I just read an article in the New York Times that I had to discuss here today, titled “The $15 Minimum Wage is Here. Why We Need $33 an Hour.” To say this is an eyebrow raiser is an understatement. Being a free-market sort of guy, who would prefer to see less government in private business instead of more, I think I just grew a few more gray hairs in my already silvering scalp. Why? Because what happens in the coastal cities and states matriculates into the rest of the country over time.
The author cited a report done in 2018, sponsored in part by City Harvest, New York’s largest supplier of food to pantries and hunger charities. The report came up with a “self-sufficiency standard,” which measures how much income is required to meet the basic needs of housing, child care, food, transportation, and healthcare, without public assistance. The findings of the report were that a single-parent with two school-age children, would need to make nearly $69,427 per year ($33 per hour) and a two-parent family with two children would need to make about $70,000 a year (each parent would need to earn at least $16 per hour). It also declared that 40% of the New York metropolitan area’s population falls below this. It sounds dire, doesn’t it? Unfortunately, the report cited, greatly lacks in specifics.
First off, while the City Harvest report doesn’t specifically make any reference to what the minimum wage should be, the NYT article leaps to the conclusion that because of what the report states, minimum wage ought to be $33 per hour, $18 per hour more than the $15, as it currently stands. Why? Because people can’t live off one full-time minimum wage job. This neglects the fact that wages are not related to the cost of living in the area. Rather they are based on a person’s production input and profit limitations that come for each job.
To give you a simple example, let’s say you are a cook in a fast-food restaurant. When you’re brand new, with no experience and just starting to learn their processes, there’s a good chance that you are losing the restaurant money. If they need, on average, each person to make 50 hamburgers per hour to break even on their investment on labor, equipment, and materials, and you are only able to produce 35 sandwiches in the beginning, you are a cost to their revenue. As time goes on, and you’ve been trained and are now making 52 sandwiches each hour, your making them a few cents extra for each additional burger you’re producing. After several months, you’ve become even more efficient in your methods and can complete 65 sandwiches in an hour. Your value to the company increases and by the time your 3-month review is due, you get an increase in your pay from minimum wage, based on your improvements. At some point, however, there’s only so much further you can increase your production, and you’ll plateau. This is where, for any position, you reach the maximum wage or salary for the job.
So, as you can see, all wages and salaries are determined not so much by costs of living, but instead are based on a person’s ability to produce more than the cost to employ them. Now, when costs of living are so high that a person who is working a minimum wage job can’t afford their basic needs, it does not mean that an employer, no matter how kind-hearted they might be, can change their wages to meet those needs. The employer’s responsibility is not to secure an employee’s well-being, it is to produce for its customers and be profitable.
Instead, it’s the employee’s responsibility to either (a) come up with a plan to reduce their living expenses, (b) build on their skills to a point where they can be promoted to a job with more responsibilities and higher pay, (c) find a way to learn skills that would make them desirable to another company that is willing to pay them more, or (d) take on additional work at the same pay levels to increase their income. The bottom line is that individuals need to decrease their expenses or increase their income. It is not a business’, nor is it the government’s responsibility.
The report also glosses over the actual data set they are using, such as numbers and percentages of things like the population sample’s: demographics, education levels, age, etc. Instead, all it provides is the 40% statistic and then further breaks down those who are below the standard. This is important, because in order to see where the problem is, you need to know who is being affected the most. Rather, the report simply presents the issue, without explanation, giving those who read it the idea that it’s a wage problem when it could be something else entirely. Is it education? Does it have something to do with the demographics? Is it a bigger issue for the young people there? Who knows?? This study doesn’t aim to answer those questions.
Additionally, you have to read the fine print to discover they are including youths between 16-24, which traditionally have double or more the unemployment rate than the rest of the general working age population have. Not only that, this group of people often have fewer of living expenses that they are talking about in the study. One is left to wonder if this wouldn’t skew the findings.
Another problem I noticed is that the study is including all of New York City’s boroughs, yet it lacks any statistics of how many people in each of the boroughs fall below their standard. Maybe this is predominately a problem in one area of the city and not the others. Also, there’s great differences between boroughs in terms of their living expenses and wages. So, when the New York Times article goes into how much the minimum wage should be for all of New York, it’s using the averages of all the boroughs – from upscale South Manhattan to the less affluent Bronx. The spread between these two cities’ self-sufficiency wages is about $34,000. Leaving one to question if it is justified to use cost-of-living statistics equally when there’s such a difference between boroughs?
Finally, the report provides only a single snap-shot of the percentage of people who fall below its self-sufficiency standard. This does not account for economic mobility. Most people, in fact, do not remain on the lower-tier of socio-economic status. The majority of whom were at the bottom of the ladder will eventually rise as they gain more skills and talents. Very few individuals, who start their career at minimum wage remain there. The authors of both the article and report seem to have this odd belief that people are incapable of lifting themselves above their current station in life.
This all leads to what neither the NYT article, nor the City Harvest report addresses: what is the impact of raising the minimum wage, let alone more than doubling it? That’s where I’ll try to help fill in the blanks. This is not a comprehensive list, but just a few of the biggest impacts.
1. Things get more expensive. People lose jobs.
There are many expenses that businesses take on when providing a product or service. One of the biggest, for those companies which hire employees, is labor. You must keep in mind that the goal of a business is to make a profit. For the small, privately owned business, making a profit is tantamount to the owner’s personal income. The smaller the profit, the less money the business owner has for his or her family. For large, publicly traded companies, it is the CEO’s fiscal responsibility to the company’s shareholders, to make as much profit as possible. So, when the cost going into producing a good or service goes up, business owners and CEOs must make hard decisions, asking themselves:
A) Do I raise the price of what I’m selling?
B) Do I keep the cost increases in check by letting people go?
C) Do I hold off on hiring new people?
D) Do I pray that, miraculously, everything will be just fine and do nothing?
For most businesses, it’s a choice between two losing options, be hated by the customers or be hated by the employees. In some situations, the business simply can’t cut the number of employees because of the product or service involved – at least, not immediately. So, they raise the price a little bit across the board, hoping it won’t be so much that it will drive away customers. For other business, the option of laying people off, might be the better one.
2. You'll see more “out of business” signs.
In the end, money is limited in supply. When things become more expensive, people become more selective in what they purchase. It could mean fewer nights out to the movies, restaurants, or clubs. It could mean holding off a while longer to get the car they’ve had their eye on. It could mean mowing their own lawn instead of hiring someone . . . You get the idea.
For businesses with small margins, just a few less customers every week, month, or year, could be the difference between keeping the doors open or having to hang up the “Going Out of Business” sign. It’s not pretty. Just look at what happened in Seattle a few years ago, when they decided to incrementally phase in a minimum wage increase from $10 to $15 per hour. Even with the slowed process, many restaurant owners reportedly had to throw in the towel after just the first increase. In the restaurant industry, among those which cater to the less affluent clientele, for every $1 increase to the minimum wage, the likelihood of it closing goes up by 14%. Why? Because less affluent customers tend to be more price conscious. The same principle works in other industries as well.
3. Higher unemployment for some.
For those businesses in highly competitive markets, where price is a leading decision factor, cutting workforce numbers is just about the only option for businesses wanting to keep going. This has the net effect of hurting some and helping others. For those minimum wage employees, who are more productive, have a greater skill set, and have more experience, they tend to gain when the minimum wage is increased. But for those who are less skilled and less productive, they are usually the first to get cut from the staff. For them, the minimum wage didn’t increase, it dropped to $0 per hour. For the young people who haven’t had the opportunity to work yet, they are virtually kept from getting that first job, where they can learn skills and begin developing their career. They lost this opportunity to someone with better experience or educational background.
This is part of the reason why youth unemployment is so high in some cities and states.
4. Misallocated labor resources.
In the study of economics, prices are called market signals. When demand is high and supply is low, prices on that good or service go up. Likewise, when demand is low and supply is high, prices go down. There is always a search for equilibrium between supply and demand, which determines price.
However, when price controls are imposed by government, they have a way of throwing things off. Minimum wage is just such a price control. It puts a bottom on how low the price for labor can be. This in turn, changes the behavior of the labor market.
People who wouldn’t normally apply for a minimum wage job, may now find that it pays enough for them to put in an application. This might lead to shortages in other types of jobs. Anecdotally, I was talking to a bank teller one day and the topic of the minimum wage increase being discussed in Missouri came up. She said that if it reaches the same level that she’s making as a teller, she would gladly move into a less mind-taxing job. Here was a bright, young woman with a solid future in the finance industry, pondering taking a fast-food job because it paid nearly as well.
I have nothing against the fast-food industry, but does this seem like a good use of talent?
5. The minimum wage will never keep up.
Here is probably the most frustrating part of the whole argument about minimum wage. No matter how much it gets increased, in short order, the cost of living goes up right along with it, because of the new increase in labor costs. It’s a never-ending cycle. No matter how much the government advocates for paying a “living wage” for people on the lowest rung of the economic ladder, it’s always going to be an elusive goal.
So, rather than trying to fight the cycle, we should appreciate low wage jobs for what they are. They are meant to be the starting point for people who are without skills and work experience. The young person’s first job is supposed to be an opportunity to learn what employment is all about. You show up on time every day, do the best to your ability, learn something new as often as you can, take on more responsibility, and grow to the point where you are ready for a better, higher paying job. And repeat.
Raising the minimum wage all the time does two things: (1) It prevents some people from entering the workforce by getting that entry-level job and (2) It locks others into those entry-level jobs. It’s obvious that the writers of both the article and the report have never owned a business, nor took an economics class. While I appreciate the goal they are trying to achieve, sometimes the side effects of the medicine being delivered is worse than the affliction.