Thursday, December 09, 2004

What minimum wage?

I am writing this post in response to an article that was in the South End today ::Click for Story:: regarding the minimum wage. Among other things, the author (not even from Wayne, I might add) promoted raising the minimum wage from 5.15 to 9.50, the Federal "poverty level." This article makes some wild claims without any math to back them up, so I will use math to counter the claims and discover the truth.

First, start with a small store with 3 employees who earn $6.00 an hour and work 32 hours a week. Each worker takes home $192 a week from this job. (I am ignoring taxes for simplicity's sake) Now the almighty and all knowing federal government steps in to protect us from ourselves once again and raises the minimum wage to $9.50 an hour (why not 9.25? Why not 9.75? Oh yeah, $9.50 is that magical "federal poverty level" standard) Before the wage was raised, the owner of the store paid $576 in wages each week. Now, if the owner kept the same number of workers working the same hours, he would have to pay $912 a week in wages. Since this is a small business, we will assume, like most small businesses, he didn't simply have the extra $336 a week sitting around not being used. If he did, he probably would have expanded his hours, expanded his business, etc. Therefore, he doesn't have the extra $336 a week to keep the employees working their old hours. He can do one of two things. He can either fire one employee and still pay slightly more than he did before the rise in the minimum wage, or he can cut each of the three employees from working 32 hours a week to 21 hours a week. Now the employees are not making 6.00 an hour for 32 hours, they are making 9.50 an hour for 21 hours. Guess what? Their wages a week at 21 hours a week at 9.50/hr. is a whole $7 more than it was at 6.00 an hour. Huge raise, huh? But just wait, it gets better. Either way, the owner has fewer employees working at any one time becuase he either fired one or cut all their hours. So the lines to wait will be longer. Customers will have to take more time waiting to be taken care of. They will get very annoyed with this and shop online instead, or go somewhere else. Now the owner is making less money, so he has less to pay his employees. Say he only has $500 instead of $576 a week. Now he has to cut their hours even more, since he cannot lower their wages. This will go on, and the owner will go out of business if he is forced to raise his prices to such an extent that people stop shopping there (very likely if the quality of service goes down as well).

That was a small store. Now lets look at a small business that makes, just for example, brass bolts. There is no need for highly paid skilled labor at this business, so the employees are paid $6.00 an hour, and there are 10 employees at the business. Each works for 40 hours a week. This means each employee earns $240 a week, and the owner pays $2400 a week in wages. Now the minimum wage is raised. At $9.50 an hour for 10 employees for 40 hours a week, the weekly wage for each is $380 a week and the owner pays $3800 a week. Again, we will assume the owner would have expanded his business if he had the extra money available before the wage was raised, so he now has to pay $1400 a week he doesn't have. He now gets to reduce the number of hours his employees work. They can either take a cut in hours to work only 25 hours a week, or the employer can fire 4 employees (or fire a lower number and reduce the remaining employees' hours). Now, either way, there are fewer employees at the business doing the work, so productivity is lowered. Gross production goes down, meaning gross income goes down, meaning less money is available to pay the employees, meaning another cut in hours is coming. Or lets say the owner raises prices instead. He raises prices such that he can support the 10 workers working 40 hours a week at $9.50 an hour. What happens now? Well, sales decrease to such a point that he begins loosing money again. Why? Because if before he was selling the nuts for $.85 when he could get $1.00 for them, he would have upped the price to increase his profits. Now he is forced to charge $1.00 for nuts that were $.85, and that means he is charging a price others were not willing to pay, so he will loose business and therefore money. These two examples are not even taking into account the ill effects caused by the suppliers of the store and the brass nut making business raising their prices, or decreasing their production (as they would have to do if the minimum wage were raised.)

Now the most obvious response to what I just said is "things won't go like that, they will stabilize." Well of course they will, but they will stabilize through inflation. The $4.35 increase proposed by the author of the article (re)published in the South End is an increase of 84.4%. This will cause drastic increases in prices at small stores and other places where employees are paid below this magic wage of $9.50. Food, clothing, gasoline, etc. will increase in cost. Assuming employers raise prices rather than cutting hours, this means a dollar doesn't buy what it used to. This is the essence of inflation. Things start to cost more, prices go up forcing everyone's wages to go up, until everything stabilized. At that point, those who were making $6.00 an hour are now making $9.50 an hour, but 9.50 can only buy what 6.00 used to. So what have we gained? Nothing, of course. We haven't "lifted" anyone out of poverty, we have just increased how many arbitrary units of measuring money (the dollar) are needed to reach the poverty level cut off. This is the essense of raising the minimum wage, and is the reason it is a pointless gesture. People don't think about things, which is why so many of them support this. They think "wow, the poor won't be poor anymore; we can kill poverty with one little law." They simply don't consider all the implications of doing this. That is what makes this proposal, like most other liberal policies, simply a feel-good, do-nothing stunt to gather votes.

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