Thursday, May 22, 2014

Raise the Minimum Wage? Arguments For and Against.

Do we need to raise the minimum wage from $7.25 to $15 an hour?  Or is it just a ploy to unionize fast-food restaurants?   Note the Bluetooth device on the protester on the left, and the mafia haircut on the fellow in the center.

The SEIU is at it again, staging a "protest" near McDonald's world headquarters with what they claim was 2,000 people - but by their own admission, only 150 actual McDonald's workers.

They claim they want to more than double the minimum wage from $7.25 to an astounding $15 an hour (that's 30 grand a year).  I discussed in an previous post that there may be conservative reasons to support this, ironically, as it would get a lot of people "off the dole" such as food stamps and Section-8 housing.  Government welfare programs, in effect, subsidize lower wages, and thus subsidize fast-food companies.

But what are the arguments for and against this?  And do they make any sense?  Let's take a look.

First, let's look at the arguments against:

1.  Raising the Minimum Wage will increase inflation, making the Big Mac cost $10.   This is a favorite of Fox News, and should be suspect right there.    But there is a core of truth to this argument.  McDonald's (and its franchisees) cannot simply "absorb" a doubling of their labor costs.  The company and its franchisees are profitable, yes, but not that profitable.  Labor is probably their number one cost, and if it was doubled overnight, prices would nearly have to double as well.   So, yes, a Big Mac could nearly double in price - perhaps not $10, but not far from it.

And as prices of all commodities produced using labor below $15 an hour increase across the board, inflation will increase as well, which could lead to spiraling stagflation as we saw in the 1970's.

2.  Inflation will immediately erase any gains from such a raise.  If you raise wages by doubling the minimum wage, prices will go up - there is no doubt about that.  This means the effective spending power of the minimum-wage worker will decrease, effectively setting him back to where he started.  As such, he will then have to strike for an even greater increase.

This is what we saw at GM in the 1970's.   Prices went up, caused by higher wages and higher fuel costs (the Arab oil embargo, etc.).  The workers went on strike, arguing that their wages were being eroded by inflation, and thus demanding more money, just to stay in place.  Higher wages meant prices of cars went up, so they had to strike again for more money to afford the higher priced cars - repeat ad infinitium.

3. The entire thing is a ploy by the SEIU to gain members, who will then put billions into the pockets of the Union in the form of dues.   The SEIU wants money - just as the UAW and the Teamsters do.    They really don't care about wages and benefits for the workers - they promise the moon (in this case, an entirely unrealistic $15 an hour) so people will join the union.   You can't go broke telling people what they want to hear, and everyone wants to hear that their wages will be doubled.  All those workers will have to join the union, in closed-shop states, and the union will demand and get high union dues from the workers, and perhaps even manage the pension fund.  Neither is in the best intersts of the employees.

4. High wages for unskilled jobs provide no incentive to achieve.   $30,000 a year is how much some skilled workers make.  The assembly line workers at the Nissan factory in Canton, Mississippi make only $15.50 an hour, and they have higher skill sets than a burger flipper.  Why bother trying to succeed, if you can just work at a shit job and make as much money?  Working at McDonald's  is supposed to suck.   It is the punishment you get for not paying attention in school and being an underachiever.   If we reward underachievement in this country, we will discourage achievement, it is as simple as that.

5. People may tip less, if you are making good money.   When Seattle raised the minimum wage at the airport, many folks got browned off that some slug flipping burgers was making more than they were as a truck driver (which requires more skills).  Do I really to tip someone making $30,000 a year?   Tip income may drop off, leaving the "worker" back where he started - and perhaps with even less income than before.

6.  Skilled workers will demand more money, increasing inflation.   If you are a welder or an HVAC technician, you are not going to sit idly by while the burger-flippers make as much as you do.   In order to attract skilled labor, companies will have to pay more than a "minimum wage" of $15 an hour, if you can make the same money at a mindless job.   Why bother going to trade school if you can make the same money at Subway?  So labor inflation will ripple upwards, and labor costs will skyrocket, leading to inflation, and stagflation, as noted above.

7.  Entry-level jobs will disappear, as labor costs will be too high.   As an employer, you can afford to "try out" a new employee at minimum wage and if he doesn't work out, you can let him go without too much cost.   But at $15 an hour (and unionized!) hiring becomes a difficult legal process, and the risk of hiring a bad apple is now a very expensive proposition.   You can't promise a raise to an employee as an incentive for hard work and showing up on time.   Everyone in the union gets paid the same, so no one tries very hard, of course.   This also means that teenagers, looking for part-time after-school work, are now priced out of the workforce.

8.  Automation may take away more jobs.    We recently went to France, and I went to a McDonald's there to get an order of "Pomme Frites" for a friend (they are large sliced potatoes, fried).   They do not have people behind the cash register, but rather a series of kiosks, where you insert your SMART CARD and then use a touch-screen menu to order your food.   When your number is called, you pick up your food.   They do this, because labor rates in France are high (as are prices!) and it eliminates about 2-4 employees per store.   You can bet they will try this in the USA if minimum wage is $15.  As I noted in another post, automatic french-fry makers are already on the market, but they are not adapted at this time, because labor costs are low enough to make them uneconomical.   Strike for higher pay, you give your job to a robot.  GM did this in the 1970's.  It takes less than half the workforce today than it used to, to assemble a car than in 1970.

9.  You may lose government benefits.   Collecting food stamps?  An Obamaphone?  Medicare or Obamacare tax credits?  What about section-8 or other subsidized housing?   At $30,000 per year, you may lose all that and have to pay for these things, for the first time, with your own money.  You may also have to pay taxes for the first time in your life.  Of course, some folks might point out that this is a good thing.   When people have to pay for things themselves, they become more astute consumers.  And when people pay taxes, well, they tend to become more conservative in their views!

10.  A $15 minimum wage would guarantee a Republican-controlled Congress and White House.    If, by some odd chance, they were able to jack the minimum wage that far, it would cause such economic disruption that the Democrats would likely lose both houses of Congress and the GOP would win the Presidency.   A lot of people who voted for Obama are very middle-of-the-road.   Embracing socialist philosophies like this would push them back into the GOP camp, particularly now that the GOP is embracing a more moderate stance.

So let's look at the arguments for.  Do they make any sense?

1.  You can't raise a family of four on $7.25 an hour.   This is a ludicrous argument, as I noted before, as no one is guaranteed the right to raise a family on a single minimum-wage job.   And as I noted in an earlier posting, when you factor in all the government benefits for such a worker, (free food, free cell phones, free medical care, free housing) they may end up with an effective income that is quite middle class.  Of course, as I noted in that posting, it would eliminate a huge chunk of the Federal budget, and end a wage subsidy to minimum-wage employers, if we raised the minimum wage.

2.  Minimum Wage is higher in many areas anyway.   This is true, and in many areas, wages for fast-food workers are higher than minimum wage (nationwide average, $9.09).  In areas with labor shortages and where cost of living is high, wages tend to creep up.   I recall the McDonald's in Crystal City Virgina offering $8 an hour back in the 1990's - when minimum wage was about $5 or $6.   Raising the minimum wage to $8, $9, or even $10 an hour would not affect the wages of many people, except those in the most impoverished areas of the country.  $15 an hour, on the other hand, is a staggering increase (at least 50%) from prevailing fast-food wages, even in many populated areas.

3.  We'd all like to have more money!   As I noted before, you can't go broke telling people what they want to hear, and everyone wants to hear that they can double their income overnight.    But you can't just vote yourself a raise or pass a law making everyone a millionaire.  Yes, the minimum wage should be adjusted over time and raised for inflation.   Arbitrarily picking a number that is double the current value makes little or no sense.  It just akin to saying, "Hey, let's all just vote ourselves rich!"  It can't be Christmas every day, and rewards should be the result of working, not just legislation.

4.  The Rich are getting Richer and the Poor are getting Poorer.  This may be true to some extent, although many folks fail to factor in basic mathematics when making this comparison.  If wages rise 10% across the board, the gap between the very rich and the very poor rises by the same amount.   No matter where you are in time, the rich are always getting richer, relative to the poor, and the "wage gap" is always rising - due to the sheer nature of math.

Suppose for example, Jim makes $100,000 a year, and Joe makes $10,000 a year.  Both get 10% raises, and now Jim makes $110,000 a year and Joe makes $11,000 a year.  The "wage gap" between them has risen from $90,000 to $99,000, and thus you can argue that "the gap between rich and poor" has widened by 10%, when in fact, they both got the same raise, in terms of percentages.  That's just a math effect, not any real representation of a widening "wage gap".  Every even raise in pay across the board will always result in a "widening wage gap."   So get used to it.

But even assuming the wage gap is widening more than that, there is not enough money "at the top" to double the wages of people at the bottom.   For example, a man runs a factory and makes a million dollars a year.   His 400 employees make $50,000 each.  Even if you could persuade the CEO to take a 50% cut in pay, this would mean a raise of only $1,250 per person.

There simply isn't enough "free money" laying around to fund a staggering raise in pay.

5.  Paying a "living wage" would take people off welfare and government assistance programs.    Here is finally an argument that might make sense - provided that inflation doesn't just raise the poverty line back up to the level where people making $15 an hour collect food stamps and other assistance.  And that is the real risk.   You raise the minimum wage to $15 an hour, and $15 becomes the new $7.25 - and spends accordingly.

And I guess that brings us to the real concern here - inflation.   If we pad wages by 100%, it won't make everyone "richer" for very long, as prices (which are a function of the labor costs used in making products and services) will double as well, making real effective earning power the same.  It is a null-some game.

But there will be real losers - those who are trying to retire on their savings.   Hyper-inflation can wipe out a lifetime of work, as people in Argentina and Greece found out the hard way.   You save up money, thinking you are doing the right thing for yourself and the economy, only to find out later that your life savings, which should have seen you safely through your golden years, are not enough to buy a decent meal.

The very rich, of course, are not affected as much.  They can afford to move money around and play the margins and prevent inflation from eating away at their wealth - too much.   But the middle-class will suffer, as they will see their earning power evaporate in retirement.   It could get very, very ugly.

* * * *

Taking all these pro and con arguments into consideration, I am not convinced that a $15 minimum wage is realistic or even possible.   Rather, it appears to be a publicity stunt by the SEIU, to try to gain members by promising Santa Claus benefits to people who really don't know much better (evidenced by the fact they work in fast-food).

But maybe people are smarter than they look.   The SEIU protests have largely been manned by Union activists and employees - paid protesters - and not so much by real fast-food workers.   The recent protest had more police and media than actual protesters.   Ahhhh.....the media.  They love a good "story".

A lot of people still remember what happened when the Unions were in power back in the 1960's and 1970's.  Poor quality products at inflated prices, strikes, unrest, and no one very happy.   Factories closed in droves and companies went out of business.  We handed our markets to foreign competitors on a silver platter.  And crooked unions diverted pension money to organized crime.

Volkswagen workers had a chance to vote Union, and said "No".   Maybe they remember that the last time VW had a unionized shop in the US, it made such horrendous cars that it had to close the factory and leave America.

Unions are like any other organization - they quickly go into self-preservation mode.   They may say they are here to help you, but in fact, they are here to boost their income so they can raise their own salaries.   And I say that as a former Teamster.

And no, I don't know where Jimmy Hoffa is buried.   Or at least, I am not allowed to say.