Wednesday, August 07, 2013

Why The Minimum Wage Doesn't Help The Poor

Let me emphasize that I am neither an economist or politician.  Yet when I read articles like this recent New Yorker piece on the minimum wage, I feel compelled to share my take.

In his piece, James Surowiecki does a good job of teasing out some of the main issues around low-wage work these days.  These include:
  • The transition from a high-wage manufacturing economy that provided blue-collar middle class jobs to a low-wage services economy (Note: It's my opinion that the high-wage manufacturing economy was an anomalous period, where an export-driven US economy could essentially grow unimpeded by competition, and where modern corporate governance had yet to place an emphasis on the primacy of the shareholder)
  • The increasing trend for low-wage workers to be adult breadwinners, rather than adolescents looking to earn spending money
  • The remarkable statistic that Apple's profits exceed those of all retailers, restaurant chains, and and supermarkets in the Fortune 500 combined...and that Apple employs 76,000, while those old-line companies employ 5.6 million
Yet Surowiecki's piece is still rife with insane troll logic.  For example, he writes, "Walmart and Target earn between three and four cents on the dollar; a typical McDonald’s franchise restaurant earns around six cents on the dollar before taxes, according to an analysis from Janney Capital Markets."

In that very same paragraph, he adds, "Congress is currently considering a bill increasing the minimum wage to $10.10 over the next three years. That’s an increase that the companies can easily tolerate, and it would make a significant difference in the lives of low-wage workers."

I looked up Walmart's most recent 10K filing.  SG&A (largely wages) made up $21.7 billion of Walmart's expenses for the quarter, or just about 19% of revenues.  Walmart's profits were 3.3%.

Increasing the minimum wage from $7.25/hour to $10.10/hour represents a 39% increase.  If Walmart's SG&A expenses rose 39%, they would increase to 26.5%.  Walmart would go from making 3.3 cents for every dollar sold to losing 4.2 cents.

Doesn't sound like something Walmart "could easily tolerate," does it?

Despite my criticisms, I share Surowiecki's opinion that raising the minimum wage isn't enough.  Raising the minimum wage is attractive to folks who lack economic sense because it doesn't carry an easily reckoned hard dollar cost, and is simple to carry out.

A better approach is to provide a more effective social safety net:
"Realistically, then, a higher minimum wage can be only part of the solution. We also need to expand the earned-income tax credit, and strengthen the social-insurance system, including child care and health care (the advent of Obamacare will help in this regard). Fast-food jobs in Germany and the Netherlands aren’t much better-paid than in the U.S., but a stronger safety net makes workers much better off."
I heartily agree, though I'd add educational reform to the mix, so that you don't have to be wealthy to get a good public education (the essential fact that drives today's housing market).

There is only one easy way to increase wages, and that is to increase the demand for labor.  The law of supply and demand will then lead to an increase in wages.  Rather that futzing around with foolish policies, our government should focus on enabling economic growth, which will help a heck of a lot more than the smoke and mirrors of minimum wage increases.

4 comments:

N. Moody said...

"I looked up Walmart's most recent 10K filing. SG&A (largely wages) made up $21.7 billion of Walmart's expenses for the quarter, or just about 19% of revenues. Walmart's profits were 3.3%.

"Increasing the minimum wage from $7.25/hour to $10.10/hour represents a 39% increase. If Walmart's SG&A expenses rose 39%, they would increase to 26.5%. Walmart would go from making 3.3 cents for every dollar sold to losing 4.2 cents."


SG&A includes, obviously, lots of expenses on top of payroll costs, so a 39% increase in the minimum wage doesn't translate into a 39% increase in SG&A. More important in Walmart's case, the vast majority of Walmart's employees already make more than $7.25 an hour (average wage at Walmart is closer to $10), so the effect on Walmart's cost structure would be minimal and, in fact, easy to tolerate.

The impact on fast-food restaurants, where more of the employees do earn the minimum or close to it, would be bigger, but as numerous studies have shown, fast-food restaurants pass rising costs along in the form of higher prices. An increase of 39% in the minimum wage would translate to something like a 30% increase in payroll costs. Payroll makes up around 25% of costs at most fastfood restaurants, so you're talking about a price increase of about 7%. Again, that doesn't seem outrageous or intolerable.

William Martin said...

There is only one simple way to increase wages, which is to increase the demand for labor. The law of offer and demand can then cause a rise in wages.

Thanks
William Martin

PPI Claims Made Simple

Foobarista said...

An idea I like is abolishing the minimum wage, and replacing it (along with other gov't handouts such as unemployment, disability, possibly SS, etc) with something like a reverse income tax.

Basically, everyone in the country gets a grant of a certain amount of cash. A flat income tax is instituted. This would make the tax de facto progressive at low levels of income, while trending flat at higher levels. Also, you'd get rid of large disincentives to work we currently have in the existing "safety net" schemes.

We'd also need to get rid of tons of regs regarding employment for this to work well, but if it was implemented, employers would be able to hire people to do jobs that don't produce enough revenue to justify employees at high minimum wages (meaning the jobs are currently done under-the-table or automated if possible).

High minimum wages increases costs and prices, drives up unemployment, and produces more under-the-table jobs.

Chris said...

N. Moody:

Great data and stats. I still stand by my argument, however, that the impact of raising the minimum wage isn't trivial.

For example, is the average wage of Walmart employees a mean or median figure? It would be great to know the actual impact.

There is a problem with the argument that "raising the minimum wage doesn't impact that many people," in that if the change doesn't impact that many people, why bother? If raising the minimum wage is such a positive intervention, won't it affect a broad swath of society?


Foo,

I'm in favor of your system. The simpler the system, the less it is subject to gaming.

Politicians try to use the levers of tax policy to effect social change, but the real impact is a wealth transfer to tax preparers, a deadweight loss from excess paperwork, and a scheme that favors the wealthy and well-educated, which is precisely the opposite of what these progressives say they want to occur.