There were tearful hallelujahs and shouts of victory in Seattle recently when the city voted to raise the minimum wage there to $15 an hour. Fast food workers are dreaming of getting nicer 
apartments, buying newer cars and going back to school. The law will benefit over 100,000 Seattle workers.
Or will it?
If a restaurant is making a 3-4% net profit now – with labor being their highest cost, what will happen with this new law? Will they just graciously increase the pay and continue to operate losing money every day? Of course not. Most restaurant owners are working hard just to survive. Brendan McGill, chef/owner of Hitchcock Deli says he will either have to buy worse food or raise his prices. And he adds, “I barely get paid $15 an hour.” Local, independent restaurants and retailers will be the ones who are really going to struggle – and many will simply choose to close their doors. Those 100,000 jobs will shrink dramatically. Forbes magazine is predicting “reasonably large unemployment effects.”
And think about the workers themselves. If this law sticks they will be paying more for fast food, groceries, clothing – the very basics they must have – AND they will be losing the little perks they’ve come to expect. In a neighboring city where the minimum is already $15/hr workers have experienced losing 401k contributions, health insurance, paid holidays, vacation days, free parking, and free meals.
Many customers of restaurants have decided to no longer leave tips, rationalizing that the waiters are already making $15/hour, more than many college graduates. How will that affect the bottom line for waitresses who may be making $25/hr now with base and tips?
If we bring this full circle it’s like paying you to build my house, but you have to buy your bricks from me. What do you think will happen if you demand to be paid more?
In 1970 the average family income was $9400, in 2012 it was $44,321. In 1970 a loaf of bread cost 36 cents, in 2012 it was $1.98. How do you think the cost of bread, milk, and school supplies will relate to wages in Seattle over the next few years?
I’m very much in favor of people earning more money. But I don’t think we can legislate those increases. I think people “earn” more as their contributions to the overall profit of the company increases – or they strike out on their own where there is no ceiling on what they can earn. To force a company to pay more is an artificial and ultimately self-defeating measure for everyone.
Your thoughts?
Nice post, Dan!
Key question:
If a $15 (or $10.10) minimum wage ACTUALLY WORKED to improve your personal economic situation, why not raise it to $100 per hour? (or $1000 or $1 million?)
The answer is that IT DOESN’T WORK because the market adjusts and costs change just as in your examples.
To make more you have to bring more value to the market (ie, your customer/employer). Only more productivity or responsibility equate to more $$. There is no short cut.
Ken – it seems so obvious. I never quite understand why the lawmakers can’t see the real end result. Thanks for your comments.
“I never quite understand why the lawmakers can’t see the real end result.” -> Because the law makers are working in self interest by making themselves look good in the eyes of their voters.
Jon – now there’s a rabbit hole with no bottom.
If the minimum wage was really a good idea, then lawmakers would have set it and tied it to inflation. But they didn’t, so they can use it as a political issue. Every time it is brought up people will contribute to political campaigns for and against.
I think they see the end result clearly. It points to socialism at best / communism at worst. If you can’t sell a people on communism, just raise everyone’s wages to the point where wages become meaningless.
Hi Dan,
Excellent post. It gives you something to think about. Increase in labor costs equals increase in selling prices. Increase in consumer goods, increase in cost of living, inflation occurs. There is no raise here because you will pay for more on the items you already purchase on a regular basis. The purchasing power of your dollar is the same. Small and medium-sized businesses will be the ones most affected. They are the driving forces of the nation. If they fall, the economy falls. It is a chain reaction because they are the results of the change. Is it sustainable? We’ll see the results in a couple of years.
Dan, this is very true and it’s something the legislators don’t think about or care about.
I’ve debated this subject a few times and in my arguments I like to use my only-partially-tongue-in-cheek Macaroni & Cheese Theory: If the minimum wage goes up, watch the price of Kraft mac & cheese. And dry pinto beans. Also peanut butter. The prices of all these elemental items will move right behind the minimum wage.
The result: Those who keep their jobs will have maybe a week or two of apparent prosperity before the mac & cheese price catches up. Along with everything else.
Eric – I think you have a solid theory here. Yep – a very temporary euphoria and then the mac & cheese erase that momentary prosperity – well said.
I don’t many people think or care about this side of the argument until it’s too late. Where I lived in Milwaukee they voted on all kind of benefits for city workers, people cheered. The result was terrible service from the city because they had to compensate.
Kimanzi,
Raising the wage for the same work has got to be an artificial solution to anything.
Raising the minimum wage upwards of 75% will be difficult at best for businesses. And where in the heck did these politicians and others who are for this, come up with $15 an hour? And we all know, $15 an hour works out to approx $30,000 per year and we all know that too is not a livable wage. But, people who make minimum wage now work at jobs that are best entry level. I just don’t get it where people think that working the counter or grill at a McDonalds is a livable, lifetime type of job.
The bottom line, while it sounds good that an entry level person at Costco or JCPenney, or McDonalds is making $15 an hour, will just cause a business to do exactly what Dan mentioned.
Bob – thanks for your comments. Yep – it’s a very artificial solution to anything.
Unfortunately, it does not appear that most legislators have ever run a business. As prices rise, that $15 per hour won’t feel like much of a raise. Price inflation will end up taking most of those raises.
Kristin,
Yes I observe that most politicians are milking that system rather than making a living in a business or their own. Unfortunately, most college professors teaching “business” have also never run a business of their own. Lots of things look easy on paper.
Dan,
This is why I started teaching. My college students are amazed to find out how business really works. After working with businesses for over 12 years, it’s nice to bring that perspective into the classroom. Unfortunately, high education values PhD’s more than real world experience but I’ve been fortunate that I’ve been able to keep finding jobs even without a PhD.
The cost of living in Seattle is already astronomical. I wonder how much of a pay raise that really is? I am just glad the lawmakers in Seattle decided to do the economical experiment there instead of where my family and I are just surviving from pay check to pay check..
David,
Yeah I agree it’s an experiment at best. Certainly not a real solution to anything.
There is another side of this story that the majority of folks here aren’t saying. Economics don’t lend themselves to simple answers, but at the risk of being oversimplistic I will state this: Cost of living in the US is ‘artificially low’, and one of those reasons is because companies can pay wages that are essentially poverty wages. Prices are increasing already for many reasons unrelated to minimum wage. Have you compared your grocery budget in 2008 with today? Huge increases without any real wage increases over the last 6 years. There is no magic number of how much someone should get paid at a minimum, but paying $1 per hour is essentially slavery and $100 is not-sustainable at our current cost of living. Somewhere in the middle will treat people with dignity. Why is $7.75 best? $15/hour is still poverty, but at least it is approaching breaking out of poverty band. Prices will rise somewhat and many will suffer a lesser ‘standard of living’, but at least a larger group of people will move out of poverty. Somewhere we have to decide that helping ‘all boats float’ is better than ‘I deserve the freedom to get cheap McD’s food’.
Treat people with dignity? Business isn’t a charity – it’s a business. It’s there to make money for the business, not to keep people out of poverty. The business will always (well – almost always) pay as little as they can for the work they get in exchange for that money. You start seeing exceptions to that as you move up the talent ladder where the employee delivering the labor becomes harder to find and they can dictate their own wage. At that point, it’s in the business best interest to keep the compensation up to discourage the person delivering the service from going to a competitor. It’s also in their best interest to offer other perks such as medical insurance, retirement, etc., to keep their people happy. If I have 10 people standing in line for the same low-end job, why would I not hire the person willing to work for less if all other things are equal? Why should I be forced to pay the person in that position more than that? If the employee is worth more, they will either find a way to earn more from the employer or find a position elsewhere that pays what they are worth.
If you worship the dollar first, then forget about any concern of people’s value or dignity. I don’t believe the majority of 48days readers are here to worship the almighty dollar, but instead to find out how to apply our God-given creativity and gifts in a way that will generate an income for ourselves, our families, our employees, and customers. The focus has always been on celebrating and valuing people and their gifts. If business always treated people with dignity, respect and fairness then the government wouldn’t have to step in a try to legislate to protect individuals who are victimized by business that pay ‘slave wages’ because they can do so in a free capitalistic system. Capitalism can work beautifully or horribly. When we victimize others because of the freedom to do so, then we all lose.
A couple of years ago I wanted some stone work done on my house. I had already seen the quality of work done by the Hispanic guy I wanted to do the work. He showed up and wrote on a napkin – $12. I said “No bueno,” scratched out his number and wrote $15. His response was very predictable – the work he did was absolutely beautiful. I then allowed him to live on our property at no cost for the four months to complete the project. I agree – we have plenty of flexibility in capitalism to treat people fairly – so everyone wins.
Dan – I truly love rewarding excellent work. My wife and I have waiters and waitresses at our frequent restaurants insist we sit in their section. We have house cleaners tell us their schedule so we can plan for them to provide the service. We are happy to do that and even invite those people to sit with us to relax for a moment and allow us to treat them like people. We compensate them well because they provide a high quality service.
We are not yet at your level but hope to be in the next few years. My wife worries that we will not be the same people when we “have money”. But since we are growing slowly that as long as we are true to who we are, we will be the same people at $10M as we are at $100K.
Having the government dictate a minimum wage has nothing to do with dignity, respect or fairness. It has nothing to do with worshiping the almighty dollar. It certainly has nothing to do with celebrating the value of people. In fact, the government setting a minimum wage says that no matter how poorly you provide a service, you will be guaranteed a certain wage. It takes away some of the ability for a business to compensate a highly valued employee over one barely making the cut.
If the minimum wage is $5 and one employee can produce 10 high quality widgets per hour compared to another who produces 6 low quality widgets per hour, a business may be able to afford paying $6 to the high quality worker. Now the government comes in and dictates “thou shalt pay everyone a minimum of $7 per hour”. This does nothing for the quality worker because the business can’t afford to pay them $8.
When dining out, do you always tip the waiter/waitress 25% every time no matter what the quality of service is? No matter if your food order comes out wrong, your beverage isn’t refilled and you are greeted with a rude attitude? I don’t. I’ll regretfully leave a big zero for that type of service. On the other hand, for great, friendly service I may leave 40%. The minimum wags dictates you will pay 25% all the time. Yes, it’s the same thing because when it comes to a gratuity, the customer is the employer.
One other thing to consider: if you don’t like the conditions you work in or the wages you are paid, you are free to find better conditions and wages elsewhere. The government saying you are worth more doesn’t mean you actually are worth more.
What about the “raise” all the government entities receive when anyone gets more pay. More federal, state, and local tax revenue is generated with a higher wage. Why wouldn’t the government back the increase.
Yep – it would appear it’s a temporary fix and a long term blunder motivated by getting a pat on the back rather than being a real solution.
I think taxes are a secondary issue. Votes are primary because it’s about power. Taxes will go up when the government wants more money regardless of wages. New taxes will appear in the form of permit fees or restrictions on how you use to do things forcing you to use things that cost more.
@Jlherrm What you describe is a perpetual motion machine; output feeds input which increases output, repeat. That doesn’t work in a world with friction, and government is the greatest source of friction known to man.
I live in Australia – taking the American and Australian dollar into consideration, it still seems to me that wages in America/Canada are very low – my son lived in Canada and did house cleaning at resorts – expecting to get no more than $12 an hour for his labour; I do house cleaning in Australia, and my minimum employment wage is $22, my private hourly rate is $25 and for one off/move out cleans I get paid $45 per hour.
At the other end of the scale you hear of people like Brendan Burchard who can charge $500 + per hour for his time as a Business Coach, and I am paying $50 this week to see a business coach for 1 1/2 hours (he has a 66% special on first consultation)
It is all very interesting.
Erin,
Great input. “Wages” are quickly becoming more and more fluid. People don’t really pay by the hour – they just want to make sure the work gets done. We quickly established a whole house cleaning fee for the gal Joanne uses. But with that being done, we don’t care if she brings two other ladies to help – which she frequently does. All we car about is the overall fee – not the hourly wage. And that’s a model we’re seeing everywhere. If people gets results with Brendon then he can charge whatever he wants. Thanks for your comments.
sorry, that should have been private hourly rate $25.