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Di Leo: From Minimum Wage to Maximum Damage

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By John F. Di Leo - 

The halls of Congress are ringing with the siren song of an increased minimum wage. Politicians who don’t have employees of their own promised their constituents fat sums of other people’s money during the campaign, and now they feel it’s time to delivery on the promise, by mandating that other companies raise the hourly wage they pay their employees. 

And it’s not just a raise, it’s a standard, a new flat number from coast to coast and border to border, determined arbitrarily, because it sounds neat and feels generous. 

The proposal on the table is to more than double the current federal minimum wage, from $7.25 to $15.00 per hour. On what is this new number based?  On the fact that several big cities have mandated this number, so the politicians can use their number and absolve themselves of responsibility for coming up with a proposal themselves. 


The minimum wage has been an enduring political issue for a century. It’s easy to see why it would be popular – free money is always welcome – and unfortunately, its many pitfalls are harder to see.  One has to actually think about it. 

Hamburgers and Handouts 

The best way to understand both the positives and the negatives of the minimum wage is to look at its impact on a single fast food restaurant in an area with a limited clientele.  Please indulge us as we leave out the real but unwieldy complexities of taxes and other benefits; we will just look at round numbers to stay on track. 

Let’s assume the restaurant has a day manager who earns $12 per hour (and the night manager earns the same), and the restaurant brings in an average profit, before salaries, of $52 per hour.  This means the restaurant has $40 to spend on the rest of their staff, who currently earn $8 per hour. 

As long as they can pay $8.00 per hour, they can afford five support employees, all of whom might really look forward to getting promoted to that $12 manager job. 

If they have to raise that salary to $10 per hour, they can only afford four support employees, so somebody loses his job.   

And also, since the difference between $10 and $12 isn’t all that great, their four remaining employees might not work so hard to earn that promotion anymore; they might not think all that responsibility is worth the trouble, for only two more dollars per hour. 

Or what if the government sets the staffers’ pay at $13.33 per hour?  Another employee loses his job, and they can only employ three support staffers to help their underpaid manager run the place. 

Now… what if the government mandates that they pay $15 per hour?  Now they can’t even afford three staffers, each of whom is now paid more per hour than their $12 per hour manager.  How can that possibly work out?  The store simply has to pay the manager more than the fry cooks and order-takers, so what the store do?  They still only have the same $52 salary pool to draw from, so now they have to give the manager a raise, and cut back the number of employees even further. 

With only a couple of employees in an establishment that requires five or six to run properly, customers will get fed up with the slow service, and the company will lose business. That means losing sales, and that means being unable to pay even these few.  The company can only close down, as hundreds of thousands of companies have done, both big and small, over this past century of increased government mandates. 

The math works out a bit differently at every store, but the basic fact remains:   math is inescapable.  A store can only pay out what it takes in.  If we mandate payouts that exceed the intake, bankruptcy is the only possibly result. 

The Big Picture 

That was the micro-economics view:  how does the individual business make its decisions? 

Most liberal politicians have never operated a business, and neither have most of the reporters and pop culture influencers who join them in championing a minimum wage hike.   

They just think of the macro-economics view:  they are tantalized by the prospect of a nation of well-paid employees, earning a living wage no matter how inconsequential and undemanding the job.  They don’t realize that their dreams are impossible, because outside of the government, employers can’t pay out more than they take in, and the government can’t magically give private sector employers a bigger pool of money (without devaluing the currency in the process, that is). 

The left sees themselves in the position of hero: we will force these mean employers to pay their employees more, as if they could have all along, but just didn’t want to.  They have no clue of how the real world works. 

The Value of Money

Currency has different values in different regions, because of the varied costs of living across the country.  In the big cities where the elite influencers live, rents are $3000 per month, and houses are well over half a million each. In small town America, you can rent a decent place for $500 per month, or buy a house for $125,000.  As costs of living vary, so do salary requirements. 

The Employer’s Ability to Pay

Different businesses can afford to pay their employees different rates, depending on the nature of their business and how successful they are.  The store that sells $1000 purses in Manhattan or Rodeo Drive can probably afford to pay $15 per hour to their staff; a similar store in a small town that sells $40 purses probably cannot. 

The Rest of the Staff: 

Salaries are naturally tied to each other, in a salary ladder, from entry level to CEO.  As we have seen, we have to compensate employees better as they take on more and more responsibility, or we won’t get anyone willing to bear the burden of management on their shoulders.  As we increase the wage levels at the bottom, we must raise the salaries of their bosses, and then their bosses’ bosses, and so forth.  How many businesses can possibly have the money to do this, especially in a recession? 

Displacement of Funds: 

Businesses spend money on things other than employees.  When a business does have additional profits beyond its operating costs, it usually rolls that money over into expansion or enhancements, so that the business can grow. This is good for employees, because new divisions, new locations, new product lines mean the creation of more jobs to operate them. Forcing a business to spend more on salaries than the market really requires can put an end to such opportunities. 

Hurting Those Who Need Help the Most: 

Allowing a business flexibility in wage levels is most important to those who are not the most desirable applicants.  While the best applicant, with the most experience and talent, may easily win an available job and be clearly worth the pay, an inexperienced or underqualified applicant is shut out when he cannot be considered worth a high rate.  Allowing a company to set wages according to an applicant’s perceived value is the only thing that enables a company to give an untried person that first opportunity that sets him on a path to success.   

Killing Competitiveness:   

It is no secret that the United States has lost a great deal of manufacturing jobs – and other high volume jobs too, such as call center and back-office work – to other countries with lower costs, often because of lower wage ranges and costs of living.  But even so, we remain a manufacturing and business powerhouse, because companies can locate plants or call centers in areas with lower costs of living, and therefore lower wage requirements, without leaving the country.  An American company might, for example, have its headquarters in Manhattan, a sales office in Los Angeles, production facilities in Nebraska and Alabama, paperwork processing centers in Arizona. A foolish national mandate to eliminate those cost opportunities in small town America will drive all of those jobs overseas.   The proposed doubling of the federal minimum wage is nothing but a gift to our third world competitors, particularly China.

 

Lessons Gained from Recent Experiments: 

This $15 idea isn’t new.  Several major cities have attempted it in recent years, to disastrous results. While a tiny, wealthy suburb (such as Kenilworth or Woodley Estates) might be able to afford to pay higher-than-market salaries to the few employees in their shops and restaurants, the same can’t be said of big cities.  Seattle, San Francisco, New York, and Washington DC have all mandated $15/hour minimums in recent years, and just as predicted, they have all seen businesses exit, heading for the nearby inner suburbs, or even outer suburbs or other states.  The flight of the business sector from these cities is well documented, as high taxes and regulations made them undesirable years ago.  This $15 minimum wage has been the last straw for many companies that had struggled to stay put.  It’s expensive to close up shop and move, whether across the line or far away, and it takes time to make such moves. For many of the employers that just saw this $15 mandate hit in the last two or three years, 2021 and 2022 will be the years in which they will finally make those moves.

 

The Entry Level and the Living Wage:  T

he modern left likes to demand that “every wage be a living wage”… but is that rational?  What exactly IS a living wage, after all?  If you’re a  father and mother supporting a family, a living wage is the cost of housing, utilities, food and clothes, all the necessities for a family.  If you’re a single adult, newly out on your own, a living wage is just housing, utilities, food and clothes for yourself, and some of that can be split with one or two roommates until you get married.  If you’re a retiree, living on pension and Social Security, all you need is the delta that the pension and Social Security don’t cover, or additional spending money enjoy vacations with grandkids.  If you’re a teenager still living at home, all your costs are met by your parents, and you don’t need a living wage at all, just  an entry level job where the experience is far more important than the pay.  In the American system, in fact, nobody ought to be dependent on a minimum wage job for a living.  Our system is designed to start out at such entry level jobs when we’re teens or college students, then move up to better paying jobs by the time we move out on our own.  A minimum wage job and a living wage, frankly, should be completely unrelated; they’re for different stages in life.  If they are not – and it is true, right  now, too often, the same person is in both circumstances – then that’s the problem we need to address.  Why are so many people depending on entry level jobs for a livelihood?  Why has this country so often, so consciously, so intentionally, driven so many jobs to foreign countries, so that so many of our citizens are depending on entry level jobs – which were never meant to be living wage jobs – for a livelihood?

 

Frankly, the problem we really face is that so many people depend on entry level jobs for a living.  The answer isn’t to attempt the impossible – forcing an entry level job to pay for a family of four – the answer is to cut regulations, cut taxes, cut the mandates, so that the business sector booms and creates better paying jobs for the American people.

Too many politicians focus on bills that place impossible mandates on the business community, so they can look like heroes to their voters, when in fact all they do is destroy jobs, destroy opportunity, destroy their communities.  Sometimes what’s going on is that kind of visible, obvious politics… sometimes what’s going on is sneakier, like when a politician helps his union cronies, knowing that union contracts are often pegged to the minimum wage, so an increase in the minimum wage also forces a business to increase its pay to all unionized employees, whether they can afford to or not.

In the end, the question is, do our politicians really want to help us live better lives, or are they just helping themselves win more votes?

In the Founding Era, our nation was designed by statesmen who would benefit most from a prosperous citizenry.  Today, too many politicians benefit when their constituents benefit politically when their constituents are impoverished; they like a dependent populace that cheers at the prospect of handouts.

We have a great deal to repair in America; this much is true… but the minimum wage for entry level employees isn’t the problem.  Our problem in America is the minimum level of economic comprehension by so many in our political class.

Copyright 2021 John F Di Leo

John F Di Leo is a Chicagoland-based trade compliance trainer, writer and actor.  His columns have been run in Illinois Review since 2009, including dozens of his  revelations about vote fraud, published as an anthology, “The Tales of Little Pavel,” available on Amazon in eBook or paperback.

 

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3 COMMENTS

  1. Excellent commentary John. Dr. Thomas Sowell summed up a mandate on a guaranteed minimum wage thusly: “Unfortunately, the real minimum wage is always zero, regardless of the laws, and that is the wage that many workers receive in the wake of the creation or escalation of a government-mandated minimum wage, because they lose their jobs or fail to find jobs when they enter the labor force. Making it illegal to pay less than a given amount does not make a worker’s productivity worth that amount—and, if it is not, that worker is unlikely to be employed.”
    ― Thomas Sowell, Basic Economics: A Citizen’s Guide to the Economy

  2. They don’t realize raising the minimum wage that much is everyone is going to want a raise especially those that make $15hr now they will believe their labor is worth more since they are making only the new minimum wage.