04 May 2006

Hatchet, Axe and Saw--revisited

Hearing more minimum wage increase talk this morning on my way in to work, reminded of a post I wrote last year.  Since my argument against it is roughly the same now as it was then, I am posting that one again, with a few revisions.

Sen. Kennedy and others want to increase the minimum wage again. Senate Amendment "To amend the Fair Labor Standards Act of 1938 to provide for an increase in the Federal minimum wage", S.AMDT.44,  amends "A bill to amend title 11 of the United States Code, and for other purposes," S.256; see also Jared Bernstein, others, "The Next Step; the minimum wage proposals and the old opposition," Economic Policy Institute, 8 March 2000. One thing that bothers me about this is that these people do not have to live, or more especially work, with the consequences of raising the minimum wage. Of course that, logically, is not much of an argument against a wage hike. So let me offer two brief arguments against it.

1. The first thing that will happen is that people who actually work for minimum wage will work less; this means that, while their wage will increase, their actual income will decrease. Now, how can this be? Get your calculator handy: we have some math to do.

In another life, I was a restaurant manager. As such, I had three highly controllable costs: food, paper products, and labor. Forgetting the first two as irrelevant to our present purpose, in order to be profitable with respect to my labor costs, that cost could not exceed 16 percent of my adjusted gross sales. So, if I was planning my week, and I projected my sales as $32,000, then my labor cost was going to have to be not more than $5,120. To calculate the number of hours I need to schedule in order to reach this goal, I divide this figure (i.e., $5120.00) by my average hourly wage. (I arrive at this average by totalling the hourly amounts each of my employees are paid and dividing this total by the number of employees.) Let's say that this average wage is $5.90. Dividing $5120.00 by $5.90 I see that I can schedule no more than 867.80 hours. If I actually do $32,000.00 in sales, then I shall make my labor budget.

Let us say, now, that an increase in the minimum wage increases my average hourly wage to just $6.15. Using the same sales and labor budget figures, the number of hours I can schedule comes to 832.52. This means that I shall have to decrease the number of hours that I schedule by 35.27 hours. 35.27 hours!!! That's near 40 hours; that's almost one experienced, full-time employee's job! Now, am I going to let a full-time, experienced employee go? Not on your life. So where I am going to cut this 35.27 hours? From those minimum wage workers, of course. You know the ones: they just got a raise from the federal government. Their hours just got cut.

The only other way I can make my labor budget is to increase my sales, which I can do only by either increasing the number of people who choose to eat in my establishment (something I was never very good at, honestly) or by raising my prices just enough to cover the average wage increase I just experienced thanks to Congress. Of course, I'll have to raise my prices eventually; so will all of my competitors, who are having the same problem. It's just a matter of which of us will raise his prices first. Since none of us want to go first, all of us are going to cut hours from our minimum wage workers until one of us just has to start increasing prices. This problem will affect anyone who has minimum wage employees; and as employers increase prices to offset the cost of the hike, the benefit will disappear. And when it does, there will be more demands to increase the minimum wage yet again...and again...and again; and so on. And when the wage is increased yet again employers will be faced with the problem the solution to which "caused" the need for the increase in the first place.

So, the only way that Congress can make the minimum wage increase of any lasting value will be to forbid employers from cutting the number of hours worked. Not only that, but it occurs to me that Congress will also have to add a price freeze to the wage hike.

2. Another problem with artificial increases in the minimum wage is inflation. Now, I am no economist, so I am more than willing, with respect to the following, to be corrected, but only by an economist. (I will accept a BA or better, in Economics, as qualifying one as an economist.)

In 1983 I bought a pickup truck for around $10,000. If I had bought that same, or a comparable auto, in 2000, then, utilizing Gross Domestic Product deflator method it would have cost me $15,375. Here's a funny thing: when I bought a new car in 2000 it cost right around $15,500! So the amount I was charged for my auto in 2000 was keeping up with inflation.

Now let's look at the artificially (and arbitrarily) set (as opposed to market set) minimum wage. When I first started working, in 1982, the minimum wage was $3.35 per hour. It is now $5.15. Adjusting for inflation, using GDP deflator, that $3.35 would be the equivalent of $5.84 today. Clearly, this seems to bolster the argument for increasing the minimum wage. What it actually does is demonstrate the problem with setting the wage by law: the law itself is not keeping up with inflation. To keep pace with inflation would require new minimum wage legislation every year or so. As I've said, I'm no economist, but I think it’s easy to understand how automobile prices have managed to keep up with inflation, and how minimum wages won't if we let market forces set the wage.  Unlike the minimun wage, automobile prices keep up with inflation because those prices are determined by the market; and the market is keeping up with inflation.

Right now, the wage set by Congress is not keeping pace with inflation. So right now, that wage works well for employers. But we are being mentally lazy if we truly believe that a minimum wage can be effectively prescribed by law. When the minimun wage does go up, as it inevitably must, that new wage will not keep up with inflation.  It will be frozen in place while inflation increases.

This, I think, explains much of the problem with executive salaries. The minimum wage is meant to be a wage paid to unskilled laborers. The unskilled have nothing to negotiate over. Executives are not unskilled. When companies are competing for executives whose skills they need, those applicants are able to negotiate better packages than the relatively unskilled. And, unlike hourly wage employees, whose wages are a function of the minimum wage, executive salaries, like auto prices, are likely keeping pace with inflation. As with auto prices, I find it easy to understand how executive salaries—without legislative interference—are able to keep up with inflation, but hourly wages can't. Hourly wages for skilled laborers are likely kept lower than they might otherwise be because they are all a function of the minimum wage; executive salaries, because they are relatively unrelated to the minimum wage, are free to grow with inflation because these salaries are determined by the executive market.  Clearly the market does a better job of determining salaries than Congress does of determining the minimun wage.

There is another problem with the minimum wage. The last minimum wage increase (to $5.15) was in 1996, if memory serves. To keep up with inflation it should be about $5.95. But it isn't $5.95; it's still $5.15.  Executives salaries are not now what they were in 1996.  Now, let's say that Congress raises the minimum wage tomorrow to the $7.00 that John Kerry and others have wanted.   E.g., Paul Farhi, "Kerry Backs $7-an-Hour Minimum Wage," Washington Post, 19 June 2004.  That $7.00 will be ahead of inflation, which means that employers will be paying way the heck more by far than even inflation requires. It raises the question: If, after the minimum wage increase to $7.00, employers will already be paying too much for their unskilled labor, why should they increase wages for their skilled labor?

Minimum wage talk is a part of the whole politics of envy. It constitutes little more than a transfer of wealth. There is little difference between my putting a gun to you and telling you to give $5.15 to your neighbor and putting a gun to you to force you to give me $5.15 which I then give to your neighbor. In both cases, I have succeeded in robbing you of $5.15.

The whole politics of envy always makes me think of a song by one of my favorite rock groups of all time:  Rush.  (Hey, Greg Bahnsen liked the Beatles.) Here are the lyrics to that song:

The Trees

There is unrest in the forest
There is trouble with the trees
For the maples want more sunlight
And the oaks ignore their pleas

The trouble with the maples
(and they’re quite convinced they’re right)
They say the oaks are just too lofty
And they grab up all the light
But the oaks can’t help their feelings
If they like the way they’re made
And they wonder why the maples
Can’t be happy in their shade?

There is trouble in the forest
And the creatures all have fled
As the maples scream `oppression!`
And the oaks just shake their heads

So the maples formed a union
And demanded equal rights
’the oaks are just too greedy
We will make them give us light’
Now there’s no more oak oppression
For they passed a noble law
And the trees are all kept equal
By hatchet,
And saw ... .

Rush, "The Trees" (lyrics by Neil Peart), Hemispheres, (Mercury/Polygram 1978).

To my mind, "equality" sought--or enforced--by means of "hatchet, axe and saw" is fascism.

I still feel that way.  And who knows: With wages determined by a freely operating market, instead of Congressional interference, perhaps, with all other costs—no longer artificially kept high—being "equal," employers may be motivated not to undercut these articially high wages by employing illegal aliens.  (I’m not betting on it, of course.)

Whatever.  Just don’t overlook two things:

1.  The Congress interferes with hourly wages by setting a minimum wage; and hourly wage employees are unhappy and, apparently, underpaid.
2.  The Congress does not interfere with executive salaries—YET!!!—and executives are (relatively) happy and, apparently, overpaid.

Employees whose wages are set by the market are happy.  Employees whose wages are set by Congress are unhappy.  The market compensates well and Congress doesn’t.  It’s the sort of thing that makes you go, “Hmmmmmmmmmmmmmm.”  Isn’t it?

(Note:  My mention of Greg Bahnsen should not be taken as evidence of my being a Christian Reconstructionist—not there’s anything wrong with that, of course.)


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James Frank Solís
Former soldier (USA). Graduate-level educated. Married 26 years. Texas ex-patriate. Ruling elder in the Presbyterian Church in America.
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