Monday, February 24, 2014

I may have to raise my prices as Congress seeks to create a greater disparity in standards of living and send more jobs to Mexico.

24 February 2014

President Obama and Congressional Democrats have proposed raising the federal minimum wage to $10.10 by the year 2016. As part of their ongoing campaign to create a greater disparity in standards of living of Americans the Obama administration wants to boost the cost of living for low wage earners. Employer mandates that had been sought primarily by unions and just generally selfish people had already begun creating an earnings disparity which was exacerbated by the Obama medical coverage tax program. In The Health Care System that we all want I provided more detail about how it was more cost efficient for employers to have fewer employees but work them longer hours with overtime pay.

A minimum wage hike will have the same effect. Non-partisan Congressional budget analyst have predicted a loss of half a million jobs as a result of the hike in prices. The greater effect is going to be the reduction in buying power of the remaining low wage earners. Minimum and low wage jobs are often held by workers producing the goods and services that we use in our daily lives: food service industry, retail clerks and stocking, daycare providers, and cleaning staff. Thus, the businesses that serve the low income earners the most will face more pressure to raise prices than the upscale and high end consumer business which already pay their workers well above minimum wage.

The other cost will be an increase in the realized tax rate for low wage earners. Often minimum wage earners have a negative or low tax rate after all of the exemptions and credits. Any increase in earnings will be taxed at the full rate of 15%.

Hardest hit will be first time job seekers such as students who need greater flexibility in scheduling. When facing an additional half million former workers who will be more desperate for jobs it is going to be a buyers market. Employers will be setting the terms of employment which may include fewer benefits, less flexibility in scheduling, and an expected increase in productivity.

Another likely result will be an increase in outsourcing to foreign locations as the disparity in wages will make transportation and capital investment overseas more rewarding. The good news is that this could help to offset some of the inflation pressures here and boost profits for the largest corporations. A boost for those of us invested in the S&P 500 or other blue chip companies that can easily adapt to these new wage pressures.

As for me I have resisted raising my rates although I have about a 2-3 month wait for new clients. If this proposed jump in the minimum wage takes effect then look for my hourly rate to go from from the current $120 to $150 in 2016 as I continue to tie it to about 15 times minimum wage.

The grand scheme is being realized – fewer higher paid workers that can be taxed more and more displaced people dependent upon government redistribution of workers incomes – which will only be hastened by a rise in the minimum wage.

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