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Minimum Wage: Is it much ado about nothing?

Posted on 10/16/15 1:00 PM

The US economy remains anemic. Some believe the government programs and polices have hindered recovery. Others believe more government intervention is required. Regardless of political position, the numbers don’t lie. GDP, the measurement of economic health, sits (adjusted) around 2%—far from the 7-9% of the 80s and not even close to the 6% of the 90’s.  US retail sales have faired no better (see chart). Surprisingly, however, the low wage employment sector has experienced the best job growth. According to the numbers, low wage job growth has been as high as 58%—twice that of the mid and high salary job market. Not surprisingly, politicians and pundits see a great opportunity to use that growth to fix the economy.

The plan is to increase the federal minimum wage from $7.25 to $15.00 an hour. The logic behind the adjustment is by paying lower wage earners more, they will infuse the economy with greater spending—consumer spending makes up about 70% of our economy. Proponents of the increase cite a letter signed by six hundred economists who believe the increase will aid growth and that the move will have no negative impact on prices or jobs. The detractors argue that an increase will kill jobs, raise prices, and actually displace low wage earners who tend to be under educated and possess lower skills.

It’s a lot to absorb and many people tune out the moment they hear GDP or Economics. The first thing to know is that this is not really a discussion about minimum wage. The second thing to know is I believe the best way the Government can help the economy is to get out of its way. Less government intervention, not more, always proves better for growth.

So why isn’t this really about minimum wage? Well because no one actually makes minimum wage.

Here are the true wage numbers:
According to the Bureau of Labor Statistics there are approximately 131 million workers in the US. Hourly works account for 77 million of the work-force. Those employees who earn the minimum wage represent about 1.6% of the hourly work-force. That is less than 1% of the total work-force.  And a third of those earning minimum wage are workers between the ages of 16 and 19.

As for Retail (including restaurant workers), which represents a substantial portion of the low-wage industry, only 23% of employees earn minimum wage. That statistic alone suggests that market forces, not government regulations, drive wages. Pay rates are after all a competitive tool used to hire and retain the most talented and most productive workers.

So if no one actually makes minimum wage why raise it?
The real goal is to raise the pay of a much larger segment—those earning between $7.26 and $14.99 an hour. That is an attempt to make the new normal thirty thousand dollars a year. At $15 an hour, an individual working twenty hours a week would earn about four thousand dollars a year above the current poverty level of $11,770. That sounds like a fair thing and a good thing for the country. Except, of course, there are real costs involved in the plan.

The 600 economists cited are not the only economic voices on this matter. Many economists have reached a much different conclusion…or at least a warning.  Read more on 'A Reckless Wager'  These detractors caution that although historical models do demonstrate certain economic benefits to increased minimum wages, these models only reflect modest increases. Keyword—modest. The fact is that there are no models to provide clues to the outcome of such a radical increase. These economists warn that such proclamations of the potential benefits of increase wages are mostly speculation and theory. They call it venturing into the fog. A fog that represents a very large gamble with America’s economic future.

Many cities have moved ahead and increase minimum wage under local ordinances. In places like Washington, California, New Mexico and NYC the raises have begun. These cities are claiming early victories, stating they have not seen the predicted loss of jobs nor the price increases…yet. It’s important to note that currently these increases are still modest and operating on a scale. In that manner they reflect the historical trends of increases and they may in fact provide a small boost to the local economy. The top of the scale, $15 an hour, has not yet been reached however and most minimum wage increases are still in the $10-11 an hour range. So we won’t know the true implications and effects until 2018 and 2019. Simply put: It’s a little early to claim $15 an hour works…because we have seen it in action. 

There is little doubt the economy continues to disappoint.
The current minimum wage (which no one makes) is representative of the same problem with earnings in general. The average worker, in all sectors, has seen their paychecks contract about 3% over the past five years. Minimum wage earners have about 4% less buying power. So in truth everyone needs a raise. Something we can obtain when the economy recovers, but not by the sheer force of the government’s will—that’s called Greece.

The chart below demonstrates the cost of living and purchasing power of two periods of minimum wage—1982 compared to 2015.

If this were just a discussion about minimum wage, we could all agree the logical increase is to about $8.25 an hour. Although that would still only help about 2% of the workforce. But as stated, this isn’t about minimum wage—it’s about all wage earners below $15 an hour and it’s an attempt to improve the economy by simply requiring businesses to pay more. Plus, it’s the kind of simple-talk solution that gets votes.

I’m not an economist, but even I can see the long term problem with such a dramatic increase. If minimum wage is $15 an hour, then logically our long-term employees will need to make more than the new guy. Our assistant managers, who would now make less than the thirty thousand a year we’d be paying a sixteen-year-old cashier, will need a significant raise too…and so will our managers…and then of course our district managers…and so on…you get the point.

But isn’t that just adding zeroes to everything? Does anyone believe that companies are so flush with cash they can make these changes without raising prices? Does anyone think that doubling low wage earners paychecks is going to double consumption? Maybe it does and everything is great. But if that doesn’t happen then what are the outcomes of these additional costs?

It seems higher costs could result in only a few scenarios. The first and most obvious is to employ fewer workers. The second is to provide fewer hours to those employed. The third and most likely is to raise prices—add zeroes to all sides and thirty thousand a year becomes the new poverty line.

There is a fourth option to control costs. One that we know works because it has worked before. Automation.

The car industry, like retail, was labor intensive. Today it is a highly automated process. That is why car pricing has remained fairly consistent with inflation. (If car prices followed the college tuition model, the average new car price would be $80,000, but colleges are, after all, labor intensive). Banks are well on their way to automation. Many of the transactions we once made at the counter are handled at the ATM and on-line.  And we see the delivery of goods and services through automation more and more. Redbox where once there was Blockbuster. Netflix in place of Cable (Cable subscriptions are falling by the hundreds of thousands.).

Many large retailers already have the self-service lines available. And McDonald’s, the world’s largest quick-serve restaurant is well underway with its testing of automated cashier services in Europe, and plans to roll it out in key markets in the US. Clearly, the business solution will be what it always is—to build a better mousetrap. Because although we can empathize with the plight of low wage earners—we can’t afford to pay fifteen bucks for a hamburger.

A hike in minimum wage? Sure, but a reasonable one. The mandated increases in wages is not the answer to our economic woes anymore than cutting a pizza into ten slices instead of eight yields more pizza.

Most disconcerting is the prevailing belief by the increase proponents that “businesses” can afford the higher wages and that those costs won’t disrupt employment, pricing, and consumer spending. It seems a contention reached in ignorance, especially as it pertains to retail in general.

A fifteen second Google search easily demonstrated the current state of retail. (I’ve done the search for you here)

 Certainly, wage costs aren’t the only factor causing retail woes. Consumer attitudes have changed, as have their shopping behaviors. Does the retail model need to change? Probably. Is the economy straining consumer spending? Obviously. Will throwing a drowning industry a $15 an hour anchor help? Well no doubt it will help Amazon…once they further automate distribution.

So although the minimum wage issue is much ado about nothing—since no one actually makes minimum wage—the impact across the entirety of the economy is certainly something that needs greater consideration and less politics. It makes more sense to wait and see how the increased wages in places like Seattle and New York City play out. What doesn’t make sense is an attitude of “we need to implement higher wages so we can see what happens”—not when were discussing the entire US economy.

A fan of increasing minimum wage? Would love to hear your thoughts.

Authored by: Ray Esposito    

Ray Esposito  Ray Esposito Linkedin 


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