomes, what can we do to stop this divergence in outcomes?

The President is probably looking for a government solution.  Ironically, in this case the government may very well be the cause of the problem and therefore the best thing it could do is simply pull back out of the way.  Over the years it has become very expensive to have employees with all of the bureaucratic hurdles that must be passed.  Gone are the days of simply handing out paychecks on Fridays.  Now an entire HR department must be staffed to handle benefits, tax paperwork, and other regulatory compliance functions.  This has reduced the incentive for entrepreneurs to hire employees.

Existing minimum wage laws have also caused employers to replace employees with technology more often.  There are a lot of tasks that an employer would have been happy to hire out at $4 or $5 per hour.  At $7 an hour or more, suddenly it becomes worth it to buy a new computer system or upgrade facilities to allow the tasks to be done with fewer people.  In some cases, tasks that were once done by employees are being given to customers (see self-service checkout at some grocery stores).  As the minimum wage is increased, this will happen more often.  At $12 an hour or more, expect to see self-serve kiosks for ordering at fast food chains.  This would be easy now that most restaurants are taking credit and debit cards.

Also expect to see the door to these jobs closed for many of the entry-level workers if the minimum wage is raised significantly.  Beyond investing in technology to reduce costs, restaurant owners will need to pass the costs onto their customers as much as they can.  This will require increasing the quality of the food and the service since there is a limit to how much you can just raise prices for the same quality.  Since, at higher wages, there will be a lot more people interested in the jobs, including people coming out of culinary school, employers will only be interested in the most skilled and the most efficient employees.  It will be very difficult for those with no experience to get a job and there will be no tolerance for anything but exemplary work performance.  So then you’ll have lots of people out of work and the price of restaurant food rising.  Not a good combination.

This has gotten far worse with the passage of the Affordable Care Act.  There are now strong incentives to cut people to 30 hours per week or less, or keep employment below 50 employees.  Employers who go over those levels will see their costs per employee rise dramatically since they must then provide expensive healthcare coverage.  This has already resulted in some lay-offs and reductions in hours.  It will get far worse this summer as the employer mandate deadline gets closer.

So what can the government do to address this issue if putting new requirements on employers is not the answer?  Here are some suggestions:

1.  Drop the minimum wage to $5 per hour.  This will slow the process of job elimination through technology upgrades and provide more people with the entry-level job they need to learn good work habits and start building a resume.

2.  Approve the Keystone Pipeline, remove the new EPA regulations requiring carbon dioxide sequestration for coal-fired power plants, and get the government out of the energy business in general.  Increasing the costs of energy and closing power plants and coal mines only reduces the number of good paying jobs available.  Pumping billions of taxpayer dollars into plants to build solar panels and other green energy initiatives has also proven to be fruitless because the market does not exist for these technologies.  Instead, fund energy production research and let the market decide when technologies are ready to build in scale.

3.  Examine and cut regulations on businesses where possible.  Reduce the hassle of starting a business and the cost of running a business so that money can be put into more productive places.  In particular, eliminate the certification requirements that are enacted mainly to protect existing businesses from competition.

4.  Eliminate the Affordable Care Act and replace it with a system of Health Savings Accounts and major medical insurance tied to the individual, not to employment.  This would remove a lot of the employment-killing rules that have kept employers from hiring over the last five years.

5.  Replace the income tax with the Fair Tax.  This would eliminate the unproductive use of time to reduce taxes and comply with tax regulations.  It would also reduce the tax burden in general since there would be less fraud in the tax system.

Contact me at, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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