The Minimum Wage & Math

[Laxman]

New Jersey recently proposed an increase in the state's minimum wage from $7.25/hr to $8.50/hr.. That's about a 17% increase. With that big raise, a person earning minimum wage who works 40 hours/wk, 5 days a week, who doesn't miss a day of work, will earn a whopping $17,680.00/yr. The difference of $1.25/hr. will cost the employer $50/wk for each employee, meaning that a small business employing 10 minimum wage workers would incur increased TAX DEDUCTIBLE costs of $500/wk.

Every time there is a proposal to increase the minimum wage we hear great consternation about the costs to small businesses and how bad this will be for the economy. Am I missing something or would a 10 employee business that has financial margins that can't work around $500 a week have other more serious problems that have nothing to do with the minimum wage?

The reticence to pay working people a fair and reasonable wage for their work unless someone makes you do it is one thing. Crying about the difficulty in doing so over the cost of a crummy dinner for 4 at Applebee's (off the 2 for 20 menu) is quite another. Using human beings to make your profit at the absolute lowest cost possible has become the American way. I find the morality of this practice and the general strip mine mentality that pervades our economy today very troubling. This is just one more episode of whining over the "victimization of the rich" melodrama that we live through today. Never look at the million dollars you made, worry about the hundred dollars you didn't.

This just struck me as very wrong when I just took a pen and paper to do the math. Am I off base? Are there any DU small business owners who can weigh in on this question?

What's the minimum wage in your state? You can click on this link to an interactive map and find out.

Minimum Wage Map

Some thoughts on a cold rainy day in New Jersey.

[leftstreet]

1. 'strip mine mentality'

Nice phrase



DURec

[limpyhobbler]

2. +1

[Coyotl]

3. Raising the minimum wage is the best economic stimulus ever!

The money circulates in the economy on payday!! It is the one that increased government revenue immediately in payroll taxes!!

[Coyotl]

4. Oregon $8.80

[AlexSatan]

5. Yes, plenty of small businesses have margins

that can't work around $26,000/year. My wife's employer often had to pull from her person savings to make payroll.

Here, let's turn it around and ask the other way. "Am I missing something or does a person who can't work around $50/week have more serious problems that do not have to do with earning minimum wage"? That sounds pretty judgmental, ignorant, and uncaring, doesn't it?

or "Crying about the difficulty in doing so over the cost of a crummy dinner for 4 at Applebee's (off the 2 for 20 menu) is quite another." when applied to the employee.

Obviously an answer from a small business owner would be better than "my wife worked for one" but hopefully it added a little perspective.

[Dread Pirate Roberts]

6. $26,000 per year is for 10 employees....

One employee is $2,600 per year, if they're working 40 hours a week for 52 weeks. That seems pretty marginal to me, especially if they either aren't full time or working a full week every week of the year. The number would be even less under those circumstances.

[AlexSatan]

8. Great answer from CincyDem

below

[CincyDem]

7. As a small business owner...

When you ask, if they can't afford $500-800/week, don't they have other problems? Maybe, but not necessarily.

That $1.25/hr change in direct costs probably hits the business for as much as $2.00 when you consider the "loaded" costs...heathcare, employment taxes, DB, etc. Many small business use a PSP (payroll service provider) to handle all that stuff. It's a nice way of saying outsourced HR but they usually have a loading factor that we pay over and above the direct labor cost. When I give someone a $1.00 raise, it costs the business $1.37 this year. Last year it was $1.38 and a couple years ago it was $1.42.

So...you're talking about a company with 10 employees being able to throw $800/week into higher employee costs. That's about $41k/year. For many small businesses, that's a lot of money. And for the small business where that's not a lot of money, they're probably working with more employees so their number is bigger than $41k/year.

To complicate this even more - you have to consider cash flow. That 5-800/week extra shows up each and every week. I may have an extra $41k/year floating around but I don't necessarily have $800 of it every week. As you cut margins closer and closer, you have to be more and more sure of your revenue stream to cover the weekly costs.

So yeah - for a lot of small business, this is going to be a big impact.

I think there's a more important issue here about designing your business so you can grow your way beyond minimum wage requirements. A lot of times, these 10 person "small businesses" are really sole proprietorships that haven't grown up. That's an issue because the owners tend to look at the sole proprietorship as their own personal piggy bank. In those cases, every $ I give you is a $ less I give me...that's a problem.

We're lucky - we're out of the minimum wage trap I don't even think about it. We pay our folks well above and we get every dollar worth of effort and more. Even the high school grad lady who answers the phone - she's so much more valuable than minimum wage. We have made the jump from sole proprietorship to business and we're never looking back. Everyone contributes to the success of the business and everyone benefits.

Get to that point and all this noise about 14cent per pizza for obamacare and the pains of minimum wage - they're all just bullshit noise in the wind because we're growing our business in a way that makes that irrelevant.

[Laxman]

10. Thank You For This Reply

That was the kind of approach I was looking for. I can see that struggling start-ups would have a problem. That makes sense. I can also see that in some circumstances the owner might end up making less than minimum wage for their efforts. However, a going and growing business that understands the value of the people who help make things go should not be sweating the increment. My issue is with businesses who either count on or thrive on paying the absolute lowest wages possible. I have found that most of the complaining comes from people who own profitable enterprises who should be thinking like you-that the minimum wage is not really a relevant issue. Maybe its just my limited sampling of opinions from my highly republican area, but I haven't heard anyone who has been complaining make the kind of sense you just did.

[ieoeja]

16. Healthcare?

I pay the exact same premium as those making more or less than me. I am pretty certain that cost is going to be the same whether they pay their employers more or not.

0.07750 = Social Security (6.2%)
0.018125 = Medicare (1.45%)
0.0750 = Federal Unemployment (6%)
0.015 to 0.135 = various New Jersey unemployment/disability/etc rates which obviously can vary greatly

0.185625 to 0.305625 = Total increased loaded costs
1.435625 to 1.555625 = Total costs of a $1.25 raise

$574.25 to $622.25 per month for ten full time minimum wage workers
$29,861 to $32,357 per year for ten full time minimum wage workers

[DukeDevil]

9. A possible negative side effect

Here's one way a small business owner might look at it (speaking from my experience doing budgeting and staffing for a consulting group). Using your numbers, if I have ten employees working at minimum wage ($7.25 an hour), and it looks like we assume they work 40 hrs/week every week of the year, my total budget for payroll is $150,800 (7.25*40*52*10). If minimum wage goes up to $8.50, I can only support 8.5 employees at full-time on my payroll budget (150800/17680). I need to either scrap together extra cash (maybe possibly, maybe not), cut hours, or let some people go.

[leftstreet]

11. ...or you could take less profit n/t

[AlexSatan]

12. How much profit do you take? (nt)

[joeglow3]

22. Those businesses typically aren't making hundreds of thousands a year.

There is a reason why so many small businesses fail.

[Egalitarian Thug]

13. The "business side" replies posted previously have shown some of the problems

that plague American small business. I was one of those justifiably maligned consultants for many years before "business analyst/consultant" became a euphemism for unemployed.

Some of the most common problems I found with very few exceptions was SBOs that believed being an SBO entitled them to live like a very successful SBO from day one. They paid themselves far more than their business justified, they frequently partnered with vultures that took exorbitant percentages of revenue right off the top, they bought services from third party vendors that their business didn't justify, they hired very expensive people (like me) that their business didn't justify, they insisted that they themselves were entitled to perqs that their business didn't justify, and always, always insisted that their workers bear the costs for their own idiocy.

As previously stated, if a $50/week/worker wage increase is the difference between profitability and loss, then you have very serious problems with your model and most likely the problem is you.

[Laxman]

17. That Was Really The Main Point I Was Trying to Make

If $50/worker/week is an issue there has to be something else going on. And for business owners who funnel their car payments, country club memberships and other personal expenses through the business as perks, their outrage borders on obscenity. Also, no matter what happens with the business, I will take out $x. Their prerogative, I suppose, but please don't complain about someone making $300/wk.

[Egalitarian Thug]

24. That 4 out of 5 small businesses fail in the first two years meme has always been

about owners being foolish and/or greedy. I think your point is one of the most important points that we usually ignore. Politicians just love to talk about small businesses, but when it comes time to write bills and vote, the small business is always up for sale.

[Spike89]

14. Sure, paying higher wages has effects on business

Really isn't the issue. Higher heating/energy costs, transportation costs, equipment costs rise. Some things fall, but most costs rise. That totally is not the point. There will be both good and bad side effects from a higher minimum wage.

The only questions that make any difference are "is minimum wage a law we want?" and "what is a fair wage to be set as the minimum?" If you hate minimum wage law, then the 2nd question has no relevance. If you think minimum wage is needed to protect low-income earners, then the 2nd question is the only question.

The effects on business should not enter into the equation, not really. Yes, set the wage too high and it does become counter-productive--it could encourage more "under the table" labor with a much higher risk of worker fraud and mistreatment and actually decrease available entry-level positions.

That said, the problem is that the (federal) minimum wage isn't pegged to inflation and is a massive political football with a large minority (republicans) opposed to the very concept. This leaves the wage set slightly low at its inception in order to get it passed at all, but then, it is almost impossible to raise the wage through legislation until it is totally out of sync and you see things like a 17% increase--which of course plays into the repug hands by appearing to be a large increase when in reality it may not even bring the wage up to where it was in real dollars 10 years ago.

This is exactly why so many states like Oregon have pegged minimum wage to inflation. It rises each year, but never by 17%. Businesses know it is coming, they don't have to absorb a "rate hike" in a big chunk every 5-10 years, they can budget easier knowing that increases will come, but they are tied to inflation (as is everything else in a real business!)

[Laxman]

15. The NJ Proposal

actually has a provision to link the minimum wage to inflation going forward. That particular provision (which makes a lot of sense as you have outlined) has Chris Christie promising to veto the bill.

When the electric rates go up or gas prices increase adding to the cost of business there is some moaning, but general acceptance. Increase the cost of people-now those are fighting words.

[Egalitarian Thug]

18. Not to disagree with your point, it is perfectly valid, but it does reinforce mine upthread.

One of the biggest problems American small business has, after the fact that virtually every level of government actively works against small business in compliance with the wishes of the bigger businesses that don't want competition, is that so few SBOs know how to run a business. They lack an understanding of what makes a small business successful enough to become a bigger business.

Since the 80s, there has been a cancer of fantasy metastasizing throughout the small business world. The fantasy was born in universities and spreads through an unfounded belief in the absolute value of a college education. There are hundreds, perhaps thousands, of symptoms but they come down to two basic false precepts; One, that you must run your small business like a big business, i.e. maximize profits and reduce costs to the bone regardless of consequences or circumstances. And two, that you can run a small business on a quarterly basis with a spreadsheet.

Too many small businesses are run at the minimum wage. Owners think of the business solely as a means to their own income to the exclusion of every other consideration, especially foresight. This strategy consistently yields consistent results, they have a hard time getting good employees, they find it impossible to keep good employees when they do find them, and they are constantly fighting against the bad will their management (or more accurately non-management) produces. Because their employees are not happy, they suffer larger internal losses and their customers are not as satisfied as they should be. This leaves competing on price as the only way to keep the doors open, and that strategy is a downward cycle that is inevitably doomed.

The SBO that understands that her employees are the key to her success, and treats them accordingly, has a whole range of options open to her with which to deal with the inevitable changes that will come up. What unconcerned and utterly feckless politicians do with the minimum wage should never come into the picture after the business is established. Alas, this is rarely the case.

[Spike89]

19. Agree with you almost completely

Especially the part about SBOs making the mistake of competing on the corporate competitor's chosen field of play. For most businesses, there are obvious benefits that arise from economy of scale factors. A small business will never win in that area--it is the primary advantage of a national or international corporation.

Of course, almost every advantage comes at a price. Economy of scale equations essentially limit choices and require somewhat "bland" products/services. McDonalds is the classic case--people make fun of the food quality, but it isn't quality that McDonalds lacks. The McDonalds menu is carefully designed to be acceptable to everyone. They don't really do regional and certainly aren't customizable. They are consistent and just as acceptable in Maine as they are in Southern California. You can beat McDonalds pretty easily in any particular region--but not by "out McDonalding" them. Add a regional "feel and menu" and market your difference.

It works for any business in competition with a national brand. The problem of course is that it can be almost impossible to transition from a local/regional success to a national player. Exactly what makes your business successful (its quirks) in its home region can be a liability elsewhere.

[Egalitarian Thug]

20. That is an excellent point, but I'm not sure that is bad thing (regional appeal). One of my biggest

complaints during the years I was working in a different region every few weeks or months was the bland sameness that crept across this nation while I was doing that. I can't tell you how many times I would wake up in my hotel, go out and eat my breakfast, and have no idea where I was until that second cup of coffee arrived. When I started, it was the differences that made traveling so much fun (or at least interesting).

I learned to like grits in GA and learned that I hate chicory coffee in LA. NY taught me what pizza is supposed to taste like and the same for bourbon (especially that illegal homemade stuff) in KY.

[Spike89]

21. I love regional

I think it is the very best strategy for most small businesses. Way too much emphasis is put on constant growth and increasing market share and far too many small business owners fall into the trap of thinking they must expand into national/international markets. What is an awesomely popular and profitable business in California may be a loser in the midwest.

[FreeJoe]

23. I oppose the minimum wage.

I would rather scrap it and replace it with a robust negative income tax for low income earners.

Why? For several reasons. First, meaningful increases in the minimum wage kills jobs. Some jobs only exist when labor costs are low. On my street, most people hire a lawn crew to cut their lawn. A few people don't. As you increase the minimum wage, you'll increase the cost of hiring those lawn crews. As the price point goes higher, more and more people will opt to cut their own lawns. The same situation applies to many other service industry jobs that intensively use unskilled or low skilled labor. Another cause of unemployment comes from outsourcing or automation. Both of these become more attractive as you raise labor costs.

Another problem with minimum wage and living wage proposals is that they don't differentiate between different needs in people's lives. A 15 year old starting his first part time job usually doesn't need to earn the same wage as someone trying to support a family. If you raise the wage base to make it possible for people to support a family off of minimum wage income, you'll make those teenage jobs dry up. If you set up a lower wage for teens, companies will prefer to higher the cheaper teens and leave the adults hard to employee.

Now before you go off calling me a heartless bastard, hear out my proposed solution instead. I suggest that we fix the problem through the tax code instead. For incomes below a certain level, we should supplement those incomes with a negative tax. This will have the effect of raising the wages the lowest earners without the job killing baggage that comes with the mininum wage. We can even make the negative tax vary based on circumstances. We could have a low negative rate for teenagers and a higher rate for adults. Then companies won't be tempted to choose the teens over the adults.

The best thing is that instead of forcing customers and struggling small business owners to pay in the form of higher labor costs, we accomplish our goal of helping lower earners by using tax revenue from the highest earners via the progressive tax code.

That's the solution I'd prefer over having a higher minimum wage.