Bad Idea of the Year: Raise the Minimum Wage

Who can live on $8 per hour these days?  Surely, in a country as rich as ours, no one who is willing and able to work should suffer the indignity of such paltry wages.  The solution is simple and obvious: pass a law.  If you work, you get at least $10 per hour, period.  Anything less is downright indecent.  And so we have a ballot initiative to make this happen in San Jose, California.

It’s anything but simple and obvious if we stop and look and think about what’s happening in the real world.  Today I went to a small family-owned sandwich shop near my house.  They are very popular and so four young workers, probably students from the nearby college, were jammed in the tiny shop with the two owners.  The sandwiches are great but I also enjoy watching them hustle at lunch time.  I’m quite certain the helpers were all earning minimum wage but had other sources of income or support.  Far more important than their wages, which will quickly be spent, is the work experience that will last them a lifetime – and the confidence that comes from knowing they are earning their money by doing a job in the very best way they can.

The McDonald’s near me employs a few senior citizens, likely at or near minimum wage.  They almost certainly have other income.  Just being active and involved in productive activity gives their lives meaning and may well enhance their health and longevity.

The sandwich shop operates on thin margins which are being squeezed by rising food prices.  If they had to pay their young helpers $2 more per hour they would probably close.  But the nearby Safeway store, which has a sandwich bar, would very likely absorb part of the wage increase and pass the rest on to customers, which would be easier to do with their family-owned competitor knocked out.

I also frequent a family-owned restaurant in San Jose.  The food is excellent, the decor is nice, but the main attraction is the owner’s friendly and outgoing personality which suffuses the atmosphere.  One day recently I had the pleasure of chatting with her after the lunch crowd had dissipated.  I’ll call her Mary.

Two major employers nearby supply most of her customer base.  Layoffs have hit one of them, and many of the fearful remnant have likely switched to brown bags.  Cuts are also pending at the other.  Mary has ideas for countering the drop with increased leverage of her fixed assets.  She has been trying for well over a year to acquire a license to serve beer and wine but has gotten caught up in a bureaucratic tangle.  She is considering expansion into dinner service.

Along with declining gross income, she faces increased costs.  Mary estimates her food bills have risen 15% in the past year, with utility increases not far behind.

Like the sandwich shop owners, Mary employs minimum-wage help.  She points out that a $2 increase would be closer to $3 out of her pocket because of payroll taxes and mandatory insurance.  And it doesn’t stop there.  To maintain morale, she would have to raise all her staff’s pay roughly in line with the amount given to those at the bottom.

Perhaps Mary could just shave a little off her profits to cover the increase.  Perhaps, if there were any profits.  We economists evaluate profits a little differently than accountants.  When owners work in their own business, we count the wages they could have earned working for someone else as an expense.  As seen by accountants, she is roughly breaking even.  From a more realistic economic viewpoint, Mary is losing money.  She knows this is not sustainable but is holding out for an economic recovery and hopes for a boost from her expansion plans.

Profit is not Mary’s main motivator, though she wants to cover costs.  She loves cooking, loves her customers, and yes, she loves her staff.  Some of them have been with her for many years.  Some have gotten married and had babies, making her feel part of their lives.

Some of her least productive employees, those who wipe tables and clean up, are the source of her only significant labor problem.  One might think the process of cleaning a table would be obvious, but there is a right way and a wrong way and some of her people don’t always do it right.  One in particular sometimes has to be reminded of what Mary expects, but he doesn’t seem concerned.  He seems not to comprehend simple work ethics – he doesn’t care if the job gets done right.  Do such people deserve a 25% pay increase?  Wouldn’t they benefit more in the long run if they had to fall on their face and learn what it means to earn a living?  Sure, they may come from dysfunctional families.  So what?

It is the customers who call the shots in any competitive business, and most especially in the restaurant business where diners have so many choices.  Through their patronage or lack thereof, customers indirectly decide the value of each factor of production including table cleaners.  When an employee does not produce enough to cover his wage, as ultimately decided by the customers, then the loss may be taken up temporarily by the employer, but in the long the result is unemployment among the very people that the law is supposed to help.  Employers suffer too, as do customers when small businesses are driven under.

For most of us, minimum wage laws are not binding.  You can’t (yet) find good economics lecturers for $8 per hour.  So high earners and medium earners can vote for the minimum wage and feel good about it, not realizing, or perhaps even not caring, what the law does to the least productive people in the work force.  Starry-eyed ideologues aside, those most eager for minimum wage laws are those just above the bottom, who can (barely) retain their jobs under the new minimum wage.  They are shielded from competition from those driven out by the new laws.  Who are the unfortunate losers?  Disproportionately, they are black teenagers, whose unemployment rate is sky-high.

It would be a tragedy if the sandwich shop or the restaurant are crushed by the new laws – for me as a customer, for the owners, but most of all for the unfortunate low-productivity workers who are barred from taking employment.

Would I go so far as to advocate and end to all minimum wage laws?  I would indeed, on moral grounds to begin with: no outsider, even a government agent backed by a ballot initiative, has the right to forcibly interfere in a private transaction such as an employment agreement.  What about practical grounds?  What if somebody offered to clean Mary’s tables for $2 an hour?  Would she be so foolish as to hire such a person?  How diligent would they be?  How long before they found something better and skipped out?  There is a limited supply of competent workers for jobs above the minimum wage and employers are forced to offer competitive wages to attract them.  The same would be true at the lower scales, absent minimum wage laws.  With repeal, there might be a short burst of low-wage activity which would subside as incompetent workers were weeded out.  In the long run very few would be earning less than $8 per hour.  Lots of other social problems would be mitigated as unemployment subsided among black teenagers and others.

Now back to today’s minimum wage earners, and let’s omit the aforementioned student and senior citizen groups.  Concern for the welfare of low-wage earners who are trying to make it in Silicon Valley is well placed.  What to do?  Substantial benefits could be realized immediately by removal of government barriers to employment.  Make participation in Social Security and Medicare voluntary.  Let workers choose whether to buy unemployment insurance or disability insurance or worker’s compensation or alternatively to take all their income in cash.  These would be great short-term fixes, but in the long run, only increased productivity  enhances incomes.  Productivity comes from education, work ethics and technology.  Minimum wage laws only make things worse.

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13 thoughts on “Bad Idea of the Year: Raise the Minimum Wage”

  1. Like so many thing that liberals/Democrats want, nobody (on heir side) has a clue of the real world consequenses, either that or they are actively trying to destroy the country, or as is most like a combination of both. I can’t imagine a much worse fate than being a small business owner in California right now.

  2. Another problem with the minimum wage, probably bigger, is that most contracted workers have built into their contracts, especially union contracts, that if the minimum wage goes up, their wages go up by a similar amount. When their wages go up, many other companies also raise their wages to keep from getting a union. This has the effect of raising costs for everybody and reducing the market for higher wage jobs, especially entry level higher wage jobs.

  3. As an employer I support labor laws and a regulated minimum wage. In the rural northeast a person could not survive on minimum wage. It would cost approximately 1518 per mo for rent 750, groceries 500, laundry 24, bus pass 45, electricity 100, heat 100, which, based on a 40 hour work week, would require a net wage of 9.49 per hour.

    I’ve had an opportunity to read several union contracts and it has never been my experience that they have been reflective of minimum wage increases, COLA increases perhaps but never minimum wage increases.

    Unfortunately, there are employers who have no concern for their most valuable asset, employees, and would exploit them for their own gain.

    1. What does it mean to you to exploit an employee? If an employee were truly being exploited, why wouldn’t he go to another employer? Employment is a two way, mutually beneficial, contract. If I am willing to work for $4 an hour and both myself and the employer agree to it, what right do you have to stop me?

      1. You make a valid point, workers are free to come and go provided there is somewhere for them to go. Employees are exploited in many ways, they may be coerced to agree to terms because they do not have the means necessary to leave. It isn’t a matter of picking oneself up by one’s bootstraps.

  4. I live and work in the UK and earn (before tax) £29,000 per annum. The UK has operated a minimum wage for a number of years which is currently set at £6.08 per hour for workers aged 21 and over. As of October 2012 this will increase to £6.19. I pay a cleaner to clean my apartment for 3 hours a week at a cost of £6.50 per hour although I nearly always leave £20 because I can not be bothered rooting around for change! Given the high cost of living in London (where I live) I believe that the minimum wage is, almost certainly necessary to prevent employers from exploiting their employees. £6.19 is not a huge sum of money, however the minimum rate does help to keep body and soul together. To me my cleaner is not a mere factor of production, she is a human being and I wouldn’t feel comfortable paying her less than I currently do even if the minimum wage where to be abolished.

    1. Which, in my mind, at least, is exactly the point. Where are these supposedly exploitable workers going to come from, and why are they going to stay in those jobs. If they take them at all it will be to learn the ways of the workplace and then they will move on.

      I can’t speak about the UK, let alone London, but in the States there are no skilled workers who in other than temporary emergency situations work for minimum wage, yes, that includes housekeepers.

      We can speak all we want about exploiting workers but, inevitably it turns into exploiting customers, and customers will NOT tolerate it.

  5. Society could increase both wages and employment by completely untaxing wages. The minimum wage is in effect a tax on employers of low-skilled workers. If one wishes to subsidize the wages of the poorest, why tax just their employers?

    1. because the governments won’t reduce their revenues in proportion to the employer funded benefit they just created, in fact, they earn more on marginal wage taxation. its an invisible tax hike.

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