Economics for Politicians: Minimum Wage Myths!

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Welcome back class! It’s been four years since we ran this ten  part series (plus extra asides) to provide you with basic economic literacy, and over a year since we had a bonus section to explain why carbon taxes are one of the most effective ways for prosperous westerners to hurt the world’s poor. So why revive the series now? Because today’s topic has become a hot issue for the radical elements of one of our major political parties, and it’s time to explain the reality of the issue in language that even a politician can understand.

Today’s class will be slightly different from previous sessions, as this is such a simple concept well go straight to the point with a brief explanation, which will be followed by numerous examples of the reality of the impact of minimum wages. First off, I’m sure that you remember those good ol’ laws of Supply and Demand. For those of you who’ve forgotten, at their essence if you make a good more expensive (cigarettes, alcohol), less of it will be consumed. Likewise if you want something consumed more, one lowers the cost – think of stores offering sales in the private sector, or you subsidizing unwanted, inefficient products like solar energy. As difficult as this may be for you to believe, this also applies to labor -really, it does!

As Zero hedge’s Tyler Durden explains (emphasis mine):

Seemingly no amount of empirical evidence can convince progressives that raising minimum wages to artificially elevated levels is a bad idea.  Somehow the basic idea that raising the cost of a good ultimately results in lower consumption of that good just doesn’t compute.  Though it does seem odd that progressives in states like California lean heavily on higher taxes as a way to curb, for example, fuel consumption.  Could it be that the left actually does understand the basic economics of the minimum wage debate but don’t find the math behind it to be particularly “politically expedient” in certain instances?

So let’s try a simple example to explain the concept:

Let’s say you run a lemonade stand. Your product is top quality, and your smarts and work ethic have created enough demand that if you don’t want to turn customers away from the long lines at your door you need to hire more help. Hooray! So you do, and in addition to helping your new employees by providing them jobs you also take home some extra from profit after the expenses incurred from pay and benefits to your new employees. For simplicity’s sake we’re going to disregard benefits, taxes, overhead costs, etc and just focus on salary. What is the bare minimum that any new employee has to contribute in order for you to hire? Since companies that pay employees more than how much they add to the bottom line don’t stay in business very long, at the very least any additional unit of labor (employee, work hour, etc) must generate at least enough revenue to cover their costs. I also understand that his gets murkier when you calculate the value of non-production staff, but they’re not the ones who proponents of minimum wage laws seek to help.

Put simply, if the minimum wage is $15 per hour nobody who can generate less than $15 per hour in revenue will get hired, or stay employed for very long. In other words,

If the output of your work does not generate enough revenue to cover the cost of employing you, you will not have a job.

Yes, it’s that simple. You might have have questions or objections to that point, and if you do please follow this two step process to understanding:

1) Punch yourself in the face
2) Read it again

Of all of the concepts we’ve covered in this series none have been simpler than the one, so hopefully after a few attempts this will sink in. For those of you who remain unconvinced, in between bouts of steps 1 and 2 by all means read on as I present to you further evidence, or as we conservatives like to call it, “facts and reality”.

Now you might have some of your talking points cued up. The Week’s Shiklah Dalmia is ready to dispel them for you. While I could easily copy and paste every word of this great essay I’ll only list the falsehoods that get addressed. By all means click and read the whole thing that blows away the theories that state:

Minimum wage hikes will lead to productivity-boosting automation

Minimum wage hikes helps firms make more money

Minimum wage hikes will stimulate the economy

Minimum wage hikes will diminish the strain on welfare programs

Or perhaps you might share some of the delusion of The nation’s Michelle Chen, who argues that a minimum wage increase will “pump” $5.9 billion into Los Angeles’ economy, but anyone knows that to pump anything there has to be a source. So from where exactly is this money being pumped? Back to a separate post at Zero Hedge and Tyler Durden, where he fleshes out my cost model:

If an additional unskilled worker will cost $10 an hour and might generate $100 a day in additional gross revenues, that is $20 in gross profit. But the overhead costs of operating a business are rising faster than inflation: junk fees imposed by cities, counties and states, workers compensation and disability premiums, healthcare costs (if you hire full-time workers), energy costs, and so on. For most businesses, overhead costs 50% to 100% of total employee compensation–wages plus benefits and payroll taxes. So adding another employee to gross 20% more doesn’t make it worthwhile–it actually generates a loss once overhead costs are paid. The only time it makes sense to hire another worker is if that worker will create 100% or more surplus value from their labor.

Some more of that enemy of Leftist thought, Math:

“Washington Restaurant Association’s Anthony Anton puts it this way: “It’s not a political problem; it’s a math problem.”

“He estimates that a common budget breakdown among sustaining Seattle restaurants so far has been the following: 36 percent of funds are devoted to labor, 30 percent to food costs and 30 percent go to everything else (all other operational costs).  The remaining 4 percent has been the profit margin, and as a result, in a $700,000 restaurant, he estimates that the average restauranteur in Seattle has been making $28,000 a year.

“With the minimum wage spike, however, he says that if restaurant owners made no changes, the labor cost in quick service restaurants would rise to 42 percent and in full service restaurants to 47 percent.”

National Review’s Kevin Williamson provides a more tangible example:

In San Francisco, the people who were bemoaning the impending closure of Borderlands admitted sheepishly that they’d voted for the minimum-wage hike. “It’s not something that I thought would affect certain specific small businesses,” one customer said. “I feel sad.”

Yeah, Adam Smith feels sad, too, you dope.

Thick though they may be, you know what those economically illiterate San Francisco book-lovers aren’t? President of the United States of America. But President Obama does precisely the same thing: With Obamacare, he created powerful economic incentives for companies such as Staples to keep part-timers under 25 hours – and to hire part-timers rather than full-time employees – and now he complains when companies respond to those incentives. Naturally, he cites executive pay: “I haven’t looked at Staples stock lately or what the compensation of the CEO is,” he says, but affirms that he is confident that they can afford to run their business the way he wants them to run it.

Let’s apply some English-major math to that question. Ronald Sargent made just under $11 million a year at last report. Staples has about 83,000 employees. That means that if it cut its CEO’s pay to $0.00/annum, Staples would be able to fund about $2.61/week in additional wages or health-care benefits for each of its employees, or schedule them for an additional 22 minutes of work at the federal minimum wage. Which is to say, CEO pay represents a trivial sum — but the expenses imposed by Obamacare are not trivial.

What’s this about Borderlands Books that Mr. Williamson references? It was a trendy sci-fi book store in San Francisco that had to close its doors. Lest you think that this is some right wing propaganda, here is a small excerpt of what they posted on their own web site:

The change in minimum wage will mean our payroll will increase roughly 39%.  That increase will in turn bring up our total operating expenses by 18%.  To make up for that expense, we would need to increase our sales by a minimum of 20%.  We do not believe that is a realistic possibility for a bookstore in San Francisco at this time.

Read the whole thing – it’s a damned tragic story. Here is another example of a small business hurt by the policy, this time in Seattle:

[Z Pizza] owner Ritu Shah Burnham said she just can’t afford the city’s mandated wage hikes.

“I’ve let one person go since April 1, I’ve cut hours since April 1, I’ve taken them myself because I don’t pay myself,” she told Q13. “I’ve also raised my prices a little bit, there’s no other way to do it.”

Wait a minute, raise prices? Kevin Mooney at The Daily Signal gives us another Captain Obvious moment:

“If the restaurant suddenly has to pay for something it didn’t have to pay before, one way to cover that cost is to raise menu prices,” Kevin says. “So we are probably going to have to pay more for that shrimp.”

And that, says Eve, will have a ripple effect. Higher prices mean people go out less often, which means less in tips for the wait staff at Leonardo’s II. “I wonder if this is something the politicians understand,” she says.

And what about that person who got let go by Z-pizza’s Burnham? That’s only one person, but what happens to that person who does get laid off or never gets an opportunity? Robert Tracinski in The Federalist talks to the always great Mike Rowe:

My job as an usher was the first rung on a long ladder of work that led me to where I am today. But what if that rung wasn’t there? If the minimum wage in 1979 had been suddenly raised from $2.90 to $10 an hour, thousands of people would have applied for the same job. What chance would I have had, being seventeen years old with pimples and a big Adam’s apple?

On a larger scale, NRO’s Mark Antonio Wright gives some great insight into White Castle, its business practices, and how these laws will hurt the very people they’re designed to help. Is that example too small scale for you? Stay on the NRO site, as Paul Kupiec explain how minimum wage mandates devastated the economies of Puerto Rico, American Samoa, and the Northern Marianas.

What other effects might we have to worry about? The Washington post frets that robotics could end up replacing the very workers the law was intended to help! Actually, there’s no “might’ to it, as Wendy’s is showing.

Those of you recovering from repeated self-inflicted punches to the face might still be sniffing, “Well THEY can afford it’, referring to some form of big business. but you know who else can? You. Here are a few examples of leftist Minimum Wage Chickenhawks who refuse to practice what they preach:

Big Labor. as well as Bernie Sanders

Various left wing publications

Billiionares like George Soros, Tom Steyer, and Michael Bloomberg. And of course, the Radical Left’s favorite child molester, Lena Dunham

Even worse, NRO’s Jim Geraghty reports on the emergence of a particularly obnoxious breed of Radical Leftist, a movement of anti-tippers (click the image to read their screed). Below the pic is Geraghty’s response:

Or, you could just have signed the check, “I am a self-absorbed a**-hole”

Let me tell you something you don’t want to hear, anti-tip lefties: You’re cheap. You like your money, and you don’t like giving up any more of your money than you absolutely must to get your burrito or meal or whatever good or service you just purchased. You can dress up your selfish and tight-fisted nature in as many social justice slogans as you like, the way you dress up your burrito with fillings and toppings, but you’re not fooling anyone. You’re greedy. You want money, and you’re not willing to part with another fifteen or twenty percent of the agreed price the way everyone else does, because you don’t care enough about the guy or gal who just served you. You aren’t really that compassionate. You aren’t really that appreciative of people who work hard. None of the servers who served you see your little note and nod appreciatively at your principled stand. They swear under their breath.

You’re worse than the non-tippers who you would call tightwads. Because the ordinary tightwads aren’t arrogant enough to claim that they’re doing the wait staff a favor by not leaving a tip.

And I’ll close with what might be the best comment came from the comments section of one Seattle based web site:

No you don’t get to get away with that.  You don’t get to advocate policies which allow you to use force to deprive people of their jobs and their opportunities and then claim that those who would have provided the jobs are the heartless ones.

You don’t get to trot out the insipid, mindless, tendentious talking points about how you are morally or intellectually superior when every “solution” you proffer is destructive and is based upon forcing others to do your bidding.  You don’t get to decide whose job is worth preserving and whose isn’t and still claim the moral high ground.

You have to own this.  You have to accept responsibility for the suffering your ignorance has caused and you have to understand that there is no way forward as long as you remain ignorant.  Until you can begin to think rationally instead of being so full of hate that you think the best solution to every problem is to use force against those you disagree with then you can’t be accepted into the company of decent people and will always be seen as supporting those who would oppress us because that is exactly what you are doing.

Ha ha! Good luck getting a Lefty to accept responsibility! Because as we all know, being a Leftist means never having to say you’re sorry.

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Cross posted from Brother Bob’s Blog

Blogging by the credo of "Making the world a more offensive place, one blog post at a time", Brother Bob started writing posts around the beginning of the Obama presidency over at Brother Bob's Blog. A born-again Existentialist and self-professed libertarian with conservative tendencies, he has ironically chosen to live in the Washington, DC area - deep behind enemy lines. He has always loved history, and spent eight years volunteering as a tour guide on weekends, giving over 200 tours to roughly 2,500 mostly foreign guests. His tours were highlighted by stories generally not found in the history books or most other tours, such as the importance of the Battle if Antietam, the origins or Arlington Cemetery, and dispelling the myths of FDR's New Deal. Although his favorite subject to blog about is Economics, as seen in his Economics for Politicians series, his posts try to address angles that other conservative writers and the mainstream media (naturally!) miss. "There's no point in putting up a post on a subject that someone smarter than me has already written". He believes in the "Happy Warrior" approach, and tries to inject humor in his posts, sometimes successfully. Two such examples are his posts comparing the modern left to the horrible Star Wars prequels, and analyzing the laments of a DC woman in search of a feminist boyfriend. Brother Bob lives with his very patient wife known as Sister Babe, and their fantastic son. Little Bob. Little Bob is also the reason that being a tour guide came to an end, as spending Saturdays raising a son takes priority over giving lectures to foreign visitors on the folly of Keynesian economics. BB is also grateful for the opportunity to take his place among the outstanding writers at Flopping Aces, appreciates every person who takes the time to read his posts, and especially those who join him in the conversation in the comments.

20 Responses to “Economics for Politicians: Minimum Wage Myths!”

  1. 2

    john

    BB I think that you should have mentioned that the $15 minimum wage will not happen immediately but will be phased in.
    Why didn’t you ?
    The minimum wage has been increased in some places, those are also mainly places that have an unemployment figure lower than the national average.
    Back in those glorious days of yesteryear when “America was great” the rich paid a higher tax rate and we had regular minimum wage increases.
    Adjusted for inflation our minimum wage is now

  2. 3

    Nanny G

    Sad to say but the Left is generating an entirely new refutation to the reality of the truths in your post, Bro Bob.
    Delusions by once called crazy people must now be respected.
    People can, quite literally, pick their own pronouns.
    (One guy picked ”your majesty.”)
    And add to this fact that a narrative, no matter how tenuously attached to reality (”hands up, don’t shoot,” comes to mind) if you won’t ”respect” it you get sent to re-education classes until you (at least) SAY you do accept it!

    And, one more thing.
    Old white men’s thinking, no matter how tried and true, is being thrown out simply because long ago white men (probably when they were young, btw) thought of it.

    So, let them have their $15/hour laws…..if they get them enacted.
    Then let them get mugged by reality.
    It has a refreshing side effect of turning them into conservatives.

  3. 6

    July 4th American

    @Mully:

    Obamacare was designed to eliminate the healthcare structure absent admission of failure on the part of the left.

    It was intended to take control of healthcare from the private sector to the government. Choice and availablity will be the consequence of government control.

    Our uneducated youth will be unable to recognize what has happened to them and as a result will become victims of excessive government control.

  4. 7

    Ajay42302

    @Brother Bob:

    So, four years later, how’s that low MW working out?

    The city of Owensboro KY and Daviess Co. recently announced they’d give Alorica $2 million in welfare to locate there and create 830 $9 to $10 an hour full time jobs. They’re taking tax dollars from higher paid workers and giving to a profitable company and then will come back to those same higher paid workers again to subsidize these new full workers with food stamps, WIC, school lunches, etc.

    And in this same state, GOP Gov Bevin is fighting against the upcoming overtime changes for salary workers, wanting full time 60 to 80 hour a week workers to stay at $23k a year, again relying on what’s left of the middle class to pick up the wage tab rather than the employer.

    Don’t you think there just might be the slightest flaw in the GOP’s economic plan? Or could it be another GOP admission of a belief that screwing workers for a job well done is just smart business?

  5. 8

    kitt

    @Ajay42302: The company is a call center, How much do you think a no skill job should be paid? Many of these companies provide healthcare benefits and cap wages below 12 an hour. They sit in climate control conditions answering phone calls. Not such a hard job. The person gets a job, the county pays out less welfare benefits that measley 2 million, made up rather rapidy. The average person on full welfare costs 60K a year with administration costs factored in. Road repairs and schools or welfare I know where I want my tax dollar spent
    The OT issue is unrelated to the creation of 830 jobs, not in India
    You not good in math old boy. Public education failure not your fault.
    http://www.weeklystandard.com/over-60000-in-welfare-spent-per-household-in-poverty/article/657889

  6. 9

    Randy

    @Ajay42302: The essay was about the economics of raising minimum wage on workers. Reality economics is reality economics, not GOP or Dem economics. Facts are facts. Your little story is just an example of someone trying bypass the learning curve in creating a valued employee.

  7. 10

    Ajay42302

    @kitt:

    Okay, so your argument is that $2 million in welfare for a profitable company is justified because the slave wages they pay are, well, better than nothing?

    And your argument on OT is, a, well, never mind.

  8. 13

    kitt

    @Ajay42302: Nope cant argue the OT without more information.
    Liberal memes such as slave wages are too old and worn out slaves never got paid so get off the broken soapbox. Working will give them something to put on a resume other than burden to society. Taking less from the system, is this a one time 2 million or is it a monthly payment or just 2 million in property tax breaks that liberals say goes just to welfare and not uniformly spread out in a budget…facts not feelings alinsky boy.

  9. 14

    Ajay42302

    @kitt:

    The point is that low wages while the rich has gotten richer haven’t worked. Workers are producing record profits for their employers and are being compensated less. That isn’t talking points but rather reality.

    It is also a reality that more full time workers are more dependent on government assistance than ever before.

    Its also a reality that more of the right are insisting on no MW hikes or even abolishing MW, weakening to ending bargaining rights, and weakening OT pay than ever before.

    It’s a reality that the inequality gap is widening rather than seeing a benifit from trickle down.

    Simply put, the GOP economic policy and insistence on low wages has proven to be an abject failure.

  10. 15

    Nanny G

    How does a higher MW help get dollars from top American companies into AMERICAN worker’s pockets?
    Apple is #1 but it hires foreign workers for the vast amount of its worker force.
    It also hoards $181 billion in profits offshore because Obama’s tax arrangements are so onerous.

    In 2014, the 500 largest American companies hold more than $2.1 trillion in accumulated profits overseas to avoid those U.S. taxes.

    IF Obama really had wanted to equalize wages between rich and poor EARNERS he would have made it cheap and easy for American companies to spend their money HERE.
    Instead he made it impossibly expensive.
    You’d have to be an idiot (or a communist) to bring all that money into the USA where it could be spent on raises for all Americans working for your company.

  11. 16

    kitt

    The GOP has never insisted on low wages thats a lie.
    Allowing companies to run their own business as they see fit. Wages and benefits should be market driven the best get the rewards, the non starters need to be made uncomfortable in their poverty to drive them out of it. But flood the market with cheap labor, good idea SJW. No one is holding these citizens back, except people like you who keep telling them its impossible then throwing roadblocks to success in their path. Did you start life making good money? Or take a first step with a low wage beginners job. Its natural to start as a seed then go through growing stages to become a tree.
    You might understand this if you are mature enough.
    If you are not a liberal when young you have no heart if you are a liberal when older you have no brain.

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