Monday, November 17, 2014

Proponents Of Sharply Higher Minimum Wage Are Incredibly Naive

Here on the west coast a number of cities are talking about increasing the minimum wage substantially over current levels, with amounts of $15 an hour or more being bandied about.  The simplistic argument is that raising the minimum wage means minimum wage workers will have a lot more money to spend, boosting the economy.  However, somehow having earned a bachelors degree in Economics eons ago, I can tell you that things are not that simple. 

First of all, for the most part, businesses are conduits for costs, i.e., the prices they charge are equal to their costs plus a small profit margin.   While many people have this idea that business profits are a large percentage of how much businesses charge for their products and services, that is usually not the case.  For example, historically supermarkets earn a net profit of 1% to 2% (i.e., 1 to 2 cents per dollar of sales).  Restaurant net profits run 3% to 5% of sales, and averaged about 1% of sales during the great recession.  (And how many people know that in the entire history of the airline industry, commercial airlines have a cumulative net loss?)  The corollary to this is that a significant increase in the minimum wage will by definition be passed on in its entirety to consumers in higher prices.  So any increase in the minimum wage will in reality come out of your pocket and my pocket.

Of course there's nothing necessarily wrong with that scenario.  It might me worth it for you and me to help finance a higher wage for low paid workers.  But alas, things are more complicated than that.  In economics there's a concept of marginal utility.  Basically economic inputs, such as labor, are priced at how much they are worth, and there is a limit as to how much any particular economic input is worth.  And frankly there are a lot of jobs out there that aren't worth $15 an hour to the employer, so for these jobs raising the minimum wage to $15 will not raise that worker's pay, but rather will send him straight to the unemployment line.  If this sounds like economic gobbledygook, check out this article on potential changes in the fast food industry.  While McDonald's is one of the major targets of the $15 minimum wage advocates, the fact is that McDonald's is hurting with unprecedented declines in earnings.  And raising the minimum wage sharply will mean that technologies that didn't make sense with a $8 minimum wage will suddenly become a no-brainer with a $15 minimum wage.  Or how can a hole in the wall family owned Chinese restaurant afford to pay its dishwashers and busboys $15 an hour?  Maybe they can't and they'll be driven out of business with a higher minimum wage.

So as the old saying admonishes, be careful of what you wish for.

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