Tuesday, March 06, 2007

What you really need to know about minimum wage:

(editors note: No, I didn't spend all morning typing this. I wrote this while on a plane from California to Minnesota, and only being able to use one hand was a blessing because it killed more boredom time on the plane.)

I thought I’d take a minute to share some realizations I had about minimum wage legislation after reading through and digesting some material about the subject. And, since I’m trapped in the world’s smallest airline seat, that of a 757-200 featuring a configuration that could only comfortably seat an army of toddlers, writing this will give me something to do for awhile and distract myself from the pain that is my back and legs right now.

First, let me give you my prior position up to this point: for one, raising the minimum wage doesn’t do anything to actually help the people that are making the minimum wage. If you run a business that employs such workers, when you have to pay them more that money has to come from someplace. Perhaps you’re going to let some employees go. Perhaps you’re going to rely on alternatives like automation or outsourcing. Perhaps you will change your raw materials to use cheaper goods, although this will reduce the quality of your own end product. Or, most likely, you are going to simply pass the added cost along to your customers in the form of a higher price.

Some people might incorrectly think that the business can simply lower it’s profit margin and pay for the added labor cost that way, but this will only work in the absence of free-market competition. If the business in question were making above normal profits, new competitors will always crop up to take a piece of that action, unless there is some force, normally government regulation, that prevents that from happening. Besides this being fundamental economic theory, I know this actually happens, because I’m one of those crazy entrepreneurs that starts those businesses. (by the way, if you have identified a market in which companies are making unreasonable profits and in which there isn’t some stupid anti-competitive legislation blocking entrance into that market, please let me know. I’ll be all over it.).

Ok, so that said, now think about the industries where people actually make minimum wage. The things that obviously pop to mind are jobs in food service, hospitality, and perhaps the very lowest, unskilled manufacturing and service jobs. Of course, if you’re making minimum wage, you may very well depend on the fact that you can get a double-cheeseburger at McDonald’s for 99 cents. By raising the minimum wage, it’s that very cheeseburger that’s going to cost more, and so the net result to you personally is going to buying-power neutral: you make a little more money, and your basic goods and services cost a little more. You also run the risk of making the companies less competitive globally, because your labor costs more than that overseas, but I discount this argument to a great extent, because, while accurate, the fact is that the minimum wage jobs are generally not making a significant contribution to the labor pool of international companies. McDonald’s is not grilling burgers in Detroit and selling them in Mumbai, so it doesn’t play much of a role.

In general, so long as minimum wage is kept low enough to only effect the small pool of workers that it does, my opinion is that, while more or less stupid, it doesn’t really matter.

Anyway, this often comes up during election years and this year was no exception. I had been lumping minimum wage discussion as an attempt at simple voter-pandering for votes: “elect me and I’ll make sure you get more money!” But it was always curious to me why they’d make such a big deal out of it, when really not that many people make minimum wage. The census statistics show that about 2.5% of wage earners make minimum wage, but the vast majority of these are in an industry where they are really working for tips, and as a result make much more than minimum wage (by the way, it may surprise you to know that airport skycaps, the guys that take your bag, move it 2 feet to a conveyor belt, and expect a tip, average over $100,000 a year in income at busy airports. And I’m sure they’re accurately reporting all those dollar bills on their tax filings…).

How many people actually make minimum wage, without tips? 0.33% of workers. Not exactly a large voting block.

But, at last, I had the ah-ha moment where I realized that all this claptrap about minimum wage wasn’t about that little handful of people, struggling to live off of such meager wages. Nope, not at all. That is just posturing to make you feel sad for those folks and support the position of increasing minimum wage, despite the fact that basic economics says it won’t help them.

Here’s the real reason those politicians made such a big deal about it: a significant number of union jobs are tied to the prevailing minimum wage rate.

Unions. A large and powerful voting block. That’s why it’s such a big deal, and this is a way to get higher wages for union employees, not because of their work for the companies they labor for, but because of propagandist tactics making you feel sorry for the 0.33% of people that make minimum wage.

So, if an apprentice in the local union gets 2x minimum wage, then you’ve just increased his salary. Same for the guy that makes minimum wage plus $25 an hour. And right up on the chain the wage increases go.

And that WILL make the companies those employees work for less competitive, because, while McDonald’s does not make burgers locally and sell them overseas, Boeing does indeed make airplanes locally and sell them overseas, and you’ve just driven up the cost of their airplanes while Airbus can keep making them outside the reach of American minimum wage laws. And that does hurt the company, the economy, and overall, the United States.

Of course, this isn’t the only issue you need to look at when casting your vote,. I can think of one state election this past year where the two candidates differed on the issue, but I would have (if it was my district), voted for the guy that wanted to raise minimum wage, even with this new knowledge, because the guy that didn’t want to raise minimum wage was a crazy right-wing religious nutjob who might well stomp all over your rights for his moral superiority. However, I think it’s important to understand that the ramifications of increasing minimum wage are much different that the stories about Jennifer, single mother of three who makes minimum wage, would lead you to believe.

And perhaps just as important, ask yourself whether your congressman should really be involved in setting the wages of pipe fitters or autoworkers, or if thats something that should really be up to the employers and their employees.

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