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The math behind the minimum wage

July 28, 2014

This wasn’t going to be today’s post topic, but circumstances can change the focus. In this case it was a visual of protesting fast food workers and a media talking head defining himself as a “compassionate Republican.”

The minimum wage of $7.25 an hour doesn’t provide enough for a family of four to live on. No argument on that from this corner.

The question is, was any minimum wage at any time ever meant to support a family of four? And if it was, where does the money come from?

Some “compassionate conservatives” are calling for an increase in the minimum wage. Certainly all liberals are doing so as well. Pictures of “outraged and needy” fast food workers protesting for that are a frequent news or print segment lead-in to that discussion.

Leave out the real possibility that many of these protesters probably are as tightly controlled and carefully scheduled as a doctor’s appointment calendar or that the same faces seem to show up in cities not even slightly geographically related. The signs they hold are definitely recycled from location to location.

Leave out the optics and the carefully staged protests, and discuss the issue instead of the politics.

Where does the money come from to pay a minimum wage of $10.10 an hour? It comes from the business. Who owns these businesses? People like you.

Depending on your definition of a “small business” this category creates or sustains from one-third to 90+% of all jobs in the U.S. If you define a small business as 50 employees or under the one-third figure applies. If you use the governments definition of 500 workers or less, it’s almost every business in the U.S.

Fast food in particular is a bad place to wage this war. Restaurants of every category are typically either mom-and-pop type establishments or owned by franchisees whose business model is more similar to the corner coffee shop than some global corporate conglomerate.

Businesses with under 50 employees may not create many new jobs but they sustain a large segment of the working public, and they operate on very slim net profit margins.

When some “compassionate” politician or media host decries the very real decline in income among the middle class, they always assume its due to those “greedy business owners” who don’t increase wages to account for inflation.

The point that no one seems to be making effectively is that most of that inflation, i.e. the decline in the buying power of the dollar, isn’t  due to small business owners driving a new Mercedes every year and rewarding themselves with a new gold chain every quarter.

It’s due to increased costs, and the biggest driver of those cost increases is the government. Whether by policies that decrease the value of the dollar or by adding mandatory costs like Obamacare, the government is the one  cost center that businesses of all sizes can’t control.

Businesses of all types allocate their revenues to certain expense categories. If they are allowing say, 25 to 50 percent for labor costs, and that figure goes up by 5 or 15 or 25 percent, they can’t just quit paying the light bill or buying hamburger buns for a short time. They can only offset the increased costs by increasing prices.

Small businesses with under 50 employees are already at a cost disadvantage, since they can seldom buy supplies in sufficient quantities to get the lowest pricing. The small businesses that can compete on price alone are almost nonexistent.

When you put them in an even less advantageous cost environment, they are going to do one of two things. Raise prices just enough to stay even, or go out of business. If they do the former and their slightly larger competitors can hold out longer before raising prices, they go out of business anyway. If they do the latter immediately, the owners just join the ranks of the unemployed and depend on the system to provide for them.

Are people, real, living breathing people struggling in minimum wage jobs?  Absolutely. Would raising the minimum wage help them? Sure…for a very short period of time.

Unless they use that increased economic power to get better skills and move past the minimum wage job, it won’t last long. It never has and it never will, so long as the government continues to define who can grow and prosper.

Judging from the past six years, that sure isn’t Mr. and Mrs. Middle Class and their kids. 












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