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A Curious Case Study on the Minimum Wage

As liberal ideas go, the minimum wage sounds (on the surface) better than most.  We have all been told that it protects those working at the bottom of the work ladder, without influencing the wages of the more experienced workers.  All minimum wage does is ensure that manual labourers, new immigrants, and those without a high-school education are able to provide some level of support for a family.   The assumption our society has accepted is that living on a minimum wage income won’t be comfortable, but it is possible. Liberal academics [read: Socialists] argue that we need a living wage — a wage that enable people to live at least a middle class lifestyle, as the minimum wage.

And if we accept the premise that raising the minimum wage has no consequences, they’re right.

Today, I’ll show you the impact that the minimum wage has on employment, and the direct correlation between a high minimum wage and unemployment.

Let’s begin with recent history of the minimum wage in British Columbia, Canada (That’s where I live, so it’s where I have the most familiarity. The same principles apply to any society with a minimum wage).

In March 2011, British Columbia released a structured plan to raise the minimum wage from $8.75/hr to 10.25/hr by May 2012. Christy Clark, the Premier of BC (the Canadian equivalent to a governor), said her reasoning for raising the minimum wage was “Wages for workers must keep pace with the challenges average British Columbians face”.  Again, to most people’s first look, this makes sense. If people aren’t able to afford to live somewhere with a minimum wage, you simply raise it. Problem solved, right?

However. Once you look at it with an eye to how economies work; it begins to fall apart.

Think of it this way, using the hypothetical Company A as an example.

Company A has 100 full time workers. As they are the most EVIL business around, literally every worker makes minimum wage, and cannot make more. (For the purposes of this example, I will use $8.75 as minimum wage)

Let’s say they have a profit margin of 30%, similar to that of McDonalds.

Let’s say Labour Costs are 30% of their total expenses, similar to McDonalds.

Accepting these numbers, the company has gross annual revenues of just over $6 million. [A]

Now. Let’s raise the minimum wage to $10.25, and see how that affects the company.

Profit margin shifts from 30% to 25%, as labour costs increase from 30% to 35% of revenues. Now, you may be saying that a 25% profit margin isn’t bad; and you’re right.

However.

Scenario A: You are a massive corporation like McDonalds, and these are the numbers from one of your many stores. Profits drop 5%. Does your stock price stay up? Does it rise at the rate you want? Do you raise prices on your goods in order to make up the shortfall? Do you lay off employees? No matter which option is chosen; even with the most understanding shareholders around, the company cannot grow at the same rate.

In fact, by having 5% more of your total revenue tied up in labour, you’re slowing the growth of the company by 16.67%. [B] (As you can only grow a company using profits. The rest of the money is tied up in running the business.)

Scenario A isn’t a death blow, but it is ethanol fuel in the engine of economic growth (i.e. it degrades it, and runs less efficiently).

Scenario B: You are not a huge corporation with massive buying power. You are a new start-up, a growing independent business. Replace the 30% profit margin with say…15% (Which is still more than Exxon Mobil).

Your profit is all the money you, the small business owner, make. The government raises the minimum wage, and you now lose 33% of your income. That income goes to expanding your product’s reach, growing your company, paying back any debt you incurred when starting the company, keeping shareholders happy (if you’ve gone public), keeping the Board of Directors happy, and keeping you and family living comfortably.

Again, in Scenario B, the company doesn’t die. It survives. But maybe you can’t open that second store. Or the third.

Scenario C: You are a small business that is barely scraping by. Your profit margin is 8%. You lose. You lose everything.

Now look at the entire economy. Any business that is hiring people for their first job has their labour costs increase by 17%. [C]

I’m not even going to get into the ‘argumentum ad absurdum’ portion of this issue (i.e. If raising the minimum wage is good, and doesn’t hurt businesses, why isn’t the minimum $15 an hour? Why not $45 an hour? Why not $1,000 an hour?)

When you increase the cost of operation, in any sense; either prices go up, or growth goes down.

Raising the minimum wage will stifle the engine of economic growth that is capitalism.

Any questions, leave me a comment. I’ll do my best to answer it.

Math

A: 8.75/hr * 40 hours per week * 52 weeks a year * 100 workers = $1,820,000

$1,820,000 / 30% = $6,066,666

B: Total Revenue of $6,066,666 * 30% = $1,820,000

Total Revenue of $6,066,666 * 25% = $1,516,667

$1,820,000 – $1,516,667 = $303,333

$303,333 = 16.67% of $1,820,000

C: 8.75 * 1.17 = 10.23 (close enough)

Luke Stibbs, University of the Fraser Valley

Luke Stibbs // University of the Fraser Valley // @LukeStibbs

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Comments

  1. Richard Matthews says:

    Great article on minimum wage laws. I am 63 years old and am pleased to know that there are college students who can reason and have good judgement. Many students have a high I.Q., but the judgement part of their brain is undeveloped.

  2. Also, there is the issue of those that already make 10.25 an hour. When the minimum wage goes up they do not get a raise, making them poorer since you have increased their cost of living and have essentially returned them to the minimum wage. No one is made richer by raising minimum wage, but a lot of people are made poorer.

  3. That’s very true, Scott. I’m considering a follow-up article talking about how it affects people. This article is more about how it affects business, and major economic trends.

    The actual personal cost, based on inflation of cost, cost of lowered opportunity to find work, etc… would be much, much higher.

    Thanks for reading!.

  4. Yes I make $10.50 at my weekend job right now which a few years ago was considered decent money where I live.. now it’s just going to be considered another run of the mill job that barely gets by.. because there will be a trickle effect and now things will cost more, and NO, I will not get a raise.. been here 4 years and haven’t even seen a .25c raise :(

  5. The author makes a valiant effort on this topic, but regrettably, must settle for an ‘F” on this for not exploring all facets of this issue. Life isn’t Fox News. There is more than one side to an issue. Most businesses treat their workers fairly and realize that properly compensating their workers with good wages and benefits helps them attract and retain the quality work force they ened to help their business — and profits — prosper. Unfortunately, some businesses choose to abuse their workers and pay unsatisfactory wages. In larger markets, workers can simply quit and go to an employer with better wages; however, in some small markets, other choices for employment may be scarce or nonexistent. Americans — not government, but Americans — pride themselves on living in the greatest country in the world. They will not harbor abusive businesses and proudly set minimum living standards for America. Perhaps this author, as are so many young Americans, is ashamed of his country. I say: Give it a chance and an open mind.THis is the greatest country in the world. Don’t be bitter; feel good about America.

  6. @Jocko. As most liberals do, you (not implying you are liberal, only pointing out the tacti c) pick one sad scenario and rule the entire article a dramatic failure. You do not seem to understand economics. If a wage is “unsatisfactory” then go somewhere else to work. Don’t demonize an employer for paying low wages. This is how competitive wages are established, by supply and demand of workers. If you need to run a business and cannot attract workers then you must improve your benefits offering to attract more people. It’s call a “right to work”. Workers are free to quit as employers are free to hire and fire. If you can’t find a job that pays better then move to where they do.

    Businesses are in the business of making money. If they were not then they would be called “not-for-profits”. When the government gets involved and decides to dictate wages the whole system is poisoned.

    BTW, if you’re opposed to low wages then stop shopping at Wal-Mart and other discount stores. Stop using coupons, competitively shopping, and watching for sales.

  7. Additionally, despite the minimum wage being $7.25 in the US, the median wage in the country is $16.20 an hour, more than 2 times the federally mandated minimum. Liberals argue that eliminating the minimum wage would result in people making $2 an hour. If that were the case, the median would be much closer to the mandated minimum.

    Here is a link to BLS data detailing who actually earns the minimum wage:
    http://www.bls.gov/cps/minwage2010.htm

  8. The premise of the whole article is that raising the minimum wage would deter economic growth or increase prices. It does not address why remaining the status quo is bad. The truth is minimum wage increases every so often while at the same time inflation always exists and I would challenge you to find any evidence to suggest there’s any correlation let alone causation between the increase of minimum wage and the movement of CPI and economic growth.

  9. Luke, Fewer than 3% of the people earn minimum wage and most of these are transient jobs. The real reason for the minimum wage is that most union contracts are tied to the minimum wage. Raise the minimum and union wages increase. More union wages equals more union dues which means more money to Democrat coffers.

  10. Luke, I am happy to see that you and more our future leaders are looking closely at the minimum wages as well as the many other ways government is managing our economy towards a cliff.

    Thanks, Ron

  11. There are many people who would like to take this very simple concept and turn it into something complex in order to make people think it’s too difficult for the average person to understand. It’s not. Thank you for breaking it down like this. All of the things we do to try to control the economy (and each other) only end of making it worse. Natural consequences have a way of working things out for us in the long run.

  12. You’re illustration is good. However, you do a disservice to capitalism by claiming that McDonald’s has a profit margin of 30%. What figs are are your using? That is not even gross profit, which is misleading in itself.
    So, you are claiming that their sales of $24 billion has $7.2 billion of profits–distributed to shareholders, execs, R&D & such? FALSE!

    The avg corp in the US has a 7% profit margin. You are are hurting the explanation of reality when you greatly inflate the margin of a company.

    Additionally, to add to your point: The unemployment rate is higher for younger & less educated persons, which is an indication that the min wage does not help. You are probably aware of that, & that would take pages to explain to leftists.

  13. This is a good article. Very good. The point was made without insulting the intelligence of workers who receive low hourly wages. Also, you made no use of “Welfare Queen” or other ill-advised, racially-charged nicknames, as your colleague did here – http://thecollegeconservative.com/2011/12/13/my-time-at-walmart-why-we-need-serious-welfare-reform/. I agree with your points.

  14. Hey Randscot, click on the links! He provides them so you can see for yourself!

  15. CANADA BUSINESS DIRECTORY says:

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