Inflation: What did cause it?
Yesterday I looked at popular explanations for America’s current inflationary woes and explained why they weren’t, in fact, its causes. So what did cause it? As I wrote last October,…
In the wake of the coronavirus, state governments got to decide what businesses are essential and which ones are not. Some of the essential businesses ended up being the ones that pay low wages; grocery stores, trucking companies, cleaning companies. There is a good explanation for this occurrence; a lot of essential jobs are associated with the service industry and the service industry is not as highly productive as other sectors of the economy. Hence the low wages of the workers in the service industry. But that has not stopped people calling for higher wages for these “essential workers”.
The following sentiment about essential workers has been expressed by a lot of people during the pandemic:
Essential workers are far too often the disregarded workers in society. They are often overlooked and underpaid. But today, they are saving all of our lives and taking the risks of delivering the crucial services that our society absolutely needs. Oh yes. We are learning how much we truly need them, and we can’t overlook them now. We can’t look away. We can’t ignore their plight. And no, we can’t thank them but not pay them. And we absolutely shouldn’t.
Some people have therefore proposed the government raise the minimum wage in order to show appreciation for these workers. And like any other time minimum wage hikes have been proposed, these proposals come well intentioned. They are meant to uplift low wage workers. But minimum wage hikes come with their own negative consequences, which at this point in time will be amplified due to the pandemic. Considering the fragility of businesses, especially those in the hard-hit industry, this is not the right time to push for minimum wage hikes.
Businesses are currently fragile
Business are facing low revenues while facing increasing costs. Some have already gone out of businesses and others are on the edge of going under, saddling businesses up with extra costs is quite irrational. In normal times, if businesses are expanding, they might still hire workers regardless of how high the minimum wage is. These are however not normal times. Businesses are not expanding, and the rate of new business formation is also quite low. It is additionally going to take a long time for consumption to reach pre corona virus levels. This means businesses will operate on contracted capacity for a while, and therefore will not be looking to hire for quite a while.
During booms, some businesses might absorb minimum wage increases through taking a short-term profit hit, although in the longer run they might reduce new hiring or trim worker benefits so that profits recover. Right now, though, most businesses don’t have profit cushions or scope to raise their prices, so there will be more immediate risks to employment.
The service industry is hard-hit
The other big risk to raising minimum wage for essential workers is that this will basically place burden on already hard-hit small businesses in the service industry. These industries are already affected by current minimum wage increases. Increasing minimum wage further will hurt both the businesses and workers in these industries.
Indeed, recent minimum wage increases will particularly affect industries harmed by COVID-19. A new Bureau of Labor Statistics analysis has found that “occupations with lower wages are more common in the shutdown sectors than elsewhere in the economy … Consequently, shutdown policies disproportionately affect workers in lower paying jobs.” It is those jobs that minimum wage policies threaten.
According to the BLS, industries most exposed to shutdowns with high concentrations of lower-wage jobs include restaurants and bars (12.3 million workers), other retail (6.5 million), travel and transportation (3.5 million), entertainment (2.6 million), and personal services (2.1 million). Even when shutdowns are lifted, consumers will hesitate to sit in crowded restaurants, vacation in hotels, and go to theme parks until a vaccine for the virus is rolled out.
A good example of this is New York
Today, it is high state and city minimum wages that will cause the most harm. In New York state, about 1 million people worked as retail salespersons, fast food workers, cashiers, wait staff, cooks, and bartenders before the pandemic. Many of their employers will not be able to afford the state’s $11.80 minimum wage nor New York’s City’s $15 minimum in a struggling post-pandemic economy.
Not to say there is a good time to force businesses into paying more than what their employees are worth, but this is a more fragile time for businesses as are trying to recover. What happens if you burden them with higher wages? Some of them might not reopen or will fail to survive after the pandemic is over. Businesses are already focused on cutting costs to stay afloat. Most of them will not be able to rehire their employees and will take a long time to recover. Using the pandemic to force businesses to pay their workers more will not help them or the economy in any way.