Sunday, September 1, 2013

Econ 101 - Minimum Wage Style

Unless you live in a cave (not that there's anything wrong with that) you know the union thugs have been rent-a-mob protesting minimum wage and saying it needs to be $15/hour.  They seem to honestly and sincerely believe that this will help them.  It's a shame they can't see the reality.

If I could talk with the protesters, really talk instead of just sitting while they shout slogans.  I'd say let's play make believe for a minute.  Let's pretend it would be legal to do everything I'm about to propose.  We just have to follow the consequences to logical conclusions.  Since we're talking about almost doubling minimum wage, here's the experiment.  Take every bill out of your wallet, pocket or money clip and double the denomination.  I mean, if you have $1 bills, mark them $2.  Take $5 bills and mark them $10, $10 bills and mark them $20, $20 and mark them $40 (yeah, I know there's no such thing, just work with me here).   I'm going to assume if you're worried about minimum wage, you don't have any $50 or $100 bills, but do the same with them if you have them.  Congratulations, you now have twice the money you had a few minutes ago.

The kicker is that everyone else in America gets to do the same thing.  Are you further ahead in life because we've doubled the numbers on the money you have?  Or is the guy that you worry about all the time, the guy who used to make twice what you make still making twice what you make?  What if the price of everything doubled, too?  Wouldn't you be exactly where you started from? 

Doubling minimum wage will create immediate problems; a lot of jobs exist between the current minimum wage and $15/hour.
According to the latest numbers from the Labor Department’s National Compensation Survey (for 2010), here are some examples of jobs that pay in the range of $15 per hour: preschool teacher, barber or hairdresser, tailor, insulation worker, and library assistant (clerical). Most of those, arguably, call for higher skills than are needed in the typical fast-food position.

Similarly, a $15 rate would push fast-food pay above the following occupations: home health aide (about $12), bailiff or correctional officer ($12), child-care worker ($9.80), telemarketer ($13.40), and emergency dispatcher ($13.60).

And according to the Labor data, a $15 wage could put entry-level workers almost on par with their supervisors. The occupational survey pegs supervisor pay in the food-service industry at about $16 an hour.

The 2010 data put the occupation “fast food cook” at $9 an hour.

Legions of jobs in other low-skill occupations, including at retail stores, have similar pay.
So what do we do with all those jobs that are now in-between the old and new minimum wages?  Well, if $15 is the law, they have to be paid at least that much.  Many of these people, such as barbers, tailors, bailiffs, emergency dispatchers, and so on, got training or went to school for some time to get to where they are, well ahead of the fast-food worker/minimum wage slot.  They worked to better themselves.  Do we just make them all the same pay?  On the one hand, since we doubled the wages of everyone at the bottom, it seems only fair to double their wages so they're proportionally above the new minimum wage.  But if you double those wages, they'll suddenly be ahead of people who worked longer and harder to get to where they are.  You have to double everybody's pay.  On the other hand, somebody is paying those wages and that's real money which has to come from somewhere.  Where? 

That money comes from the price of what they're selling.  The price of every product sold and every service rendered will go up proportional to the amount of labor in the current cost.  Prices on everything won't double - some surely will - but every price that contains a labor component can go up.  Some prices will go up simply because sellers will rationalize that everyone has more money, so the price should go up.  That means the people trying to get this new wage to make themselves better off will pay more for everything they buy, and while the complaint is that they can just barely get by on the minimum wage, they'll most likely find they can't get by much better, if any better at all, on a doubled minimum wage.  They may find they lose their job because the only way to lower costs with everything increasing in cost proportional to its labor content is to cut the labor cost.

Fast food restaurants get by on a small average margin, but an average McDonalds makes around 10% of sales in net profit (it's not the same on all products) and the stock turns about 5% earnings per share.  No company is in a good position to absorb doubled labor costs, least of all these guys.  All restaurant prices will have to go up.  Some customers may not choose to keep going there.

Expensive labor would be a Godsend to Momentum Machines, who make the hamburger making machine I mentioned here last February. They suddenly become much more competitive and easier to sell.
(A Momentum Machines burger.  Note the glass tube to the right of the burger, containing chopped lettuce.  Behind that, the upper half of a tomato is visible, behind that a pickle is in another tube.  Tomatoes and pickles are fed into these glass tubes where they're fed into slicers that create the slices for the burger.) 

What we've accomplished by arbitrarily increasing everyone's pay in relation to a new minimum wage is inflation.  Workers make more nominal dollars (that is, they make twice the named number of dollars) but they haven't increased their wealth in any way.  They haven't advanced with respect to any other workers.  They haven't made themselves more valuable in any way, so their relative value compared to other workers still leaves them on the bottom of incomes.  It's still minimum wage, after all.  All they've done is crank another inflation source into the economy which hurts them at least as much as anyone else.   

Maybe this whole thing is just to give cover to the administrations efforts to raise the minimum wage to $9 an hour.  It helps them appear more reasonable.  The results will be the same.


  1. Well said, and amen...preach it brother.

  2. I made an effort to read your post word or word, but kept winding up, skimming it. I skimmed it, because it didn't have anything to say that I don't already know. I can't understand, why so many supposedly intelligent people, find these concepts so hard to understand. Keep up the good work.

    1. I understand. It's hard to write this sort of thing because it's so obvious.

      I get tired of arguing this point because (1) we're always right and (2) then they raise minimum wage anyway and we suffer the consequences we told them would come.

      People with no understanding of Econ 101 insisting raising the minimum wage will help them are like the people who insist gun free zones protect their kids at school. They just can't get past the first idea to ask "what then?".

  3. It's so easy. But they never stop shouting the slogans.