Friday, December 15, 2006

The War over Raising the Minimum Wage

It seems that there is some disagreement between economists on the subject of whether or not to raise the federal minimum wage. At present, it is $5.15 per hour and has not been changed since president Clinton increased it from $4.25 in 1995.
Health care costs alone have risen over 80% in the past two years. Gasoline was about 99 cents per gallon back in 1995. It's well over $2.00 now. Housing has gone up, electricity, heating, clothing, everything has gone up since then. But despite cost increases and everything that has happened in the past 11 years, we have had that same income rate without matching increases for those unskilled workers who rely on the minimum wage jobs across the country. The Democrats hope to increase this into the mid-$6.00 range when they assume control of the house and Senate in January. Republicans want to see it either stay as it is, or they would drop the minimum wage guidelines altogether.

Economists are split roughly down the middle on what they think the effects of raising MW are. The basic argument in favor of it is that it is impossible to live on that and it’s therefore unfair. The basic argument against it is that if you raise the rate, then employers drop the numbers of people employed, and so jobs are lost altogether. But things are a little more complicated than that. Let’s look at it a little more deeply.

In favor of a decrease or elimination of minimum wage:

Those who do not want an increase of the minimum wage suggest that increasing the wage increases the costs for small business owners, and therefore forces them to lay off some workers, thus decreasing the overall number of jobs available and this hurts rather than helps the people who would normally work at these jobs. Further, they suggest that these people do not have a political voice and therefore could not very well attack the politicians who make this policy, to show their displeasure. So they suggest that politicians who advocate the higher wage are taking advantage of them by appearing to be helping the poor and appearing to be humane, but actually they are helping themselves at the cost of those not in a position to complain. They argue that if increasing the wage from 5.15 to 6.50 is a good thing, then why not increase it to $10? Why not $25 per hour? Why not $100/hr? The reason is because there is a balance of needs, and currently things are in balance, and raising the rate would put things out of balance.

In favor of an increase:
Those in favor of the increase note that, in real dollars, the buying power of today’s minimum wage is $2.00/hour lower than it was in the 1960s. It is virtually impossible to live on this wage, and that is why there is a grass roots movement afoot across the country that is advocating a so-called “living wage” of at least $10 to $12 per hour. This actually reflects the costs of living at the lowest levels of society in this day and age. They argue that if 5.15 is too much and the republicans say it should be lower, then why not make it $1/hr? Why not $1 per day like in China? Why don’t we do that? Because then those workers would starve.

My own analysis:
Let’s look at why we have a minimum wage in the first place. It exists because otherwise, the jobs would be held only by teenagers that are supported by their parents. All others who need to actually support themselves on their income would not be able to. This eliminates their legal, law-abiding methods for supporting themselves and they then must choose to either starve to death, or be forced into a life of crime to survive.

People who cannot survive in our system don't just suddenly disappear. They don't evaporate into thin air. They must still find SOME way to get food to eat for themselves and their families. It is up to society to provide a legal and moral way for people to do that. There should always be a legal, moral, ethical way for a person who chooses not to become a criminal to support themselves in this society.

Not everyone is cut out for college. Not everyone can perform at that level, and frankly, with the dramatic rise in college tuition fees in recent years, not everyone can afford higher education. So we have to expect that a certain percentage of the population will always have to do unskilled labor, or at least jobs that do not require high education. And typically, these jobs are at the lowest levels of income, and we are talking here about how low that lowest level should be.

If business owners had their way, with no controls whatsoever, then they would choose to maximize profits by lowering payroll costs, and the levels would drop to nothing. This is because there are some people who would work for nothing to gain experience, or to work for other reasons. These would be people who are supported by their parents or a spouse. Employers would have a virtually free workforce, and that is what we used to call slavery. Those who lack the education to get the skilled jobs, but also don't have someone else to pay the way for them, would be trapped in a position where they literally could not support themselves legally in this country. We would have taken away their only option.

A wage that is lower than what it takes to survive is not only unfair – it is very unwise, because it FORCES people to use crime to supplement their income to survive. A decent minimum wage is not only fair and humane, it is also prudent because it protects the rest of society from a whole large sector of the population being forced into crime.

Crime is both dangerous AND expensive, since fighting crime is also not free, and the costs are further passed to the rest of us to pay through increased taxes.

Remember that it costs $66,000 per year to keep a prisoner in jail. That includes the room, bed, food, clothing, guards, medical needs, etc. And that does not even begin to approach the costs of police work to capture them, or the courts to prosecute. Nor does it begin to talk to the costs of insurance and loss in the community for the things that are stolen, broken, or lost through the direct effects of the crimes themselves.

Given all this, I wouldn't doubt if the real total cost per criminal/prisoner to society is around $90,000 to $100,000 per year. By comparison, it is FAR cheaper to pay that person a living wage of $10 per hour, which translates to $20,000 per year, and it stimulates the economy, because, at that rate, ALL of their money is put right back into the economy to buy food, clothing, transportation, and all the essentials of living. Paying a salary to a worker stimulates the economy. Paying costs to capture and incarcerate them, is only a drain on the economy.

To my mind, the argument that increasing the minimum wage loses jobs is weak, and a thinly-disguised attempt to protect profits of business owners, and pander to their interests, and therefore to their votes and their financial support. So it is more a politically motivated argument. The so-called "balance" that some talk about really means that for business owners, things are in "balance" when they are coming out ahead. Back in the days of slavery in this country, the wealthy landowners thought society then had a "balance", and that by freeing slaves, they were upsetting that balance. So the "balance" argument is also flawed and highly subjective.

Raising the minumum wage does not really lose jobs. After all, by that reasoning, if we lowered the minimum wage to $2.50 per hour, could we then expect the business owners to suddenly hire twice as many people than what they have now? Of course not. They would simply take the higher profits.

Some states, such as Illinois, have already raised their state minimum wage levels to $6.50 per hour. There was no increase in unemployment attributable to this. Nothing changed in that state except that people at that level of income were better off.

Let’s think about this in very real practical terms. I used to own a fast food restaurant, so I have some experience in this area.

Let’s say you own a fast food restaurant like a McDonalds franchise location. You have 6 people working each shift and you have 2 shifts to cover the business hours.
If the minimum wage was increased by $1.35 from $5.15 to $6.50/hr, what choices would you have to compensate for the increased payroll? Would you fire 1 person on each shift? How could you? It takes 6 people to run the restaurant. If it really only took 5, would you have hired a 6th person in the first place just because you were only paying them $5.15 per hour? Of course not. You have 6 now because it takes 6 people to do it. So, to manage the store properly, all along, you only had the minimum number of people it took to run the restaurant. And now, if you want to continue to run the restaurant, you STILL need the 6 people. Nothing has changed there.

Would you fire the whole second shift? Of course not. You need the business revenue from those hours of operation. The equipment and real estate bills can only be paid if there are two shifts worth of business hours to bring in revenue per day. That's how the business model works.

Therefore you would NOT be able to reduce any jobs. You are already operating at minimum staffing.

So what are your other options? Well, you could either reduce your profit margin expectations, or increase your prices to force revenue up to cover the increased payroll cost. What is the negative side of increasing the prices? Usually, it reduces some of your revenue because some customers will choose to go to the competition. But in this case, their costs were ALSO increased by the same amount and for the same reason. A higher minimum wage affects all businesses equally, therefore they would also have to raise their prices slightly in order to offset the extra cost. This brings you back into sync again.

And how much would the meals cost? Well, at $1.35 more per hour for 6 employees, let's round it up to $1.50 for each employee including FICA. That's $9 per hour times the 16 hours per day they are open. That's a total of $144 spread across let's say 1,000 meals for the double-shift day. That's about 14 cents per meal at that rate. So a meal that costs $5.81 today would cost $5.95. A mere 2% increase in the price of a meal. Would that make a huge difference to your customers? I don't think it would affect sales. Especially if all the competition were doing the same increase. But it sure would make a difference to the employees! It's a 26% increase in pay for them!

As a business owner, suddenly, your people are making more money and it doesn’t really cost you anything because you raised prices to cover it, but so did your competitor, so you lost no business.

No jobs lost. No business lost. Happier employees. Less crime. And frankly, guess who buys your hamburgers? A lot of people who work at minimum wage. Do you suppose they might eat out more often – at your restaurant – if they now have a little more money? Of course they would.

Henry Ford had two brilliant, forward-thinking initiatives to help make America become the great and powerful country it eventually became. First, he created mass production – the factory manufacturing process that allowed us to out-perform and out-produce all the other countries in the world. We could simply manufacture more things, and make them faster and cheaper than anybody else. That gave use both economic power and military power in the world. It allowed us to make more planes and ships and tanks, and other equipment than any of our competing countries.

The other initiative was that he stated specifically that he wanted to pay his workers enough money that they could afford to buy the cars they were building. This built the middle class. This created the huge group in the middle of the economy that then eventually became a huge economic driving force that catapulted us onto the world scene with the strength of materials, and resources, money, etc. that helped us to win World War II.

Those were key inflection points in the development of this nation. Without those two things happening, we would have remained a largely agricultural country of wealthy landowners and peasant workers – like so many other nations of the old world.
Instead, we became industrialized and developed our middle class and eventually built ourselves up to become the most powerful nation on the planet.

That is the lesson that history teaches us on this subject.

Sure, there is a limit. We should probably raise the base salary to $10 or $12, but not $25. We have to remain competitive. Fast food companies don’t compete for local business with overseas companies, but manufacturers do. And with the US dollar in decline, our manufacturing base might start to build up again. We have to keep our wages manageable for business owners trying to survive in a globally competitive environment.

But, at the same time, it pays to pay workers enough to stay legal and legitimate. To send their kids to school. To stay away from committing crimes.

Basic decent humanity pays back both in the short term AND the long term.

At least that’s my opinion.


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