THE BLOG
12/04/2012 11:19 am ET | Updated Feb 03, 2013

Minimum Wage, the Poverty Trap, and America's Imperative (Part II)

In Part I of this piece, I made a case for why it is imperative that the minimum wage in America, which keeps millions trapped in a cycle of debilitating poverty, be raised to a level that enables people to climb out of their economic black holes. I did not mention Walmart because it seemed like just one of many examples of rich companies paying abominably low wages to their employees, but as the controversy expands to include possible wage-theft and overt exploitation, the grand scale of the company's alleged infractions has highlighted the problem of wage unfairness better than any union ever could.

What Walmart and many other employers who push back against higher wages don't get is that the need for fairness is not merely a moral imperative but a financial one as well. Low wages, and the poverty that they foster, exact a heavy toll on our economy, and ultimately impact companies like Walmart themselves.

The first part of this equation, which I mentioned in Part I, is consumption. The less money people make, the less they are able to spend, which directly hurts businesses. Consumer demand is the lifeblood of our economy and without it, no amount of innovation, productivity, or profitability makes the least bit of difference. By paying a third of their workers at or below the amount required for them to transcend the poverty line and to become robust consumers, American businesses are effectively sawing away at the very branch of the tree that they are sitting on. As an aside, it is true that the minimum wage is also used to index higher paid union jobs, meaning that raising the minimum wage would increase compensation for higher paid workers as well who are not living below the poverty line, but the argument remains the same: they are all consumers, and increasing their pay will benefit the private sector through higher demand.

While a company like Walmart might maximize its profits in the short term by paying their employees less or shortchanging them in benefits or overtime, they are also killing their own consumer base in the long run. The Walmart example is particularly ironic since the big box retailer's business is actually targeted at the very same demographic they employ, which is to say people on the lower end of the income scale. But, of course, common sense, as they say, is not common to all, and apparently not to the management of Walmart.

Which brings us to the second part of the equation -- poverty, or rather a lack of understanding of its dynamics. Everyone acknowledges that poverty is terrible but most business owners fail to grasp why it is a black hole from which there is no escape. Some do, of course, but as the increasing number of worker strikes in the country demonstrate, clearly not enough.

What makes poverty a vicious cycle is the simple paradox that the poor pay more for things than those who make more money, both in terms of time and money itself. The time part is obvious; poor people spend more time commuting on public transport, work longer hours to make ends meet -- including on weekends, and cannot afford to outsource any aspect of their life for a lack of resources. When they do try to free up time, it is usually at a price that they can scarcely afford and which pushes them even further down the financial abyss.

On the money front, the story is more complicated but no less poignant. Take, for example, a minimum wage worker who has to pick up groceries for the week. There is a discount store ten miles from his home, except that his boss will not let him leave work during the day and his weekends are occupied with his second job. He could go at night but without a car, he would need to take the bus, transfer twice, and still probably not make it before the store closes. As a result, he is forced to shop at a more expensive supermarket or convenience store in his immediate neighborhood, where everything from milk to frozen peas costs between 50 percent to 150 percent more (if this is not your experience, you live in the only price-stabilized town in America). Not only that but if by some chance the man does manage to make it to the discount store, he is then confronted with the dilemma of lugging industrial sized packages of everything back to his home, which requires an expensive cab ride. Unlike someone with a higher income, who has the luxury of choosing where and when to shop, the minimum wage worker is a prisoner of his circumstance. Cost effectiveness is unattainable in his world even though that is exactly what he needs.

The above illustrates how even the incredibly simple act of shopping for groceries, which most of us can manage without any trouble at all, can become a logistical nightmare and a fruitless game of devil's alternative for a low income person. This wastage of time/money then keeps the same person living a hand to mouth existence, either spiraling into debt to buy time or giving up valuable time -- that could be used for advancing his skillset and improving his job prospects, for the sake of paying his immediate bills. For the readers who think that this situation is the worker's own fault, or that he could get ahead if he just worked a little harder, I dare you to actually walk in this man's tattered shoes for a week before you venture your silly opinions.

Naturally, no argument in a society addicted to money can be complete without quantifying the above in dollar terms. So here are some greenbacks to think about: child poverty alone, along with all the scourges that go with it, costs the United States of America $500 billion a year. No, I didn't substitute a "b" for an "m" there. We are talking about half a trillion dollars of damage to our economy, not to mention our civilization and the prospects of future generations, annually. For comparison, the entire federal deficit for 2013 will likely be a trillion dollars. So, regardless of whether you are a diehard capitalist or an ardent socialist, you need to worry about the cost of poverty, and you need to worry about how the inadequate minimum wage of $7.25/hour (which amounts to just $15,080/year for a full time worker and which is well below the poverty line) and the opposition of the business community to raising that wage impacts not just low income workers but the entire nation.

I agree that businesses are not charities, but paying someone a living wage is not charity. The problem with letting the market decide what is fair is that the forces of supply and demand are rational only from the perspective of the business owner and not from the perspective of the worker. The game is rigged in favor of the employers, and there is nothing American or even capitalist about that. A prime requirement for healthy capitalism is that all parties play fair and by the same rules. Employers work on the principle of maximizing profit, so why shouldn't workers? Granted, a worker could simply opt not to accept a job at a particular wage, but in reality a person on the edge of poverty does not have that luxury.

Simply put, those on the lowest rungs of our ladder are being given the choice to either starve or accept a lifetime of economic slavery from which there is no emancipation; and that is patently "unfair."

In Part III of this blog, I will discuss the initiatives currently under way to address this issue, and suggest more solutions.

SANJAY SANGHOEE has worked at leading investment banks and at a multi-billion dollar hedge fund. He has an MBA from Columbia Business School and is the author of a thriller titled "Merger", which Chicago Tribune called "Timely, Gripping, and Original". Please visit www.sanghoee.com for more details.