Fifteen dollars an hour. That’s what Congressional Democrats are pushing as a new minimum wage by 2025. The Congressional Budget Office recently released a survey that showed 17 million people would get a pay raise, while 1.3 million would lose their jobs.
Sounds like mostly a big benefit, right?
Not So Fast…
A $15 minimum wage will reduce real income for nearly all people because the costs of goods and services will rise to offset the higher pay.
You see, only 12% of low-wage workers live in poverty. The majority of folks working for under $19 an hour are teenagers in middle-class households or second earners supplementing a partner’s income.
The net effect is staggering, an $8.6 billion economic loss…
I support a living wage 100%. I don’t see how people can live in the U.S. on $8 an hour. But, because I live in the real world, I can see how a $15 minimum wage an hour is going to be a big problem.
In the real world, money doesn’t grow on trees. It has to come from somewhere. So, while the worker gets $15 an hour, what about the owner of the company? His costs are going up, no two ways about it. So, either people are going to lose their jobs and whoever is left over does more work, or prices for goods and services will go up.
I can see clearly the damage to the economy by looking at my own spending habits. If you’ve read my previous articles in The Rich Investor describing the “Middle-Class Millionaire” approach to life, you’ll know my mind operates quite a bit differently than the average person’s.
This Is How I Do It
When it comes to spending, I work backwards. To keep the numbers round, let’s say I decide I’m going to spend $50,000 this year to live. I set a number because I want to make sure I take care of the most important thing financially each year. That’s paying myself first. So, I maximize all of my retirement contributions. I do that before I do anything else.
If $50,000 is the target, then I have to look at what it costs for food, clothing, shelter, and spending some dough to enjoy life.
If certain costs I have little control over, such as property taxes, are going up, then I cut something else out. I don’t think twice about it. Every year, something gets cut.
This year, I trimmed a bunch of monthly subscriptions. Netflix? Gone. HBO Now? Gone. The Peloton cycling app? Gone. The only thing left is my American Express card. That’s getting cut in November. They just don’t know it yet. In the end, I’ll save a couple grand for the year.
Just because those things are getting cut doesn’t mean I’m not enjoying life. I recently had an amazing vacation in Bermuda for a week. I’ve been on a couple of other smaller trips this year too.
That said, I know where I’ll cut next. Eating out. Eating out has become less interesting to me. I like to cook, which helps. Eating out is expensive. When you pay people $15 an hour, it becomes outrageous.
Results of a recent survey conducted by the New York City Hospitality Alliance paints an ugly picture:
- 75% of restaurants will reduce worker hours.
- 47% will eliminate jobs.
- 87% will raise menu prices.
After all that, you can expect a lower-quality experience, including the service and the food.
This is just one industry in one city. Imagine the impact these higher costs will have across the U.S. A living wage makes sense. But it’s not that simple. It won’t do much good to make $15 an hour if you can’t find a job.