Talent and the Minimum Wage
Some ads airing in Missouri are accusing Jim Talent of being against raising the minimum wage. Others are claiming he has worked hard to support increases. My question is: who cares?
I know a lot of people think the minimum wage is the way to create a wonderful, almost utopian society where everyone makes a “living wage” that allows them to do what they want with their lives. The problem is that the minimum wage will never be able to provide a living wage for longer than a very brief period of time.
The problem is simple and involves two facts. First, those who actually “benefit” from the minimum wage are at the bottom of the corporate ladder — the laborers who make stuff and keep the machinery of business running. That means every product you buy probably has some minimum wage people dealing with it. Second, companies exist to make a profit and usually aim to make a certain margin of profit. Now, if the minimum wage workers make $1.00 more an hour, the company will (rightly) transfer that additional cost to the price tag of the product, since they need to maintain the margin of profit that keeps the company solvent (at the very least).
So, let's say Bob is a minimum wage worker and he makes ten widgets an hour. If he makes $6.00/hr and we hike the minimum wage to $10.00/hr (a “living wage”), we have added $.40 to the cost of the product. Put simply, on labor intensive products, the product may actually double in price if we double the minimum wage.
Now, when products start going up in price, everyone starts demanding raises to meet the rising costs. This further increases the rise in prices as the raises move further and further up the corporate chain to the very top. Soon, Bob may be making $10.00 in 2007 dollars, but those dollars are worth the same as $6.00 in 2006 dollars, since milk and bread now cost nearly twice as much to purchase. The big idea is that the minimum wage causes inflation. It comes no closer to giving everyone a “living wage” than a hamster comes to traveling across the country by running in his little wheel.
I've passed over an important issue thus far. In this consideration, I've assumed companies will always simply raise the price of a product when wage rates are forced up. That is not true; sometimes companies will simply cease production (or outsource to places with cheaper labor). For example, if the most people want to pay for a widget is $1.00 and an increase in the minimum wage forces the price up to $1.25, the company will necessarily stop making the product and then Bob and all of the other minimum wage workers simply won't have a job at all. Now, it is true that eventually (in most cases) inflation will level things out so that $1.25 is essentially what $1.00 use to be, but that takes time — time that can kill off a product. Moreover, if the industries affected by a wage hike are makers of non-essential items, demand for those items may simply cease rather than causing inflation.
I wish everyone could have a living wage, really, I do. But the simple fact is that it does not matter if Talent or anyone else supports increasing the minimum wage. Because of its close ties with inflation, you will never make the populous better off by arbitrarily increasing the minimum wage.
This is a complex issue, and there is a certain amount of logic in all the arguments. One factor is that raising trhe minimum wage causes a shift in how industries and businesses use minimum wage people. A percentage of minimum wage people are in manufacturing, but a great many are in service positions. In manufacturing. the tendency is for the manufacturer to either raise prices, or to use fewer people, by investing in capital equipment. Since most manufacturing already inviolves some capital equipment, the cost of the product includes the raw material, the incremental cost of the invested capital (each widget uses up 13 cents of the table saw) and the labor. Increasing the labor cost may cause a shift in the cost of the materials, or a shift in the rate of utilizing the capital equipment. This all takes time, it doesn't happen instantly, or even in a couple of months.
In the service sector, where labor is a huge part of the cost, increasing the labor cost does cause an increase in the cost of the product. Maids cost more, restaurant meals cost more, stores have longer lines and fewer sales. Retail is funny, increased labor costs both increase the cost of the product, as well as make it longer to check out. The customer pays with his time.
Generally, what happens is that fewer people get employed and those employed keep their jobs longer. Companies tend to invest time and training in people with good basic skills and work ethic, while those employees with poor people skills, bad work ethic, or bigger problems (drugs, etc.) get dealt out.
The minimum wage pool fluctuates, in recessions, “welterweight” employees get pushed into the minimum wage pool, and even decent people that are normally minimum wage people are pushed out.
In general, raising the minimum wage creates a stable floor, and local businesses adapt. Non-competitive industries go elsewhere, or fold and the product comes from China, or Bangladesh, etc.
Service industries become better at what they do.
Increasing Missouri's minimum wage
Has some insight.
Here's my take (by example).
Say a widget costs $100. And 100 minimum wage workers make them. At the end of a year, after a 24 percent increase in the minimum wage:
Widgets will now cost $103
They will be made by 92 workers at the Widget Works.
Those 92 workers will consist of 20 workers who were there a year ago, and 72 hired in the past year.
The 80 who left will consist of 30 who now make more than the new minimum wage. 30 who make the minimum wage, elsewhere, 10 who are unemployed, and looking, and 10 who aren't looking (retired, school, etc.)
That's the industry side, which is less than half of minimum wage people. (But I know industry better than service).
The service side is much more fluid - my only experience is as a security guard.
In general, we needed more guards, so the ones on the payroll got lots of overtime. We had no challenges from management if we switched shifts, and let someone else get time-and-a-half (but we couldn't do double time without permission). But, if we were fully staffed, it would have been cheaper.
One thing to realize that a 24 percent increase in the wage does not automatically mean 24 percent increase in labor. The employer side of payroll consists of:
FICA and Medicare - 8 percent
Unemployment Insurance - 4 percent
Workmen's comp - at least 2 percent
Liability Insurance - 1 percent
Plus it costs 50 cents to do payroll and cut each check.
Supervising a couple dozen employees costs the same, before or after a pay raise.
The 24 percent increase is closer to a 15 or 20 percent increase.
Good points, Mike, and you are quite right. I'm impressed that you even had turnover of employees figured in. Wow!
We're all right - raising the wage raises prices, reduces employment, but all those ripples get buried in the huge waves of the economy. When the economy stinks, min wage people are unemployed. When it's great, everyone is working.
Here in SF, there are few minimum wage people. The lowest any job pays (in the burbs) is 10 an hour. 12 in San Francisco.