Thursday, September 4, 2014

Minimum Wage vs Liveable Wage

[Johnathan Clayborn]

Today there were protests in 150 cities across the country from fast food workers who are demanding that the $7.25/hour minimum wage be raised, more than doubled, to $15/hour. The basis of their argument is that it is not possible in today's economy to support a family on minimum wage. While I may be empathetic to their argument, I am not sympathetic to their cause. Raising the minimum wage would be a terrible idea, for a number of reasons that I will try to illustrate.

In the United States the legalization and establishment of a minimum wage occurred in 1938 by President Franklin D. Roosevelt. It was originally $0.25/hour when the law was first enacted. Adjusting for inflation, that would have been approximately $4.08/hour by today's standards. In 1939 the Federal Minimum Wage was increased to $0.30/hour, or $4.97/hour after inflation. By 1950 Minimum Wage had risen to $0.75/hour, which is $7.16 after inflation adjustments. The rate has been fairly consistent since then. The primary reason that the Federal Minimum Wage Act was passed was to prevent people who were desperate for work coming off the heels of the Great Depression from being unfairly exploited by business owners looking to save some cash. (You can see historical minimum wage rates here). 16 US States currently have minimum wage laws higher than the Federal standard.

Let's take a moment to talk about how economics work. In the most basic sense there is a production of goods or services, then those goods or services are exchanged to consumers who trade them for monetary units. This has been the basic rule of economics for centuries. Keeping this in mind, people can only spend what they earn, and much of their income goes to things like food, shelter, transportation, personal insurance, and healthcare. According to the US Wage and Labor Department, the median household income in the US is $51,000. In fact, according to an analysis by CNN Money the average spending for households in this median bracket is 69% of their budget on those items. That leaves only 30% of their budge for discretionary spending on items such as entertainment, clothing, and miscellaneous items.

Before I continue further, let's talk a moment about how the wealth is distributed within the US. By now everyone has heard of the "Occupy Movement" and the unfair distribution of wealth among the "1%". The chart below illustrates that concept, but it also illustrates something more important to this discussion. The Median Income, as I mentioned, is $51,000. This means that half of all US Households make less than that annually. As you can see from the chart, the distribution of wealth does not follow a bell curve. In fact, the vast majority of the population is clustered near the bottom end of the spectrum; less than $33,000 annually.

Let's revisit that financial analysis again, but this time with a household in that $33,000 income bracket. Looking at Food, Housing, Transportation, Personal Insurance, and Health expenses this income bracket expends 80% of their budget on these items. That only leaves 20% of their budge for discretionary spending.

Now that we have that background out of the way, let's talk about this $15 minimum wage push. One of the biggest mistakes of this logic is what it will do the economy itself. The logic seems to benefit the individual at the expense of the economy as a whole. While more than doubling the worker's income would certainly do more to increase their discretionary spending, it actually will hurt businesses. In order for restaurants to be successful they have to maintain certain budgetary ratios. For Fast food the employee wages should typically not exceed 25% of the overall budget, for sit-down restaurants it should not exceed 35%. Assuming that they keep the same amount of staff, this means that an increase in wages by 200% would push their employee costs up to around 50% of their overall budget, which would sink even fine dining establishments. Some businesses are already legally challenging this decision in Seattle by filing a lawsuit claiming that impedes their ability to compete in a free market economy. In the meantime some businesses are trying to offset this increase in cost by taking measures such as doing away with company sponsored benefits such as sick time, pensions, retirement, and medical insurance. Some companies have even taken to charging their employees for previously-free conveniences such as parking on the property. In the end though the business owners are left with only two main options; reduce the number of staff or increase the prices of their goods.

If companies reduce the number of staff then there will be fewer people working and spending money, which means that businesses as a whole make less money and are forced to take cost-saving measures such as layoffs of price hikes. Some McDonalds stores have already floated the idea of eliminating cashiers and replacing them with kiosks in the lobby. This would spill over into retail establishments who would soon be forced to follow suit with either price hikes or layoffs, or both. The Self-Checkout lanes would almost completely replace cashiers.

If companies try to offset the cost by increasing the cost of items, effectively passing that cost on to the consumers directly, then that means that people will not be able to spend as much money, they will spend less, buy less and companies will lose their profit margins. This will result in either staff layoffs or price hikes to compensate, which further exasperates the issue. In either case, the end result is the same; a Kobyashi Maru that serves no purpose other than to destroy the base level of the economy.

Let's examine another less obvious side effect; what this does to non-minimum wage jobs. Increasing minimum wage to $15/hour would make their annual salary $31,200. According to the Bureau of Labor Statistics people with an Associates Degree earn an average of $40,820 annually. Bachelor's Degree holders earn an average of $53,000 annually. To put this into a different perspective, a teacher needs to have a 4 year degree plus certifications in order teach in any state in the US. In Arizona the average starting salary is $31,689. Raising the minimum wage to $15/hour doesn't automatically increase the wages of everyone else. So this devalues the educated middle class. We would essentially be saying that a job that requires no skill and just a few hours of training that literally anyone could do is worth the same value as someone who requires a minimum of 4 years of training to do their job. This logic is folly.

Going back to the main part of the argument; that people cannot support a family on minimum wage salary; it is not intended for that. Minimum wage jobs are intended for students and unskilled or barely skilled workers to fill the entry-level positions in the job market. This push for a higher minimum wage, more than anything, smacks of the lack of ambition and determination that seems to permeate our society of late. If you don't like how much money you make, improve your situation; go to school, get a different skill set, move up in your company. Don't be content with doing nothing with your life and then complain that you can't support yourself. Anyone can improve their situation with enough drive and desire to do so.

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These blogs represent my thoughts, ideas and opinions. They may be different from yours. You may not agree with them. While I do enjoy a good, polite debate on a topic (where points are countered with other points based on logic, reason and fact), I do not enjoy an argument (where you tell me that I am wrong simply because you disagree and cannot offer any reasons to support your position). I am very respectful of others, and I expect everyone on here to be respectful in return, not only to me, but to each other as well. Disrespectful posts will be deleted automatically. Feel free to share your ideas, but keep it civil, please.