The Minimum Wage

Increasing the Minimum Wage Increases Unemployment

The argument for a continuously higher minimum wage is based on the premise that “a working man deserves a decent living wage” and therefore the solution is to raise the federal minimum wage to a so-called decent level. The problem is that it doesn’t work when viewed from a realistic economic perspective.

For sake of argument, let us agree that the objective of raising the minimum wage to a decent standard of living is a laudable goal and that it is the responsibility of the Federal Government, that is to say that it will be paid for by the American Taxpayer.

The argument for the minimum wage is based solely upon some notion of fairness and the goal of raising the working poor’s standard of living. That is a noble endeavor but unfortunately it will have the negative effect of raising unemployment within the very class of people that the proponents of the federal minimum wage law have targeted. Their unemployment must rise as a matter of simple economic truth.

Labor as a percentage of total costs is a material amount. In manufacturing, total burden labor (which is overhead that includes wages, vacation, sick leave, 401k matching, etc.) exceeds 30% of total in-house costs. The remainder of overall expenses includes raw materials and parts (which have labor embedded in those costs too), and the cost of operations like rent, utilities, etc. In the food stuffs industry labor is typically 40% of total costs or higher. Doubling the amount of a single component of overall costs will have a dramatic impact on the Cost of Goods Sold (total costs).

Can the McDonald’s franchisee absorb these costs? Not likely, so they’ll have to pass them along to the consumer in the form of higher retail prices. McDonalds is in a highly competitive world and the market forces there can be very brutal and swift.

If we are to agree that a decent minimum wage is desirable and that it should be effective, why set the wage at only $6 or $7 per hour? A $7 per hour wage, for a 40-hour work week, will yield $280 per week or about $14,560 per year (assuming no vacation time). No family man can raise a family of four on those wages. At best, you would be renting a box in a poor neighborhood in a poor city or town.

Currently the protestors in New York City (NYC) are demanding $15 per hour. That equates to $30,000 per year ($15 * 40 hours * 50 weeks, assuming 2 weeks non-paid vacation). Where in NYC can one live on that amount? You can’t so is the solution to raise the minimum wage even higher?

Let us say that in order for a family of four to have a reasonable shot at the American dream of owning a car, a home and living in a decent town/city/neighborhood, will require him to earn say, $50,000 per year for a family of four. $50,000 / 50 weeks / 40 hours = $25.00 per hour. That sounds great! Okay, the minimum wage is now $25.00 per hour and all employers must pay their employees that wage.

But here’s where the argument runs off the rails. The average employee at McDonalds, Burger King, Target Stores, etc. starts at the minimum wage. Currently the minimum wage is approximately $7.00 per hour so with the increase we jump to 3.57 ($25 / $7) times the current rate.

It is only logical that the employer will have to raise the cost of their goods and services accordingly. If we take the average cost of a Big Mac Meal of about $6.00 McDonalds, after being forced by federal labor laws of raising their minimum wage to $25.00, will have no choice but to raise their product costs or close their doors.

It’s simple math. The cost of a Big Mac meal will be raised to a minimum of $12.17 ($6 X 40% labor cost x 3.57) and likely more when other directly related labor costs are added, plus the rising costs of raw materials since those employers will have to increase their prices to McDonalds. Will you pay $12 plus for a Big Mac, the SAME Big Mac as it is currently prepared and sold to you? I think not.

Will the minimum wage earner even be able to afford to take his or her family of four to McDonalds for dinner? Let’s see what that dinner at McDonalds would cost our minimum wage earner: Two Big Mac Meals at $12.17 plus two Happy Meals, adjusted accordingly, would cost almost $50.00 and likely more.

The only choice for McDonalds is to refuse to pay the higher wage, cut the employees hours back so they don’t have to comply with the law (part-time employees), reduce labor costs by laying-off employees, or close their doors. Either way, there would be a substantial rise in unemployment!

Who or what entity should determine what is a fair wage? Should it be congress or the president? Or some distant and detached bureaucrat that knows not you nor your individual circumstances? Who is so pious that they can fairly determine your wage or what your worth to the employer and society may be?

The answer is simple. What is fair is what you and your prospective employer decide what your potential value is to their enterprise, and it escalates as you gain tenure and demonstrate greater value to your employer’s business. It must also be noted that most businesses provide opportunities for advancement through promotions as they become warranted. The operative tenet here is that an employee is prepared to accept accountability and responsibility for applying themselves to achieve those promotions.

Entry level employment is just that, entry level. It is available for one who has little skill or education that merits higher pay. Beyond that, as an individual’s skills increase and value rises, the free market is the best arbiter of an employee’s worth, period.

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