Captain's Quarters Blog

« Reviewing al-Qaeda's Claim of Responsibility | Main | Krauthammer Pounds Le Monde Editor »

March 12, 2004
The Folly of Minimum-Wage Increases

The Minnesota Senate will begin consideration of a series of increases to the state's minimum wage, currently set at the federal level of $5.15 per hour, the Star-Tribune reports:

Minnesota's minimum wage, frozen at the federal rate of $5.15 an hour for the past seven years, would rise to $6.65 over the next 16 months under a bill sent to the Senate floor Wednesday.

A party-line vote of eight DFLers in favor and six Republicans opposed in the Jobs, Energy and Community Development Committee produced one of the rare legislative movements on the state's wage floor since it was increased from $4.75 per hour in 1997.

Proposals to increase minimum wage provide an opportunity for Democrats to throw some red meat to their base and normally appear, as this bill does, in election years. The Strib takes its normally biased approach, accepting the statements of the bill's proponents without rebuttal but challenging its opponents twice:

If the minimum wage is raised, replied Mike Hickey of the National Federation of Independent Business, "job loss is going to occur. The question is how much and where." Under questioning, however, he said he had no evidence that Minnesota lost jobs when the minimum wage was raised in 1997 along with the federal rate. Hickey and other business spokesmen said Minnesota should not get ahead of the federal rate, which also has stayed at $5.15.

But 12 other states and the District of Columbia have done that, with minimums ranging from $5.50 an hour in Illinois to $7.16 in Washington state. Washington and Oregon also have indexed their rates to inflation, a feature of Anderson's bill, as well.

Too bad the Strib doesn't apply the same critical approach to the entire concept of raising the minimum wage. It's popular economic pap, as anyone who ever had to meet a budget will tell you, because while it changes the numbers on the paycheck, it does nothing to increase buying power in the long run. Businesses create jobs when their revenue stream requires servicing, and the number of jobs they create depends on that revenue stream. The wage is set by market factors, job demand against supply, but limited by the revenue stream itself.

If I make pizzas, for instance, and I hire ten people at $6 per hour for full-time work, I'm paying out $2400 per week in straight salary just in labor, and I'm not including fringe for health insurance or other benefits. Factor that it with the rent, the suppliers, and all of my other expenses. Now, if the government changes the minimum wage, I will have to increase my wages to at least that level, but in reality I will probably have to go up $1.50 to match the upward pressure of the labor market.

Now I'm paying $7.50 an hour, and my straight labor costs have gone from $2400 per week to $3000 per week, costing me an extra $600. If I'm selling $10 pizzas at a profit margin of 10% (which would be a healthy margin for the food industry, believe me), I would have to sell an extra 130 pizzas (see extended entry for calculation) a week to pay for that! Instead, what's more likely to happen is that I will either have to increase the price on my pizzas, or I will have to get rid of two workers to bring my labor costs back in line.

If I lay two people off, I pay the same amount in salary but get less productivity, and the community pays more for unemployment services. If I keep them on, I get the same productivity but my prices go up, and not just my prices but the prices on all of my supplies and services as well, as those companies have to also raise their rates to cover their labor costs.

As those price increases roll through the economy -- also known as inflation -- earning power decreases proportionally, and eventually that $7.50 wage winds up being the equivalent of the prior $6 wage. At that point, people start agitating for another increase in the minimum wage to address the lack of buying power for entry-level jobs, and the whole cycle begins again.

Wealth is not created by government wage and price controls, especially simplistic and pandering proposals such as these. The only way to achieve a true increase in buying power in a market economy is to work hard and move up. People who tell you something different want you to believe that government can take care of all your problems by offering artificial and superficial band-aids. The Strib, in its zeal to push this solution, ignores basic economic reality and ridicules those who understand it.

In order to calculate the amount of extra product at a 10% margin, which is the owner's salary, after all, I made the following assumptions:

1. Labor, supplies, and fixed costs comprise equal portions of my overhead (33% each).

2. Wage pressures will force a 25% increase in labor and supplies cost while leaving fixed costs unchanged.

Under these conditions, the current output at an average cost of $10 per unit (a pizza), I am currently selling 792 pizzas, and in order to maintain the margin, I would need to sell 924, or 132 extra pizzas a week, or almost 20 per day. In order to maintain profit at a flat dollar amount of $720, I would have to sell 912 pizzas a week, 119 more, or 17 a day.

Sphere It Digg! View blog reactions
Posted by Ed Morrissey at March 12, 2004 5:48 AM

Trackback Pings

TrackBack URL for this entry is

Design & Skinning by:
m2 web studios

blog advertising


Proud Ex-Pat Member of the Bear Flag League!