Minimum Wage

Up front: small changes in minimum wage levels are not going to have much of an effect on the economy as a whole (nor on the people getting the raises!), so, from a practical standpoint it’s not worth worrying about too much. However, what is worrisome is the low level of understanding of economic reality behind some of the arguments, as if poverty could be solved by just raising the minimum wage high enough – and then giving everybody a job. If it worked that way, the Soviet Union would stand astride the world and we wouldn’t be buying goods produced by capitalistic Chinese factories. Yet, that seems to be the assumption…

dollarsHere’s the deal: either raising the minimum wage makes more money available for paying wages, or it doesn’t. If it does, then why not think big? How about a $50/hr minimum wage? $100/hr? Then everybody’s in the 1%!

If raising the minimum wage doesn’t make more money available for paying wages, then the only way to increase the wages of some workers is for there to be fewer workers or for other workers to have their wages reduced. Now, if those dollars were redirected from the multi-million-dollar compensation packages of CEOs, few hearts would break outside the CEO’s immediate family. But: is that enough? Let’s see:

There are about 3.5 million minimum wage workers in the US. They are mostly part time workers. Since I can’t do a ton of research on this, I’ll make some simplifying assumptions – that way, the thinking will be clear, and, if you have better numbers, you can plug them in! Assumption 1: the average minimum wage worker works 20 hours a week. Assumption 2: we won’t consider the just-a-little-bit-more-than-minimum-wage workers that start to figure into it as you raise the floor very much. As you’ll see, adding workers will just amplify the point I’m making anyway. So:

20 hours a week equals about 1,000 hours a year. So, a $1 raise in minimum wages equals an average raise of $1,000 per year. Multiply that by the 3.5 million minimum wage workers, and that’s a tidy $3.5 billion dollars.  That’s in the ballpark of what the CEOs for the top 300 or so companies made in 2012, provided we include stock options realized.

So, yes, in theory, if CEOs at the top companies worked for nothing, there would be enough money to give a $1 raise to all minimum wage workers without otherwise disrupting the economy- IF, somehow, that money could be seized and pooled and redistributed.  There’s no necessary relationship between CEO salaries and the number of minimum wage workers they employ: Investment bank CEOs have relatively high compensation yet employ relatively few minimum wage workers. Therefore, you’d be taking the investment banker’s salary and using it to increase the wages of workers in other industries all together, such as counter help at local franchises of some food chains.

But CEOs aren’t going to be willing to work for nothing, and there are probably downsides to constructing the totalitarian level of state control required to do the seizure and redistribution of CEO wealth. In practice, if CEO compensation is heavily taxed, CEOs and the companies that employ them will be strongly motivated to find other ways, to make sure as little money as possible is paid out in the form of CEO compensation. And, really, while a thousand dollars is nothing to sneeze at, making $9,000 per year versus $8,000 a year is not pulling anyone in the US out of poverty.  So, if the exercise here is anything more than assuaging our consciences, we’d need to think bigger – or differently.

One thing to be very careful of is punishing other wage earner in order to make ourselves feel better.  One little-appreciated fact is that, for most businesses, people are the biggest single expense. Most businesses already spend more on people than on any other single item, so that, when you put pressure on companies to come up with money, the first thing they look at is – people. Because that’s where the money is going. To illustrate:

2012 Profits versus Payroll

Total corporate profits in the US: 12.4% of GDP =$1.9 trillion

Total worker compensation in the US:  54.6% of GDP = $8.6 trillion

2012 was an outstanding year for corporate profits, the highest rate since 1943. But the point of these numbers is this: I’d need to cut profits by almost 5% to free up the same amount of money I’d get by cutting worker compensation by 1%.

Corporate managers aren’t necessarily any more evil than anybody else, but they are subject to unique pressures: cutting profits, even for a good cause, makes investors unhappy, which tends to get corporate managers fired. Laying of workers makes a different set of people unhappy – a set of people with much less power to get you fired. So, corporate managers treat profits as sacred, and lay off the people.

Before feeling all outraged over this, ask yourselves: got any stocks? A 401K? Any bonds or savings tied to corporate returns? If so, guess what? YOU are the person enforcing the decision to fire the manager if he lets profits fall. Because you (and me) would move our money out of stocks where profits are falling into to other instruments, if the (risk-adjusted) yields on the other instruments are better. Mutual fund managers do the same in your name.

To sum up: rolling 100% of corporate profits into wages could give everybody a 20% raise! Woohoo! And end investment in the US, causing all the factories to shut down and all the stores to close and so on. TEOTWAWKI. So, the game we’re playing here, if we want to raise the minimum wages and wages in general, is how much of those profits we can reallocate OR how much more we can reduce other expenses OR how big we can make the pie – or some combination. Or, getting crazy here, how about measuring our wealth not primarily by wages, but rather by investment? That’s how rich people do it. Then, we’d all be working towards being owners, and share in the profits that way. It would be beautiful!


No answers here, just info and speculation.




Author: Joseph Moore

Enough with the smarty-pants Dante quote. Just some opinionated blogger dude.

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