Race Toward $15 Minimum Wage

June 1, 2015

By: Kelly Diamond, Publisher

minimum wageWhere to even begin with this ripe pile of nonsense? As I try to organize my thoughts on the US economy, so-called “trade deficits”, minimum wage, and these godforsaken unions, I can’t help but work myself up into a ball of frustration.

Of course the US economy is a mess for more than just the minimum wage battle, but it is a vital piece to this puzzle of economic failure.

There’s been a recent explosion in the news regarding a serious increase in the minimum wage. We’re not talking the typical $0.25 per hour crap we’ve seen over the years. We’re talking $2 to $7 per hour increases. Elizabeth Warren and Bernie Sanders have been crying out to the heavens for “living wages” for a couple years and that populist rhetoric has resonated with many like-minded politicians.

Bernie Sanders has sent people off clamoring for $15 per hour while last year, Senator Warren argued why the minimum wage ought to be $21 per hour. Her argument rests on the increased rate of productivity, along with an inflation conversion rate that has $1 in 1960 equal to $10.52 in 2012. Interestingly enough, not everything kept up with rate of productivity. If it did, and I use Warren’s assumptions, here’s roughly what you would see:

Minimum wage 1960 $1 = $10.52 in 2012 X 2 (increase in rate of productivity) = $21.04

Gallon of milk 1960 $0.49 = $5.16 in 2012 X 2 = $10.32

Gallon of gas 1960 $0.31 = $4.00 in 2012 X 2 = $8.00

Let me be the first to say THANK GOD PRICES DIDN’T KEEP UP WITH THE RATE OF PRODUCTIVITY!!!!!

It is also worth mentioning that the rate of productivity isn’t attributable to the US labor force working harder or even smarter.  We’re fatter and working less hours.  It’s because of technology.  I mean, that’s like crediting the field hand for what the cotton gin picks.

We could also say minimum wage isn’t keeping up with inflation rates, which is true, and it’s not really parity with the USD of 1960. According to an inflation conversion calculator called DollarTimes.com (which makes lower assumptions in the conversion rate from 1960 to 2015 than Warren’s), the federal minimum wage is about $0.75 per hour short of matching inflation. The USD purchasing power is tragically low. But that’s not a minimum wage issue, that’s a Federal Reserve issue.

Seattle, Washington is on a 7 year course to getting their minimum wage up to $15. That is over double the current US national minimum wage of $7.25. Los Angeles is on a 5 year track to get to the same figure.

A few things come to mind when I read that:

  1. How many people are actually making minimum wage in Seattle now? How many people make below $15 per hour?
  2. What happens to the middle managers who actually make $15 per hour now? Do they continue to make the same as the entry level folks or do they also get a $7 per hour raise?
  3. What about industries that don’t make a large margin? Are they meant to increase prices? Or take it out of their own pockets?

To answer the first question, USA Today reports that Seattle city officials estimate approximately one quarter of Seattle employees make less than $15 per hour. That’s about 100,000 people. For Los Angeles, the number is considerably higher with nearly 50% of its workforce making less than $15 per hour. That’s about 723,000 people, according to the NY Times.

I haven’t even gotten to the issue of jobs yet. But if the expectation is that all this money will come from the wealthy pockets of business owners, or at the very least their profit margins, they are in for a nasty surprise.

The greatest concentration of minimum wage and low profit margins is in none other than the restaurant industry. Seattle being an already high wage city to begin with, with a starting point of $9.32 per hour as their minimum wage, they don’t have the same distance to crawl as Los Angeles might. The estimation is that this hike will overall add about $0.05 per dollar in cost to goods and services. So instead of being $5 per unit, now customers will pay $5.25. What does that mean from a customer’s perspective? People will naturally still buy things. People will still pay to eat out… but perhaps not as much. People will still eat out but maybe won’t dine in and worry about paying the tip.

Indeed the simple law of economics says that outside of Giffen Goods – which labor definitely is not – when prices go UP, demand goes down. Recall what happened to the consumption of gas when the prices shot close to $5 per gallon in some markets? It’s not that everyone just stopped driving and no one bought gas ever again. It’s that overall consumption of gas dropped. Likewise, it’s not that the entire economy will just dry up and everyone will be unemployed; it’s that people won’t be buying as much. Perhaps people who were making minimum wage will be able to afford more; however, people who don’t get a raise just got the prices jacked up on them with absolutely NO increase in value in return essentially got robbed 5% in purchasing power.

Likewise as demand for goods and services goes down, so will the demand for labor. So whereas two people at one point could’ve had a job for $15 per hour, now only ONE can. No different than if you doubled the price of shoes on me: instead of two pair, I’ll buy one pair.

One of the major defining differences between Walmart and places like Trader Joe’s and Costco is that the latter two pay a higher entry level wage than Walmart. “Oh why can’t Walmart be more like Trader Joe’s and Costco!?” A $15 minimum wage might very well do just that. It means a fraction of the work force they have now, shorter hours of operation, limited selection, and lower paying management positions. Then Walmart can be like Trader Joe’s and Costco.

However businesses choose to absorb or adapt to the hike in the cost of labor, it will inevitably have a harsh and negative toll on the economies in which it is taking place. Seattle is already seeing a high restaurant closure rate, and that was when the new law was just on the horizon. There are people who went from $9 per hour to zero overnight.

There are those who argue that a hike in the minimum wage brings everyone up. But that hardly seems possible. The buying power of the new minimum wage won’t go up proportionately to what $15 per hour WAS a year ago. Contrived or forced inflation such as a hike in the minimum wage means that the cost of all goods goes up. If the suggested 5% hike is indeed what Seattle should expect, then perhaps their buying power will go up. But I can’t imagine that wage hikes happen in a vacuum.

To say that a higher minimum wage would bolster the economy is like telling someone to keep a mortgage so they can write off the interest. In no way is it a net benefit to have a mortgage and pay interest just so you don’t have to pay taxes on the interest. The math doesn’t work. The interest is greater than the taxes you’d pay on it. Likewise, it’s not how a rise in the minimum wage works because the price of goods don’t stay the same so it’s not like $1,000 in wages more in outlay equates to $1,000 in revenues. If people don’t spend that money and decide to save, if people pay off debts with that money rather than spend, and if the cost of goods go up then it’s no longer a wash. It’s a loss.

Los Angeles will be facing similar problems as it institutes its 5-year plan to $15 per hour from $9 per hour. This is such a welcomed treat to this lovely blue state that the unions asked for an exemption!  You read that correctly. Seems unions like asking for exemptions when laws are passed ostensibly to benefit the good ole proletariat. Remember when they asked for an exemption from Obamacare? Well now they are asking for exemptions from the Los Angeles minimum wage.

One of two things is happening here: either the unions don’t want the state to collectively bargain and phase them out of the picture altogether OR they want to dangle lower wages to businesses that aren’t currently unionized. Either way, their motives are never any good. One minute they want healthcare and higher wages…then when the government mandates it, they don’t want it anymore? Makes you wonder, doesn’t it?

The bottom line is: we are pricing ourselves out of the labor market one city at a time. This is exactly why the US has lost its footing in manufacturing, customer service, and data entry. These entry level jobs just aren’t worth $15 per hour. This is one of the many reasons the unskilled and/or under-skilled are struggling to find jobs. This is why we import more from developing countries than we export. These are all part of the bigger picture of a failing US economy.

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Comments

  1. Joseph E. Stiglitz, former World Bank Chief Economist wrote the following………….

    “The top 1% have the best houses, the best educations, the best doctors, and the best lifestyles, but
    there is one thing that money doesn’t seem to have bought; an understanding that their fate is
    bound up with how the other 99 percent live. Throughout history, this is something that the top
    1 percent eventually do learn. Too late.”

    • Kelly Diamond says

      There is only a problem when the other 99% are living in squalor. If the remaining 99% are simply varying degrees of wealth, then what you have is a diverse and happy middle class, which is actually very good. The healthiest middle classes were not contrived, but rather were a natural byproduct of a free and healthy economy. Tampering with the minimum wage, or price fixing labor, is not a sustainable method by which to accomplish a healthy economy.

  2. Best analysis of the impact of the $15 minimum wage I’ve read.

    Kudos, Kelly!

    Jim

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