Meet Ted. Ted is the proud owner and operator of a small little take-out place. Ted is running his business fairly, not overcharging customers and not underpaying workers (according to the law). After all the cost of running his business is done, Ted takes home $40,000 a year.
Ted has four employees. Two are minimum wage earners, working 40 hours a week for $5.15 an hour. Ernie, his cook, has been with Ted for a year, so Ernie is making $6.15 an hour at 40 hours a week. Bill has been with Ted for a couple of years. He is the night shift supervisor, so he makes $7.15 an hour at 40 hours a week. In total, Ted is currently paying $49,088 a year in wages for his workers.
Enter the minimum wage hike. When Congress raises the minimum wage to the projected $7.25 an hour, Ted will comply. The two minimum wage workers will get a $2.10 an hour raise. Of course, Ernie could get a $1.10 an hour raise to bring him up to minimum wage, but that hardly seems fair to put him at the same level as the entry-level workers. And it is less fair for his long time employee and shift manager to make the same as the entry-level workers, even though he would see a $.10 an hour raise. So Ted does the fair thing and shifts everyone by $2.10 an hour. Now Ted is paying $66,560 a year in wages for his workers.
Ted has a tough decision now. He can take the loss himself, requiring him to live off of $22,528 a year, or he can find some other way to equalize the business. If he lets one of his entry-level workers go, he would gain $15,080 a year and only drop to $37,608 a year. Of course, that would leave him short handed. He could avoid making the wage hikes for Ernie and Bob, but they wouldn't stick around long at that rate, and he'd be short handed and out of the experienced workers he had. So Ted has another option. He can hand off the cost to his customers. Dividing it over hundreds of customers shouldn't be too bad, so he boosts his prices to compensate for the $17,472 he has lost in income.
Funny thing. While not everyone is making the same decision, many are. Of course, those with more employees make bigger changes because those with more employees are having more dramatic effects on their businesses. Ted is not hiring that new employee he was hoping for. Others are laying off some of theirs. A lot are adjusting their prices to compensate. And, as it turns out, the cost of living ... everywhere ... goes up. As it happens, when Ted's wage requirements match California's wage requirements, the cost of living matches California's cost of living.
Well, of course, now those minimum wage workers are having trouble making ends meet ... again. They boost in pay was nice, but everything costs more now, so it doesn't feel like much of a pay boost. And the losses of entry level jobs is having a drag on the employment market. It was nice for a short time, but now $7.25 is a sub-poverty wage. Why doesn't someone do something about it? Shouldn't the government raise the minimum wage? Surely anyone who works for 40 hours a week deserves not to live in poverty ...
Maybe it will happen this way, and maybe it won't. But those who argue that the minimum wage needs to be increased, I think, are not taking into account all the factors, including the fact that it hasn't made those workers in other states with higher minimum wages any better off where they live than those with lower minimum wages. Yes, yes, I know ... economists are not in agreement about how this all works itself out. Yes, yes, I know ... my scenario is overly simplified. I'm not really trying to prove a point here. All I'm asking is this: Are we really thinking this through ... for everyone?
5 comments:
Of course not. You are correct. Every time the minimum wage or energy/gasoline costs go up...so does inflation. And every time it seems to put more and more of the small businesses out of business.
Think about it, back when we were kids...there were so many gas companies. Now there are only a handful of corporations that own all those names.
Anybody could have the american dream of running their own business, now with all the costs involved, it is next to impossible. Minimum wage is only one factor.
Law suit happy people, looking for the easy get rich are another. Then you have attorneys who lobbied to get laws passed that paralegals can no longer help others without an attorney involved. Who can afford an attorney for all the simple legal issues that come up? Oh I know, big corporations.
Raising the minimum wage always sounds good when we don't follow it through to the consequence. Isn't that true with so many of our decisions today?
No, I don't think we are. Those are good examples of how backwards that logic is.
A bunch of conservative blogs had Milton Friedman tributes a few weeks ago when he passed away. It was quite an education to see webcasts of some of his old PBS interviews, which made pretty much the same point. I need to read his books.
That would require more than single-stage thinking. Virtually all Democrats and some Republicans are unable to think past the first stage. Raise wages, wages go up. That that buys less is stage Two. The little Dem microchip overloads and shuts down.
Ted has another dilemma. His take-out business will reach a certain inertia if it hasn't already where his price increases will start to be neutralized by volume decreases. Each price increase affects a volume decrease. Of course, his customers are less capable of paying the higher prices. Result; Ted slowly watches his income reduced to zero, and into the negative. At that point, he's paying sales tax, payroll tax, all sorts of surcharges and property taxes and probably having to borrow to do so while earning nothing for himself. I can attest to that since that's the story of my business this year.
The truth for the worker is almost as bleak. Each new wage increase puts them in a higher tax bracket. They reach a point where nearly all the new income goes to paying taxes. Jumping to a new job won't escape the reality that government taxes the middle class and poor out of existence. The other job is just as likely to be more unstable. I have an employee who left his job for another, lost that job immediately, and now has no job to come back to, and no one is hiring. A new employee is as attractive as added ballast to a sinking ship.
A great analysis on single-stage thinking (i.e. politics' influence on economics) is Thomas Sowell's book, Applied Economics.
Great post, as always.
Jim, I hadn't even thought about Tom's other dilemma, the decrease in sales volume caused by increased prices. Good point.
The primary reason I didn't think about it is because it's not "right" to do so. The perception in much of America today is that the "business owner" is "bad", while "the worker" is good. You always have to look out for the worker; you never have to worry about the owner. They're rich, don't you know?
It's erroneous thinking, of course. It's just another one of those things that we're not allowed to talk about ... "What about the owner? How is he going to get by?"
How about we just make the refineries sell diesel gas at what it costs to refine it and deliver it? That way the trucking companies won't charge so much for shipping our GNP to every corner of the nation. Prices should go down and everyone should have a cost of living raise because a dollar buys more...
No, that won't work. No one has the vision to see that sometimes lower costs mean more volume of sales and more leftover money at the end of the month. And the refineries will dig in their heels or make another deal with the Arabs so they can continue to gouge Americans.
It seems we are still learning the lessons that the Roman Ceasars learned at the colaspe of the Roman Empire. Why don't we ever learn?
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