Minimum Wage is going up! Is it really helpful?
As many of you are aware minimum wage is going up as of Jan, 1 2014. The Colorado rate will increase from $7.78 to $8.00 per hour – this is a 2.8% increase. Minimum Wage is a political football on a persistent basis. It seems that the “left end” of the political spectrum seems to push for higher Minimum Wage rates most every year. It all sounds good if you are the one making Minimum Wage, however are there other things to consider? Are there consequences beyond simply “helping” folks out who are in the lowest bracket of wage earners? Let’s take a look at this in a bit more detail.
Minimum Wage was originally instituted as a labor law to protect workers from abusive employers. The “Fair Labor Standards Act” was passed in 1938 and set Minimum Wage at $0.25 per hour. I remember my first job as a grocery store bagger/stocker in 1972 was at $1.57/hr – I’m pretty old though! States and local governments can set their own Minimum Wage standards and many have a rate that exceeds the Federal level. For instance, during 2013 the Federal Minimum Wage was $7.25, the Colorado rate was $7.78. The City of San Francisco’s rate is $10.00 with an increase to $10.74 on January 1, 2014.
Pros: On the pros side; if you are the politician who pushes through a higher Minimum Wage rate, you will probably win votes from those who think you have done them a favor. If feels good to have a larger check and it makes you think you will have more net spendable income. The question is – is it really true? In the very short term it is true. The worker will be able to buy incrementally more and some financial pressure will be relieved for a short time. But in the long run does it really help?
I think we have to go back to the question of why there are Minimum Wage jobs. We also have to talk a little about what a Minimum Wage job is. In the most general terms Minimum Wage are low skill entry level jobs. They are representing how we begin in the work force. Minimum Wage was never intended to be a place where we stay for a lifetime. It is certainly not enough to raise family on or even support yourself as an adult. If you work full time in Colorado for Minimum Wage at the current rate, your annual gross income will be $16,182. In 2014 the rate will increase to $8.00 and by the same annual calculation you will increase by 2.8% to $16,640 – an increase of $458/yr.
Cons: On the cons side of the discussion, when a business owners operating costs go up prices generally go up by an equal amount. The problem with a Minimum Wage increase is that it is arbitrary and is not tied to increased profitability. Many workers assume that their “bosses” make enormous profits as a percentage of gross sales. This is simply not true. The average profit margin for most business is 2-5% of gross. I believe that Wal-Mart’s profit margin is between 2.5-3%. The margin for effort is very small. So a 2.8% increase in wages for a large percentage of their work force has a direct an immediate effect on their ability to survive as an entity. Wal-Mart’s prices will rise and will do so quickly. The same will be true of their suppliers and manufacturers – this will happen all the way down the food chain and affect all levels of commerce. On average payroll is about 64% of a company’s gross cash flow. When wages go up it has a massive and nearly instant effect on a company’s ability to survive and be profitable. This is especially true when you take into account how slim real world profits truly are. Make no mistake – without profits, there are NO JOBS!
The bottom line is that those who earn the least are most affected by small changes in our economy. When wages go up by edict and are NOT tied to increased profitability, the prices of all goods and services will go up and match those increases very quickly. The net effect on those who got a raise is NO NET RAISE. On the other hand when a worker is rewarded by a raise because they are more productive, acquired new skills or education, innovates with a new idea that helps his employer make more money – this is the raise that you get to keep. It rewards the one who actually makes a difference and because it is profit based and not arbitrary, you get to keep it – isn’t that the way it should be?