Related post: The fallacy of the middle wage: part three
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The fallacy of the minimum wage: Part One
By Rob Janicki
The fallacy of the minimum wage and its claimed benefits continues on with eight states raising their minimum wage rates by an amount equal to the increase in the cost of living (inflation) as measured by the Consumer Price Index.
[...] Minimum wage rates in Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont and Washington will rise between 28 and 37 cents per hour on Jan. 1, thanks to state laws requiring that minimum wage keeps pace with inflation.
Rates in these states will range from $7.64 per hour (in Colorado), to $9.04 (in Washington) in 2012. [...]
The first consideration to understanding the fallacy of the minimum wage is to clearly understand that the minimum wage is an artificial creation made by politicians, for the benefit of politicians for purposes of re-election. That should make it fundamentally suspect at the outset of any analysis. Minimum wage laws try to overcome and supplant the laws of supply and demand in a free market capitalist economy. This is akin to trying to deny the immutable law of gravity in physics because government mandates exceptions to that law of physics.
The joke that went around early in the Obama administration had Rahm Emanuel, Obama's Chief of Staff, when asked if the administration understood the law of supply and demand, stating that they would repeal any such law.
Moving along back to reality.
A rise in minimum wage rates is simply and without argument, an increase in the cost of doing business. This leaves a business with three possible actions or combination of actions to take in response to increased labor costs.
The first choice a business can make is to absorb the increased cost of labor by accepting a decrease in profits.
The second alternative a business can engage in is to increase the selling price of its goods or services to accommodate the increased labor costs incurred with the rise in the minimum wage rates.
The third option a business can exercise is to reduce the size of its labor force and thus offset the increased cost of labor input in the profit and loss computation.
Let's analyze each business choice.
If a business absorbs increased labor costs, it reduces its profits. This has two very negative results. First, it discourages investors from investing in the business with its reduced profit margins and rates of return on investments. Second, it reduces the entrepreneurial risk taking to innovate, because it makes the cost of making mistakes in exploring new technologies, more expensive based upon less money available to research and development programs. Third,it reduces the capital worth of the business, making credit more expensive to acquire. This increased cost of credit even further reduces the business profit margin. This becomes a vicious cycle and difficult to break.
The next choice or hurdle to overcome has to do with attempting to pass along increased costs to the ultimate consumer. The problem is that for each increase in cost inputs, there is a quantifiable decrease in consumers willing to pay higher prices for those products or services. In other words, increasing prices results in losing marginal consumers who might have previously made the business comfortably profitable and able to continue R&D development and save for rainy day economic downturns.
The third issue revolves around reducing the labor force by a factor equaling the increased cost input of the higher minimum wage rate. Let me spell that out for the terminally brain damaged liberals. Businesses will reduce the size and thus the cost of their labor force to meet the increased cost input of the higher minimum wage rate. Businesses will simply lay off people to maintain the same cost input and then push existing labor to match the previous productivity levels of the larger labor force.
Unfortunately there is also a fourth business consideration. Some businesses, especially sole proprietors or small partnerships will choose to go out of business and put their capital to work more efficiently through other means of passive investment.
Part II will analyze and comment on the effects of increasing the minimum wage as an economic stimulus to the macro economy.
The fallacy of the minimum wage: Part Two
By Rob Janicki
Most of what I will outline below is common sense and I apologize in advance if it seems I am stating the obvious. If it were so obvious, liberal Democrats would not continue to push for higher minimum wage rates and I wouldn't be here explaining the myth of the minimum wage.
In Part I I outlined the options a business has in order to deal with an increase in the minimum wage, whether it is set by the federal government or state governments. A minimum wage increase is a quantifiable unit increase in the cost of labor. It is an important component in determining whether a business is profitable, to what extent it is profitable or whether it's a business operation that is actually losing money and headed for bankruptcy.
I indicated a business could absorb the increased labor cost from its profits (assuming it is profitable at the time), increase its pricing to offset the increased labor cost, reduce the labor force to compensate for the increased labor cost or as a last resort, cease business operations which would become unprofitable as a result in the rise of the minimum wage amd invest resources in some passive form of investment other than manufacturing or providing services to consumers.
Supply and demand of labor in the market place determines the relative worth of someone's labor and productivity, not some politician's idea of what someone should be earning in wages. Why do some people command higher wages/salaries while others do not? It's simply based upon the skill and the level of productivity they bring to the particular job.
Ditch diggers command a low wage rate because their productivity is very low when compared to a mechanical backhoe and one single operator, not to mention it is a dirty and back breaking job. A baseball All-star commands a higher salary, compared to other baseball players, because he brings a very high skill level to the game that most other players cannot perform to. A CEO that is able to lead an organization to greater profitability will receive greater compensation than another CEO who has failed to meet revenue and profit expectations.
Businesses pay people only what they have to in order to grow revenues resulting in increased profits. It's that simple. So, when a business pays a CEO what would appear to be a huge salary, it's based upon the belief that the CEO has the ability to lead the business to greater profits and that is always the bottom line.
So, what other factors make someone more valuable in the labor market than others? Education is one element, The longer it takes to gain an education and the commensurate skills in a field of work, the smaller the number of people are able to enter into that field when compared to the need for that skill. Think of professionals such as doctors, dentists, lawyers, engineers, etc.. Even then, when a field has more members in it than the market demands, one of two outcomes will result. Compensation will fall as employer choices increase in the available labor market or members of the professional group will migrate to other forms of employment that return greater compensation for the work effort put forth.
Another factor which contributes to determining a market based wage rate has to do with the element of danger inherent with some jobs. The greater the physical danger involved in a job, the fewer people are interested in pursuing that job. Deep earth mining is an example of a dangerous job that limits the pool of available labor compared to demand and thus it drives up the wage rate of that labor market. There are other similar jobs that limit the potential labor pool. Some people do not want to work at jobs that entail getting dirty, working in distasteful situations and conditions, such as collecting garbage. Any time a job has certain conditions associated with it, there is an inherent limiting effect on the available labor market. When the limitations are greater than the demand for that labor, the cost of that labor for employers will rise to encourage people to work for the highest available wage being offered by an employer.
By now it should be obvious that labor is a commodity of sorts like any manufactured item. Its a service provided by a laborer to an employer. In return the employer benefits from the utility of the worker's labor and productivity and is able to sell the resulting production of the employee, pay the employee and hopefully make a profit after all other related overhead costs are covered. The immutable law of supply and demand is at play in any labor market just as it is in any commodity market.
In Part III I will provide research data that supports the argument that artificially imposing minimum wage rates and any increases to that artificial floor on wages, actually decreases total employment and does very little to increase overall consumer spending as a result of nominal individual wage increases.
Many of our friends owned three or more fast food restaurants - which are by no means small investments. All got out of the business because of labor problems, most notably the poor work habits of the younger workforce.
ReplyDeleteNow my close neighbor, the state of Washington, is demanding that these fast food places pay their teenage workers over nine dollar an hour for a job that is maybe worth seven dollars an hour.
I predict that you will see older workers take over the jobs that have traditionally belonged to the younger worker. I'd be very happy to flip burgers for $9.00 per hour.
In a future part I will address how increasing the minimum wage rate disenfranchises those under the age of 21, which usually means high school and college students and especially minority individuals in this age group. Tune in again for the next part and a summation part.
ReplyDeleteI'll wait until I see the second part. My brain is working overtime and I think you'll probably answer what I want to know then.
ReplyDeletePart I is self-explanatory, simple to understand.
ReplyDeletePart II: The entire thrust of the liberal mvt. is to negate everything you are pointing out. The reason has to be that it is the balm on the dumbing down of America.
I perceive the minimum wage as rewarding those that choose not to become educated, or just plain screw off in school, knowing that they will always have some sort of income, even if they fall into the welfare system. And then there is SS and basically they don't have to do much their entire lives. But they could vote!
Liberal politicians have turned these lazy mothers into deserving, poverty-stricken, financially neglected, downtrodden voters, and rewarded them with minimum wage!
I do not believe that there will be any change in perception by either side, politicians or their voters. To change, would mean that politicians renounce corruption and that their voters actually seriously look at honest work and getting an education as making a change in their personal ethics. Are you laughing, yet?
The entire Obama campaign of '08 was geared toward these people and will be again this year. The sad part is that he has collected all the money he needs to further his goals and most people have not even looked under the veneer of this charlatan.
I would love so much to see this America, these people who are being called lazy, and soft, to recognize what is being done to them, because they don't even once, shut their eyes, and listen and think. But, that is what the dumbing down of America is all about. They just don't get it. These are the baby-killers and freeloaders and druggies who are going to flip burgers, empty trash and clean out chicken coops for $9.00+. It is we, the producers, who are made to feel guilty.
Have you ever read Ayn Rand's The Fountainhead? It is so obscene, and so right on the mark.
You have a Part III - why? I am crying.
PS: Do not mean to sound so dramatic, but your subject is so very serious, and the people who should see it, never will.
Kudos on the Watcher's Council's Honorable Mention of this article! :)
Oh, I am so sorry. Looking in that little box, I can never tell how long something is.
ReplyDeleteB,
ReplyDeleteDon't worry about the little box. Keep writing.
I think that the unions have been the primary driver of both min wage and time-and-a-half 40-hr overtime laws. Both benefit unions. In the case of time-and-a-half, a company would be induced to hire more workers, rather than ask current workers to work more hours. Now, a company is smart to avoid paying overtime, and a worker, even if they want to work 60 hrs a week without time-and-a-half, can't. They could be making the straight $20 or more an hour at their current job for a full 60 hrs, and both they and their company would be happier, and better off. Instead, the company has more overhead as they have to hire temp workers or additional full-time workers to cover that additional 20 hrs. The full-time worker, in order to get the extra money, is forced to go take a second part-time job, STILL making straight pay anyway, but it is likely to be at $7 to $10 instead of his higher normal pay at his full-time regular job. Plus there is the extra hassle and lost efficiency of the worker having to travel to the second job, additional job-related expenses, etc. So both the employer and employee are likely to be WORSE off in this scenario.
ReplyDeleteThis results in the possibility of a company A and B, where employees A and B are having to clock out of one company at the end of 40 hours, and then each switch which company they are working at for the remaining 20 hours. The companies are out of pocket on the overhead of having to hire the additional worker, along with the reduced efficiency of the part-time worker, and the workers are getting paid less (i.e., starting pay for a temp-part-time worker) for their last 20 hrs of the week. It even seems the companies these days are more accommodating to the employees in this respect. I've seen more and more people who are working 4 10's at a given company rather than the traditional 5 8's. That makes it easier to go work 2 more 10-hour days somewhere else, and still have one day a week off.