Sunday, May 11, 2014

The Minimum Wage " A Tempest in a Teapot"

Listening to the radio driving home from work the other day I heard a 19 year old single mom saying she couldn’t raise her child on the minimum wage. I’d go so far to say that her wages probably wouldn’t even cover paying for day care while she worked. She had problems before she started looking for a job.

In the early 1980’s I couldn't find any work in Colorado, so I bought a lawnmower and placed an ad in the local paper. I had no trouble making lots of money, but cutting the same lawn time after time was not mentally stimulating to me, I was bored to death, but it left my winters open for skiing. My only point is that many people expect someone to offer them a job. It doesn’t have to be that way, you can create a job yourself---no job application required.

If we were to examine a small business today, employing 20 workers, at 8 dollars an hour, for 40 hours, just the payroll would be $6400 for the week. Now raise wages to $15 an hour. The employers’ budget is still $6400. He has 20 employees currently earning $320 a week. Divide that by $15 and we get a 21 hour work week. On the downside, the more productive employees will move to jobs with more hours, so in the long run, a worker who can hustle, will get the better wage. Over time the successful employer will have to pay more to keep their most productive employees. The increase in wages also changes the economic factors that determine if it is more practical to move production overseas.

Notice however, in the public sector, when you pay more to keep employees, you are also committed to paying the "dead wood" the same rate and there is no way to fire these bad apples. 40 years ago, civil service was a way to get experience for your future job in the private sector. The dead wood employees stayed there, at a low wage forever. Back then, there was a stigma attached to civil service employees—-loser was a polite term for them; they couldn’t get a real job. The neat thing about that era, was that the taxpayer didn’t pay extra for civil service incompetence, if you were good at what you did, the private sector had a job waiting for you at twice the pay. Things have sure changed since then.

Raising the minimum wage doesn’t necessarily increase the number of jobs available and lowering the minimum wage suggests that there might be more jobs offered but with fewer applicants applying for them. The minimum wage is really just a labor entry point, all the employer is saying is that he will train the employee and give them work experience. With the increase in the minimum wage, the worker is demanding more money for a job that takes no skills, with the thought, “I can do this until a real job comes along.”

In the fast food business, it is now practical to build a machine to grill hamburgers and I'm sure French fries won't be far behind. The entrepreneur has the option, to replace labor with machines. Robots don’t join labor unions and can work 24/7. If an automatic hamburger griller costs 100K and replaces 3 people, how long would it take to pay for the grill? At $8 per hour, about 2 years, at $15, a little more than a year. Do the math, that job will disappear.

These people picketing for an increase in the minimum wage to $15; how did they all of a sudden arrive at the “earth moving revelation” that you can’t raise a family on the current minimum wage? The graph below displays the minimum wages paid in other countries:

A school janitor today probably makes about 20 dollars an hour. Do you think that he graduated from high school and got hired for the job on the spot? I can still remember our high school janitor 50 years ago; an immigrant from Italy with a bad limp named Luigi (raising 3 boys). The school kids were cruel, they use to mimic his Italian accent and his limp. But there was a certain harsh reality that hasn't changed over time; “A high school education only prepares you for an entry job as a laborer.” Luigi worked hard to get a decent paying job and it didn't come overnight.

In today’s world, many jobs start at X amount more than the minimum wage. So raising the minimum wage increases everyone’s wages. Will the new reality reflect itself in the government Cost of Living Adjustment (COLA)? Of course, maybe we ought to create a Gullibility Index for the nation based on an inverse of the COLA value. As the COLA’s decrease, the Gullibility Index for the nation increases.

The neat thing about raising the minimum wage is that it increases tax revenues. The poor will no longer be at the poverty level and will now pay taxes and consume less welfare---Why does that sound so absurdly insane?

So with the proposed pay raise, everyone will get paid more for the same amount of work and everything we consume will cost more. Economics tells us that the minimum wage is set by supply and demand not government edict. I'm sure that we can get Congress to repeal the Law of Supply and Demand. And while we are at it, maybe Congresswoman Pelosi will introduce a bill to rewrite Newton's Third Law so we can get better gas mileage.


Dan Mac said...

Hi Jim. I just saw on the news that there are fires in San Marcos. I hope not too close and that you and your family are safe.

Best wishes from the east coast...


Jim in San Marcos said...

Hi Dan Mac

We are doing OK so far. Looks like the fire has move East of us into Escondidio. I think that they will have it contained soon.

Keep your fingers crossed, I think we will be OK. The thing that bothers me, is that this sort of stuff is supposed to happen in July and August, not in May.

Thank you for your concern

Take care


maurice schuetz said...

If they up the minimum wage, that cost will basically be passed to all of us as comsumers, in higher prices.

Would that not be pro-inflationary, in an already pumped up pro-inflationary environment?

The Fed has seemingly tried so hard not to let capitol trickle down to the average middle class citizen.

Wouldn't it then hurt the Fed to up the minimum wage, by letting the inflationary cat out of the bag?

Curious about your thoughts.

Jim in San Marcos said...

Hi Maurice

Sorry for the late reply, I was up in Berkeley for my sons graduation.

We are seeing the minimum wage increase, and that is due to the inflationary spending of Congress. Although the average guy on the street can't connect the dots between inflation and government spending by borrowing.

What the Fed is doing with their re-purchase program is kind of like treating a bad case of hemorrhoids with pepper spray. You'll reflect back wondering what were you thinking.

My next article I hope to examine how this mess is progressing, but it is a little too late to stop what has been set in motion.

A basic rule of thumb, if the minimum wage doubles, your retirement nest egg needs to double. Inflation is a tax on savers and bonus bucks to credit card abusers.