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.
[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:
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:
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.
Cross posted from Brother Bob’s Blog