Fixing Income Inequality Without the Minimum Wage

NEW YORK (TheStreet) -- Demonstrators bent on forcing McDonald's (MCD) to dramatically raise wages are doomed to fail, but their rage is well founded. Yet inequality requires much better solutions than boosting the minimum wage.

McDonald's sales and profits are already sinking, as Americans increasingly patronize competitors like Panera (PNRA) or Chipotle (CMG) that offer a better quality meal and atmosphere, albeit at a somewhat higher price.

Raising McDonald's starting pay to $15 an hour could increase the cost of a quarter-pound hamburger meal from about $6 to about $8, assuming that hourly labor costs increase by about $8 dollars. (That includes add-ons like payroll taxes and unemployment insurance at the franchisees.) If labor costs are 25% of product costs, that's about $1.50 more per meal. And there might be a markup too.

Higher costs might drive even more diners to competitors. About 90% of McDonald's restaurants are run by franchisees, often in choice locations. They might choose to shut down and convert their property to more profitable activities.

That story is playing out in San Francisco and Seattle, where some restaurants and other businesses either closed or reduced hours for workers as new laws hiked the minimum wage to unrealistic levels.

Simply, the notion touted by liberal activists that a law raising wages will create more spending power and more jobs is neither supported by economic theory nor those real-world experiences.

Yet for the working poor things remain very tough.

Nowadays, workers need a great education to get on a good career track -- and that is either too expensive or inaccessible for too many Americans.

A liberal arts diploma from a nondescript state college too often is not worth much more than driving an Uber cab or serving coffee at Starbucks.

Expanding community college education won't help a lot. While those relatively inexpensive institutions train workers for booming sectors like health care and information technology, too many students enroll in programs aimed at transferring to four-year liberal arts colleges. Some of these programs have terribly low graduation rates.

Shifting more community college students into vocational tracks would help. However, the economy, as it is currently managed and organized, could not create enough good-paying jobs for graduates from expanded technical programs to absorb 20 million unemployed and underemployed prime working-age American adults.

The U.S. normalized trade relations with China during the Clinton Administration and sought strengthened commercial ties with the rest of Asia. Countries in the region have exploited better access to U.S. markets, while manipulating their currencies and imposing various administrative barriers to U.S. exports.

Consequently, the U.S. trade deficit with Asia has grown to about $400 billion annually and the U.S. economy has grown less than 2% a year since 2000. By virtually every measure, wages and family incomes for most ordinary Americans have fallen, while bankers, engineers and other professionals, who can directly market their services abroad, have seen their incomes rocket.

Now, President Obama wants to negotiate a new free trade agreement in Asia, the Trans-Pacific Partnership, but more trade with Asia is a fool's errand if the policy is not seeking to erase the $400 billion annual trade deficit with the region -- and that is not mentioned among the president's negotiating objectives.

Balancing trade with Asia would create 3 to 6 million good-paying jobs -- still not enough to absorb all the unemployed or underemployed, but a good start.

Many of the income support programs for low wage Americans -- such as food stamps, free and subsidized medical care and disability benefits -- are too easily accessible to -- and abused by -- the 7 million unemployed men between the ages of 25 and 54 who refuse to look for work. To assist those still struggling, those programs should be consolidated into the Earned Income Tax Credit to more generously reward work among low-income Americans, instead of paying for indolence.

For too long, national policies have stacked the deck against working Americans. We won't get the country turned around until we stop cultivating false hopes with minimum-wage laws and instead put workers first through realistic international trade policies and income support programs.

This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.

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