One day, I took a vacation day, picked up my girl friend, and headed for Lake Tahoe. On the way, we stopped by a restaurant owned by a mutual friend. As we walked in the door, the friend said, “Sit down, I’ll be with you in a minute. I’ve only got ten more minutes on this shift.” We sat down and ten minutes later she joined us. She said, “One of the girls called in sick, so I had to take her shift.” She sipped her coffee, asked how we were, and stated taking her tips out of her pockets and counting them. I watched in amazement as she kept pulling bills and coins out. She began counting the money and I was astounded to find that she had made about $120 in tips. At the time, minimum wage was $5/hr, so the normal waitress would have made $40 for the shift in pay, plus $120 in tips. I asked about the “normal” waitress and was told that she was a college freshman working at the restaurant during summer break. I thought, “That gal is making more than ME. Maybe I should get a ‘minimum wage’ job.” (I’m sure the waitress claimed ALL the $120 for income tax purposes.)

I have been thinking about the concept of “minimum wage” for several years. One of the first questions that come to mind is, “Why does the government have the right to tell me the minimum I must pay someone?” or alternatively, “Why does the government have the right to tell me the minimum I must charge for my labor?” I recall that at one time in this country, people would work for room and board in order to have a job that would teach them a trade. It was a mutually beneficial arrangement—the employer obtained help he could not afford to pay and the employee obtained training. I recall talking to a restaurant owner that hired an employee for “nothing” (except tips). The employee “cut a deal” with the owner that if the owner would train him to be a waiter, he would work for nothing. I went back to that restaurant six months later and asked about the employee. I was told that he had gone to San Francisco and obtained a very well paid job in a fine dining restaurant. Such would not have been possible under a strict interpretation and/or enforcement of the minimum wage laws.

When one considers the logic underpinning the minimum wage laws, it is quite apparent that the laws are politically motivated. It is a blatant attempt to gather and garner the “poor” vote—even if that vote is harvested at the expense of that very population.

Let us consider some economic assumptions:

Assumption #1: It is assumed that the only reason an employee employs someone is to make a profit from that labor. The employer expects to “package” the work the employee performs and “resell” it for a profit.

Assumption #2: If you recall your pay last raise, you will note that you “saw” about half of it. The tax laws in this country are such that, at the margin, you receive about half of your wages.

Assumption #3: Generally, for every dollar you receive in wages, it costs your employer TWO dollars. This is a function of payroll taxes (Social Security, unemployment, disability, etc.), time off (e.g. holidays, vacation), and benefits. (Use some other figure if you wish.)

Assumption #4: Typically, product costs are 2/3 labor.

With the above assumptions in mind, let us consider some of the economic aspects of the minimum wage.

An acquaintance once said to me, “I wouldn’t mind paying a nickel more for a hamburger if the employee could get paid a dollar an hour more.” I suspect contained in that statement is the entire philosophy of those that support the minimum wage. First, they wish to speak for everyone. My immediate reaction was, “Why don’t YOU pay TEN cents more for YOUR hamburger and let ME pay the price I am presently paying?” Second, the statement is made with such assurance that one takes no notice of the fact that there is no thought behind it. When the statement is analyzed, it becomes absurd. In order for the employee to make a dollar an hour more, the employer is going to have to pay TWO dollars an hour more (assumption #3). In order for that employer to “break even” charging a nickel a hamburger more, that employee is going to have to sell FORTY MORE hamburgers an hour. However, for every employee at the cash register selling hamburgers, there are at least two (and probably three) employees preparing the food, cleaning up, on the drive-up window, etc.), so in order to pay each employee a dollar an hour more, that store must sell about a hundred hamburgers more EACH HOUR to break even. (Ironically enough, while the employer is paying two dollars an hour more for each employee, the employee is “seeing” only fifty cents because of the tax laws [assumption #2].) I suggest that the only way the employer can make this situation “work”—i.e. break even—is to reduce staff and work the remaining employees harder.

One must consider how small businesses work. In many cases, the owner is working right beside the employees. It is not unusual to see the owner of a small business sweeping the floor. Oftentimes he would rather hire someone to perform that task, but cannot afford the wages to do so. Assumption #1 states that an employer hires people to make a profit. Consider an employee making minimum wage. If the employee’s wages are increased by one dollar/hr, it costs the employer two dollars/hr (assumption #3). That means that in an eight-hour shift, it will cost the employer sixteen dollars. If the product markup is ten percent, then that employee must sell an additional $160 in merchandise each shift in order for the employer to “break even”. Clearly, in all probability, the employer is going to raise prices and/or reduce staff.

Finally, let us consider the impact on the population we are attempting to help. Let us assume a 10% raise in the minimum wage. Because of the payroll taxes, this will cost the employer 20% (assumption #3), and the employees will “see” 5% because of the tax laws (assumption #2). If 2/3 of the product costs are labor (assumption #4), then the employer will have to raise his prices by 2/3 x 20% or about 14% just to break even. (This assumes that his raw material costs do not increase due to the wage increases imposed upon his supplier.) So, the employer increases his costs by 14% and the employees see their (real) wages rise by 5%. As the increase percolates through the economy, the minimum wage employees are actually WORSE OFF than they were before the raise due to prices higher than their wage increase. It is a gradual, almost unnoticeable effect.

The reader may well wonder how this is different from (e.g. union) negotiated raises. It is quite simple. At contract time, labor and management sit down at the negotiating table and “divide the profits”. When the company is doing well, a generous settlement is made; when the company is doing poorly, labor may well believe it is best to settle for less rather than to bankrupt the company. The raise given to the employees is a function of the ability of the company to pay. On the other hand, the minimum wage is imposed upon ALL businesses, regardless of how well they are doing or their capability to comply. It is imposed by an external “force” regardless of the ability of the company to pay, and there is no “negotiating”.

One must be somewhat skeptical of a “system” that:

1. Causes people to lose jobs.

2. Curtails the rights of people to sell their services.

3. Hinders the efforts of people to obtain training.

4. Bankrupts businesses.

5. Causes woe and hardship for the very people it is supposedly designed to help.

In closing, I wish to state that at one time, the highest paid employee in Reno, Nevada was the head waiter at the show room at Harrah’s Club. He was officially paid minimum wage. He drove a Mercedes.

Regards,
Tony De Maio
Whiskey & Gunpowder

July 26, 2010

The Destructiveness of Minimum Wage Laws was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

I don’t mean to preach to the choir, but there goes the remnant of what might otherwise have been the start of a jobs recovery.

Wage and Price Controls don’t work. You and I can see it in everyday real life. Richard Nixon tried it and failed. The Pols that run the country can’t seem to see beyond the end of their noses. Actually, they know exactly what will happen but they’re so hell-bent to reward unions, they don’t care.

Why unions? Simple. If the minimum wage is increased, naturally the union wage must also be increased. Increasing the union wage rate keeps the membership in line and fattens the pockets of the union officials. In turn, it helps get the Pols re-elected. Talk about being hypocritical. The very Pols that caused the dollar to lose purchasing power due to government deficit spending now pretend to be so munificent as to help the poor earn a “living wage.”

This is no different than rent controls or price controls. Anytime artificial numbers are substituted for what an otherwise free market would be willing to pay, somebody gets hurt. In the case of minimum wages, it’s the very low-level worker that gets hurt. If the objective is to provide employment for entry level workers, minimum wage isn’t the answer.

Would you like a job paying $6.55 per hour or would you prefer no-job paying $7.25 per hour?

It really is that simple. If you’re a marginal worker, you’re expendable. The business for which you work can perhaps justify paying you $6.55 per hour to sweep or wash dishes. When then forced to pay $7.25 per hour for the same services, the business just decides they can no longer afford to hire the sweeper or dishwasher. They make other arrangements to get the jobs done. Meanwhile, the former dishwasher is now out of a job thanks to the Federal Government raising the minimum wage.

During WWII, we had all sorts of wage, rent and price controls. Perhaps because we were involved in a major war, folks simply made-do without and devoted their efforts to helping the United States win the war. Once the war was over, most of the wage and price controls were removed. The economy then took-off like a scalded dog.

There were a few pockets of resistance however. One was Santa Monica, CA. They decided rent controls were necessary because “greedy” landlords were taking advantage of the “poor” tenants. Ditto NYC, by the way. The result was fewer units available because the very folks that risk their own money and expended their own energies to provide living accommodations weren’t willing to do so for a less-than-profitable return. Existing units were not well maintained because the owner was seldom allowed to increase rents to cover expenses. New units were exempt. Those new units were rentable at whatever the market would pay. As a result, all varieties of high-priced new units came on the market while the more-affordable units vanished. Once again, the very folks who were supposed to be helped by rent controls now found themselves with no choices, thanks to government interference.

As mentioned above, during WWII, we had price controls on almost everything. We also had coupon books that limited the quantity of almost every good we could purchase. My mom traded coupons with other moms so everyone had a chance to get what they really needed. Shortages, however, were the norm. It made almost no difference whether you had an “A,” “B,” or “C” gasoline sticker for your car because you couldn’t buy tires.

When prices and/or quantities are artificial.

Why Minimum Wage Means Maximum Slaverylly limited, scarcity is the result.

Have you heard the opposition to Obama’s National Health Care complain about rationing? This is exactly the “why” of that complaint. Some bureaucrat will decide who gets what medical treatment. The excuse is that medical costs are too high. It’s another form of wage and price controls. In this case, the result will be otherwise-avoidable deaths simply due to the rationing of medical services. And as you’ve read many times, if you think health care is expensive now, wait until you see what it costs when it’s free.

So what’s the solution? What about “all those poor people?” What’s a heartless capitalist to do?

Recall Mama Obama ranting during the campaign that “some folks are going to have to give-up some of their pie so that others can have some?” Neither she nor the multitudes like her understand the basics of Economics 101. Our economy is not a zero-sum game.

For most of my life, I raced cars and one of my favorite races was the 2000 mile La Carrera Panamericana from Guatemala to the USA through central Mexico. Let’s admit that Mexico is a poor country. That is, many of the folks are considered to be poor. Yet as I traveled throughout Mexico, I saw color TVs in cardboard shacks. I must have been really “poor” when I was a kid because we didn’t even have a black and white TV. No one did. We were one of the first families in the neighborhood to get a TV and that wasn’t until 1948. Today, even a poor Mexican can have a color TV. Why? Because contrary to Mama Obama, the world’s pie continues getting bigger. That means even the poorest among us can enjoy a living standard that wasn’t even available when I was young.

We have a bunch of politicians who continuously deficit-spend thus reducing the purchasing power of the dollar. Then they graciously increase the mandatory minimum wage in order to off-set the loss of purchasing power they, themselves, created. Do you suppose there is a moral hazard hiding somewhere in this fraud?

Regards,
Tex Norton

Why Minimum Wage Means Maximum Slavery was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.