The Destructiveness of Minimum Wage Laws
Once upon a time, many years ago, I had a Civil Service job and was making the princely sum of about $3,000/month ($150/day). At the time it was one of the highest paid Civil Service positions in the State of California. (For the most part, higher levels were political appointees.) I had a Master’s Degree and had worked for the State for about 10 years.
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
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Good analysis, but this has all been well-known for decades. It’s all politics, supported by those of the public who are motivated by what they believe is compassion. It’s vote-buying by politicians who have never, ever worked in any sort of small retail business. Or any other, probably…
Tony,
This is a gut feeling but I would be willing to bet that most small business’s that are successful pay more than minimum wage. Not to say that I disagree with your post. I just think that in most cases you get what you pay for. A company’s success depends on the quality of people that it hires. That being said, constantly raising the minimum wage only serves to push all wages up. This inflation is the real silent theif that no one seems to talk about. Every year you have to make more money just to maintain purchasing power. I think that is probably a greater damage than anything. Rather than see the minimum wage go away I would rather see the 3% or so raise that everyone seems to expect as normal go away. If everyone’s wages would just stay the same you dont have to work near as hard to maintain purchasing power. Everyone seems to expect that their wages will go up every year because of inflation but yet that is the very thing that causes inflation.
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Tony,
The valid points you make are over-shadowed by your invalid assumptions. The assumption that a minimum wage employee only earns half his wages and that one dollar in wages costs employers two dollars really invalidates the whole article – a critical thinker cannot get past this. I would like to see your valid points backed up by intellectual honesty, not hyberbole.
It may be called the minimum wage, but it is, in fact, the de facto maximum wage for those at that wage point. Many large employers “profit” to the max on the “minimum” scam. Erase it.
I have known plenty of waitresses and you sir are no waitress.
Whatever arguments you may have against minimum wage, and I agree with many of them, there is no reason to believe that average waitresses make anywhere near what government employees make, now or at anytime.
Anthony,
I managed a greasy spoon for 5 year. Most waitresses live in poverty and misery. The young cute ones do a bit better.
Regards
George
George how do you define misery? I’m not being flippant, What are the standards for misery? What is poor?
I’ve never agreed with the idea that government should tell me what I must be paid for my labor, or what I must pay for labor. The MW wage laws, plus others, keeps a lot of entry-level people from having jobs. I’m not gonna pay minimum wage for some high school kid to hold the other end of a board while I nail it, nor pay it for some floor sweeper-gofer at my small business.
Regardless, the idea was for entry-level unskilled or learning-a-skill people, not for support of a family. There has been more than just a modicum of twisting of the intent of the whole deal.
“Average” waitress? Which average? The average at a Harrah’s club, or the average at the Good Eat’s Cafe?
Rat,
I could be mistaken but employers dont have to pay minimum wage to certain people. This is what i found:
“There some other employees who can be paid at hourly rates below the minimum wage according to the Fair Labor Standards Act (FLSA). Young workers under 20, workers who earn tips, and some other categories of employees can be legally paid at rates below the hourly minimum wage according to the Fair Labor Standards Act (FLSA).
These subminimum wage employees include student-learners (vocational education students), and full-time students working in retail, service, agriculture, or higher education. Other employees who fall under this category include those whose mental or physical disability (due to age, injury, etc.) impairs their earning or productive ability.
Employment at less than the minimum wage helps to prevent loss of employment for these workers.
Subminimum wage employment necessitates a certificate issued by the Department ofLabor’s Wage and Hour Division.”
Lynne,
There are spiritual/psychological types of misery and then theres the more practical sort of misery that comes with poverty. I have read Chekhov’s “Misery”. So I guess the word “misery” is vague and really not appropriate. I saw my friend’s father get his tooth pulled out with a pair of pliers. This operation was the result of not having enough money to go to the dentist. Now that’s poor and misery! A few years ago I met a waitress at a Dennys in Arizona that made $2.19 per hour. The manager explained to me that Arizona was a “RIght to Work” state.
Regards
George
Hi folks,
I just came across this post. It is witty intelligent, accurate, and appropro. If I weren’t so humble, I’d be perfect. Originally published on “The Texas Ring”, I was surprised to find it here.
Let’s start with Dave. Dave seys:
“Whatever arguments you may have against minimum wage, and I agree with many of them, there is no reason to believe that average waitresses make anywhere near what government employees make, now or at anytime.”
The argument against the “minimum wage” is philosophical. By what right does the government tell me how much I may contract my wages for?
In terms of “amount”, hell, I considered myself highly paid (particularly when I considered what I had to do to get that amount). I don’t know what the “average” (state) employee made and I don’t know what the average waitress made. I DO know what I observed.
always,
tony
John,
Youse sed:
“The valid points you make are over-shadowed by your invalid assumptions. The assumption that a minimum wage employee only earns half his wages and that one dollar in wages costs employers two dollars really invalidates the whole article”
You will note that I sed “Use some other figure if you wish.” with regard to benefits/overhead. O.K., let’s look at it:
To keep the figures “nice”, lets assume 20 work days a month, thus one day is 5%.
In general, folks earn 1 sick day for each month of work: 5%
In general, folks earn 1 vacation day for each month of work: 5%
In general, there are 12 holidays a year, one each month: 5%
In general, payroll taxes of unemployment, disability, etc are about 5%
In general, insurance is about $300/mo or so, or about 20%
In general, Social security and medicare is about 10%
That’s about 50%. That doesn’t count “special” leave time like military leave, jury duty, etc.
NOW, let’s look at overhead. There is the building, phone, electricity, taxes, water, sewage, trash, insurance, vehicles, accounting, inventory, supervision, staff meetings, etc. Typically, overhead is 50% to 100% of wages. A good accounting system will prorate that to product costs or sales costs.
As I sed, though, pick your own number. It still works out the same. P’haps not as dramatic, but the results are the same.
always,
tony
Oldmanriver,
Yep, I agree with you. As long as you pay “minimum wage”, your people can go anywhere and get the same pay. As such, there is no “penalty” for moving from job to job. As folks gain experience, they are worth more. If you don’t pay them more, you lose when they quit and go somewhere else.
The (cynical) trick is to pay them enough so they can’t leave.
always,
tony
John,
As I sed in the original post, “Use any numbers you wish.” (for the benefits and overhead). The end result is the same, just not so dramatic.
On the utter hand, consider:
Assume there are 20 work days in a month (it makes the numbers “nice”).
If a guy gets:
1 day of sick leave a month, that’s 5%
1 day of vacation a month, that’s 5%
12 holidays a year, that’s 5%
10% social security/medicare
5% unemploymet/disability/etc
$300/mo insurance of various types is 25%
There’s probably a few other costs there also like tools and equipment, additional leave (jury duty, military), etc.
That brings an estimated total to 55%
Overhead is a bit harder to figure. It may involve vehicle costs, staff meetings, phone, payroll/accouting, management/supervision, building, business insurance, etc. Typically, businesses figure 50% to 100% overhead.
tony
John,
As I specifically sed in Assumption #3, “use some other number if you wish”. The “nice thing” about using “twice as much” is that it makes the numbers “nice” and no one gets lost in the arithmetic.
On the utter hand, I believe it is reasonable–for one thing, it’s the number I used to use when estimating project costs. Let’s look at it.
In general, all employee costs are theoretically broken down to actual work hours, not hours on site. For instance a paid holiday is “paid for” by the hours worked, as is a “coffee break”.
The cost of an employee can be broken out into three parts:
1. Direct wages
2. Benefits
3. Overhead
Direct wages are fairly obvious.
Benefits consists of several costs. Let us assume 20 work days a month (it makes the numbers “nice”.)
If a person gets
1 day of sick leave for every month worked, that’s 5%
1 day of vacation leave for every month worked, that’s 5%
12 holidays a year is 1 day a month, or 5%
Payroll taxes (unemployment, disability, etc) is about 7%
Retirement is generally about 6%
Social security is about 7%
Medicare is about 2%
The lowly 15 minute coffee break (2) is .5/8 hours, or over 6%
Other leave (military, jury, etc.) is difficult to estimate
That’s a total of over 40%. Insurance and other fixed costs will count as various percentages depending upon pay, so it is difficult to estimate a percentage cost. Of course, the fixed amount will be a higher percentage for the lower paid workers. Add in various insurances (medical, life, dental) and other costs (e.g. training) and I suggest that a 50% benefit cost is quite reasonable, if not conservative.
Overhead is a bit more difficult, since it varies greatly from industry to industry and from organization to organization. It consists of things ranging from plant costs (including depreciation) to staff meetings (where time is taken from work), to a portion of the CEOs pay and even the CEOs secretary‘s pay, janitorial costs, and taxes. Also included is a telephone, desk, travel, per diem, equipment, safety talks, vehicles and transportation, coffee breaks, pencils, etc. Most businesses figure 50% to 100%.
As such, I don’t believe 100% of a person’s pay (50% benefits, 50% overhead) is unreasonable.
As I sed, though, use some other figure if you wish. The results are the same, just not so dramatic.
Always,
tony
Sorry folks.
I wrote it, sent it, and I thought it didn’t go, so I sent it again–and again.
always,
tony
Simply put, this sophomoric analysis proves that your an idiot. Its funny that you posted this on the web to prove that fact beyond a reasonable doubt.
Thank you for putting it simply.
It is so simple, I’m having a bit of trouble understanding your position. Can you present it a bit more intelligently?
always,
tony
p.s. Your use of the word “your” is incorrect. As you use it, it means, “You are an idiot.”, often written as “You’re an idiot.” As you spelled it, the word is generally used to denote the possessive, as in, “Your intelligence leaves something to be desired.” or, “Your behavior is somewhat out of place on this board where we treat each other courteously.
Thought you would like to know.
My apologies, Tony. EYE posted the article here on W&G (having great editorial powers, and all) and thought I had told you, and sent the publisher at the Texas Ring, our mutual friend, a copy as a courtesy because I knew he would enjoy it. He took a quick glance (new baby), no doubt, and took it for a submission. Hence the confusion. C. August shows up occasionally and says unpleasant, irrational things. Ignore him. No one sets out to be a professional waitress, surely. In general teenaged girls/boys and losers do such work and make a couple of dollars an hour and tips, so let’s all be generous, particularly at lunch. I start at 20% for dinner and go up or down depending upon whether or not I am pleased, and I do not tolerate not being pleased. Chuckle…the kids are so abused, and there is nothing like the look on a kid’s face when she realizes she got a 50% tip at lunch!
I trust C. August got that I used “EYE” because we do not have rich text, denying me the ability to underscore and Italicize “I?” One never knows…
Linda,
1. No problem. I didn’t know what the policy was on “double posting”. As I sed many moons ago, I wrote these things for my own benefit for various reasons. If someone else can get some benefit from them, I gots no problems. I leave it to you, Gary, and Mike to take care of the postings. I was just surprised.
2. In terms of “C”, I choose NOT to ignore him/her. If he sees some problems with my analysis, I’d like to know what they are. However, like you, I see no reason to be rude.
3. Don’t feel sorry for ALL waiters/waitresses and other minimum wage folk. As I sed, the highest paid employee in Reno was the head waiter at Harrah’s club. OFFICIALLY, he was paid minimum wage. Oftentimes even when folks make ONLY minimum wage, they are learning skills and developing their character and work ethic. If they are “smart”, the young’uns are learning that they had better learn some skills or get some training/education or they are gonna have a miserable life.
My neighbor just turned 18. Cute girl. She came over a few days ago to show me her engagement ring. I asked about her fiancé, “How will he support you? Does he have any skills?” She replied, “Oh, yes. He can hunt and fish.” I have yet to figure out how to respond to that.
always,
tony