There has been so much talk lately on raising the minimum wage in the United States. People are so confused about this subject. I thought I should help explain the logistics of said raise. On the surface, it sounds like a great thing. Everyone could use more money in their wallet. Unfortunately, that is where the confusion steps into the picture. Let's take a look at what happens when we raise the minimum wage.
To better understand this subject one must put themselves in the position of someone earning minimum wage. Currently, the jobs which pay minimum wage are those in retail, restaurants, grocery stores, gas stations, etc. If you have never worked in one of these industries it will be difficult for you to understand. Obviously, people who work for minimum wage don't have much money. They have to get the highest value products when they shop. They don't usually have the luxury of deciding which brand to buy. They have to buy the cheapest items they can find; never mind the fact that these items are usually of lesser quality. The only places this group of consumers can shop are discount stores and low price grocery stores. They still have to buy gas if they drive. If they have children that opens up another list of non-negotiable items they must buy. In some cases, people earning minimum wage don't even make enough to use a budget. Budgets require that you have enough money coming in to support the bills you have. This is not the case if you make minimum wage. You must constantly be making decisions on where to spend your money. You come upon questions like "should I pay the electric bill this month or let it go until next month and pay the outstanding balance?" You may not want to do this but it's the only way you will be able to have money for gas so you can go to work. Problems like this pop up every month. You wind up constantly being behind and trying to catch up. Even this wouldn't so bad if you could maintain it. But what happens the next month when you need a set of tires and you're already behind on the electricity. (no tires= no work= no money) This equation is not an option, so what would you do?
Now consider this; the places where you must shop are places which also pay their employees minimum wage. They do this to keep prices low. These jobs require a low level of experience. Many of them employ high school aged kids and young adults who, for one reason or another, don't require a high rate of pay. They may still be living with their parents.
These businesses are set up on a profit per transaction basis. That means that during every transaction several things must be considered. These are the cost of the goods being sold, operations; that is the cost of having the business, insurance, state and local fees, utilities, and labor. The only variable cost is labor, and it is tracked and scheduled very closely. This way they can have more people working during periods of higher demand. That is why your grocery store has more people working on Saturday morning that they do on Tuesday evening.
Knowing all this, what happens when you raise the minimum wage? The first thing that happens is that the politicians feel good because they got their constituents a raise. It makes them look good when election time comes. The next thing that happens is the workers get their raise and they feel good because they suddenly have more money. They can see the light at the end of the proverbial tunnel. Maybe now they can catch up. What happens next is where everything falls apart.
Employers who pay minimum wage are suddenly hit with a big drop in cash flow. They have a few options. They can cut hours by reducing the number of people they use during those periods of higher demand. This results in the workers having to do more. You might say "that's fine. They are getting more, they should do more." Let's assume for the moment that you are correct. These workers were already working very hard before they got the raise. Now they are being required to do more with less help. What ultimately happens in this scenario is that customer service suffers because the worker's morale is now lower because they are working harder. The job they were used to doing has changed. When customer service falls, so does profit. The next option is that the employers can raise prices. You may say, "That's fine. I don't mind paying a little more if it means the workers at my favorite store are getting more money." In reality, what happens is a combination of both scenarios. Prices go up and labor is cut. Doing one or the other would be too extreme.
Keep in mind that when the grocery store sells you a loaf of bread, they are not making much on that sale. You may be surprised to learn that the profits from most of their sales are only a few cents. The only way they make enough is by doing a high volume of sales. (Some items in your local stores are actually sold at a loss in an effort to attract more customer who will also buy other items.)
Now let's take a look at the result of our raising the minimum wage. We know that for every action there is an equal and opposite reaction. The worker works twenty-eight hours at $7.25 per hour. They make two-hundred and three dollars before taxes. What if we raise the minimum wage to $15.00 per hour as is being suggested by many politicians? Using the scenarios above the workers get their hour cut to somewhere around twenty hours. That gives them $300. Now the prices they pay for everything from food and clothing to gas also go up. What benefit have they gotten? They will also have to start paying income tax; another reason politicians want this. Yes, they have more money on payday but, the day after payday they still have the same amount. If prices go up twenty percent that turns $100 worth of groceries to $120. $70 worth of gas turns to $87. You get the idea. Using twenty percent is a very conservative estimate when you increase the minimum wage by more than 100%. The price increases could be as much as 30% - 40% or more. In the end, the minimum wage still won't be enough to budget everything.
Twenty years ago (1994) the federal minimum wage was $4.25 per hour. At that time the price of gas was $1.20 on average. A loaf of bread was $.80. Electricity was $.90 per kilowatt/hr. Today those same prices are gas $3.60; bread $1.40 and electricity $.14 respectively. With that minimum wage, an employee could earn as must as $170 per week without overtime. Compared to today that is a difference of $33 per week.* It is plain to see that the minimum wage is not the problem. So many lives are simply not hinging on $33 per week.
One major difference is the number of hours employees are allowed to work. With current laws the way they are, employers are afraid to give more than twenty-eight hours per week. Many employers would have no choice but to go out of business if they gave employees forty hours and provided health insurance. Like it or not, those are the facts. Twenty-eight hours per week is the new standard. People do have the option of working two jobs; as many have had to do in order to get by.
Now consider, if you will, another problem associated with raising the minimum wage. There are people who make a little more than minimum wage. Anyone who makes less than $15 per hour but more than $7.25 will also get a raise. But their raise will only put them at the new minimum wage. In today's economy, someone making $15 per hour is most likely working full time and already has health insurance. The people who make say $10 per hour will really be hurt.
A company with 100 employees, 75% of whom make minimum wage; the rest are long-time employees, management, or skilled labor making more than $15 per hour, will not be able to afford to give the others a raise. It simply will not happen. What will the increase in the minimum wage do to them? After prices of basic necessities go up they will also be in bad financial shape. They will be pushed closer and closer to the poverty level as time goes by and prices continue to rise. How is this helping anyone? The poverty level has always been slightly lower than minimum wage.** It is not illogical to say that trend will continue into the future.
Raising the current minimum wage to $15 per hour sounds great on the surface but in reality, it will cause more financial hardship for more Americans. The solution is to leave the minimum wage alone, or dare I say lower it, but have average Americans making more than the minimum. How can this be accomplished? We have to lower all of the other costs associated with doing business. This will allow employers to pay more in wages. The American spirit of competition will ensure this. But how do we lower those other, fixed, costs?
Let's look at the restaurant business. A certain restaurant owner brings in $4,000,000.00 per year. 28% of that or 1.12 million dollars goes to his food cost. You have to ask "why does the food cost so much?" Fuel prices. That's right, fuel prices are so high and they are associated with every phase of business. Farms are spending more to fuel the equipment. Truckers are spending more to fuel the trucks. Processors are spending more to fuel their facilities. Another set of truckers is also spending more to fuel the truck that delivers the product to market,(or distributor as the case may be), and still another set of trucks is required to deliver the product to the restaurant. That is five steps where fuel prices have caused retail prices to rise. That is a basic scenario. More complex products require more fuel stops along the way. The solution is staring us in the face. Lower the price of fuel. What would that do?
Let's take a look at this. Let's also stay with the food business because that is one of the easiest businesses to understand. Basically, the farmer grows the food, sends it to be processed and packaged, then it goes to distributors, and then to the store to where we must drive to purchase it and return home. That's a very simple business plan. Now if the farmer doesn't spend as much on fuel for tractors, combines, and whatever else they use they won't need to charge as much to make the same amount of money; simple math a-b=c. Next, when the distributors pay less for the product they, in turn, can charge less and still make the same amount of money. So far so good, no one has taken a loss yet. Common business sense tells us that profit must be made at every step of the process. In this example, the only thing that was lowered was the cost of the fuel the farmer paid. In reality, each step along the way has its own costs lowered as well. This makes the price shrink exponentially by the time it gets to the consumer. Everyone wins, including the consumer who is earning minimum wage. Their earnings will buy more. Everyone wins. The farmer makes the same amount but it costs him less. They, in turn, may opt to hire more workers or pay present workers more. This concept can also be applied at every step of the process. Consider, if you will, how many steps are in the process of manufacturing one car. Prices will go down across all industries nationwide. When this happens $7.25 per hour won't look nearly as bad.
Every industry in America is subject to fuel prices in some way. Is there any way to lower fuel prices? Yes. Good old supply and demand. Increase the supply, demand goes down. When demand goes down, so do prices. All we need is a bigger supply of fuel and all of our financial problems will be solved. So I pose this question: From where can we increase our supply of fuel? Fortunately for us, the answer to that question is also very simple. Aside from Canada and the Keystone Pipeline, we also have access to one of the biggest oil fields in the world. In fact, we own it. It is positioned below the Gulf of Mexico. There is only one question left to answer. Why are we not doing anything about it?
*Bureau of Labor Statistics
**US Department of Labor
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