Rising Minimum Wage Real Test of Obamanomics

Back in 2006, Ohio voters approved a constitutional amendment that would increase the state’s minimum wage and peg future increases to the inflation rate. Now, as unemployment continues to hover near the national average of 9.1 percent (seasonally adjusted), inflation has increased 4.1 percent in the Buckeye State, pushing the minimum wage to $7.40 per hour (about $15,000 per year for a full-time employee) on January 1, 2012.

In a very real sense, this is the essence and folly of Obamanomics which emphasizes boosting consumer demand to jumpstart the economy. According to the conventional White House received wisdom, the increase in wages should boost consumer spending and keep the economy afloat. That was the philosophy behind pumping more money into unemployment insurance, propping up public sector jobs, and funding low priority “shovel ready” projects when the Stimulus package was passed in February 2009.

Unfortunately, household incomes are falling because the economy continues to slog along at a positive but anemic rate. (Notably, savings rates actually increased during the recession and financial crisis.)

What is missing in the White House’s economic equation is any concept of what economists call “opportunity costs,” or the foregone benefits of investing resources in alternative and more productive uses. White House analysts probably don’t believe that hundreds of jobs won’t be created or filled because employers will find ways to achieve the same tasks with fewer workers. In an environment where household incomes are falling, inflation is increasing, and wage costs are going up, they will have little choice. Moreover, many of these jobs might well disappear simply because businesses decide their margins are simply to thin to continue operating in the State of Ohio.

Ohio is shooting itself in the foot with it’s mandatory increases in labor costs, showing once again the folly of making public policy by constitutional amendment.