The Minimum Wage – How Poor is Poor?
Friday, July 30th, 2010Author Tony DeMaio
Once upon a time, many years ago, I had a Civil Service job and was making the princely sum of about $3,000/month ($150/day). At the time it was one of the highest paid Civil Service positions in the State of California. (For the most part, higher levels were political appointees.) I had a Master’s Degree and had worked for the State for about 10 years.
One day, I took a vacation day, picked up my girl friend, and headed for Lake Tahoe. On the way, we stopped by a restaurant owned by a mutual friend. As we walked in the door, the friend said, “Sit down, I’ll be with you in a minute. I’ve only got ten more minutes on this shift.” We sat down and ten minutes later she joined us. She said, “One of the girls called in sick, so I had to take her shift.” She sipped her coffee, asked how we were, and stated taking her tips out of her pockets and counting them. I watched in amazement as she kept pulling bills and coins out. She began counting the money and I was astounded to find that she had made about $120 in tips. At the time, minimum wage was $5/hr, so the normal waitress would have made $40 for the shift in pay, plus $120 in tips. I asked about the “normal” waitress and was told that she was a college freshman working at the restaurant during summer break. I thought, “That gal is making more than ME. Maybe I should get a ‘minimum wage’ job.” (I’m sure the waitress claimed ALL the $120 for income tax purposes.)
I have been thinking about the concept of “minimum wage” for several years. One of the first questions that come to mind is, “Why does the government have the right to tell me the minimum I must pay someone?” or alternatively, “Why does the government have the right to tell me the minimum I must charge for my labor?” I recall that at one time in this country, people would work for room and board in order to have a job that would teach them a trade. It was a mutually beneficial arrangement—the employer obtained help he could not afford to pay and the employee obtained training. I recall talking to a restaurant owner that hired an employee for “nothing” (except tips). The employee “cut a deal” with the owner that if the owner would train him to be a waiter, he would work for nothing. I went back to that restaurant six months later and asked about the employee. I was told that he had gone to San Francisco and obtained a very well paid job in a fine dining restaurant. Such would not have been possible under a strict interpretation and/or enforcement of the minimum wage laws.
When one considers the logic underpinning the minimum wage laws, it is quite apparent that the laws are politically motivated. It is a blatant attempt to gather and garner the “poor” vote—even if that vote is harvested at the expense of that very population.
Let us consider some economic assumptions:
Assumption #1: It is assumed that the only reason an employee employs someone is to make a profit from that labor. The employer expects to “package” the work the employee performs and “resell” it for a profit.
Assumption #2: If you recall your pay last raise, you will note that you “saw” about half of it. The tax laws in this country are such that, at the margin, you receive about half of your wages.
Assumption #3: Generally, for every dollar you receive in wages, it costs your employer TWO dollars. This is a function of payroll taxes (Social Security, unemployment, disability, etc.), time off (e.g. holidays, vacation), and benefits. (Use some other figure if you wish.)
Assumption #4: Typically, product costs are 2/3 labor.
With the above assumptions in mind, let us consider some of the economic aspects of the minimum wage.
An acquaintance once said to me, “I wouldn’t mind paying a nickel more for a hamburger if the employee could get paid a dollar an hour more.” I suspect contained in that statement is the entire philosophy of those that support the minimum wage. First, they wish to speak for everyone. My immediate reaction was, “Why don’t YOU pay TEN cents more for YOUR hamburger and let ME pay the price I am presently paying?” Second, the statement is made with such assurance that one takes no notice of the fact that there is no thought behind it. When the statement is analyzed, it becomes absurd. In order for the employee to make a dollar an hour more, the employer is going to have to pay TWO dollars an hour more (assumption #3). In order for that employer to “break even” charging a nickel a hamburger more, that employee is going to have to sell FORTY MORE hamburgers an hour. However, for every employee at the cash register selling hamburgers, there are at least two (and probably three) employees preparing the food, cleaning up, on the drive-up window, etc.), so in order to pay each employee a dollar an hour more, that store must sell about a hundred hamburgers more EACH HOUR to break even. (Ironically enough, while the employer is paying two dollars an hour more for each employee, the employee is “seeing” only fifty cents because of the tax laws [assumption #2].) I suggest that the only way the employer can make this situation “work”—i.e. break even—is to reduce staff and work the remaining employees harder.
One must consider how small businesses work. In many cases, the owner is working right beside the employees. It is not unusual to see the owner of a small business sweeping the floor. Oftentimes he would rather hire someone to perform that task, but cannot afford the wages to do so. Assumption #1 states that an employer hires people to make a profit. Consider an employee making minimum wage. If the employee’s wages are increased by one dollar/hr, it costs the employer two dollars/hr (assumption #3). That means that in an eight-hour shift, it will cost the employer sixteen dollars. If the product markup is ten percent, then that employee must sell an additional $160 in merchandise each shift in order for the employer to “break even”. Clearly, in all probability, the employer is going to raise prices and/or reduce staff.
Finally, let us consider the impact on the population we are attempting to help. Let us assume a 10% raise in the minimum wage. Because of the payroll taxes, this will cost the employer 20% (assumption #3), and the employees will “see” 5% because of the tax laws (assumption #2). If 2/3 of the product costs are labor (assumption #4), then the employer will have to raise his prices by 2/3 x 20% or about 14% just to break even. (This assumes that his raw material costs do not increase due to the wage increases imposed upon his supplier.) So, the employer increases his costs by 14% and the employees see their (real) wages rise by 5%. As the increase percolates through the economy, the minimum wage employees are actually WORSE OFF than they were before the raise due to prices higher than their wage increase. It is a gradual, almost unnoticeable effect.
The reader may well wonder how this is different from (e.g. union) negotiated raises. It is quite simple. At contract time, labor and management sit down at the negotiating table and “divide the profits”. When the company is doing well, a generous settlement is made; when the company is doing poorly, labor may well believe it is best to settle for less rather than to bankrupt the company. The raise given to the employees is a function of the ability of the company to pay. On the other hand, the minimum wage is imposed upon ALL businesses, regardless of how well they are doing or their capability to comply. It is imposed by an external “force” regardless of the ability of the company to pay, and there is no “negotiating”.
One must be somewhat skeptical of a “system” that:
1. causes people to lose jobs
2. curtails the rights of people to sell their services
3. hinders the efforts of people to obtain training
4. bankrupts businesses
5. causes woe and hardship for the very people it is supposedly designed to help
In closing, I wish to state that at one time, the highest paid employee in Reno, Nevada was the head waiter at the show room at Harrah’s Club. He was officially paid minimum wage. He drove a Mercedes.
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Lynne says:
July 31st, 2010
4:39 pm
I have never liked the idea of min. wage or just an “employee” mindset. Every person that works is an independent business. You are trading your skills, time and effort for money.
When I was in the Army I seldom made min. wage , never made time and half or double time. But I loved it and my compensation seemed worth my time and effort.
Tony says:
July 31st, 2010
6:36 pm
Lynne,
The minimum wage is insidious. When folks first get it, they are happy, since they have increased purchasing power. As the effects permeates the economy, they slowly fall further and further “behind” and end up worse off than before. Since they “got theirs” first, and in a “lump sum”, it’s easy for them to believe they are better off. They ARE–at first.
always,
tony
Lynne says:
July 31st, 2010
8:02 pm
I agree Tony I just never understood it. When I worked food service I got a raise when the PTB’s raised it. Then I had to still cover the idiots that were just a body. I’d have preferred my employer to split the min. wages of the slugs and give it to the folks that took up the “idiots” slack. Hell we were doing the “slug” work anyways. But I’m sure that would have been considered unfair.
So I got no raise based on “merit” because “teddy kennedy” had a moment of caring about the “proletariat and forced all employers to give a raise across the board. Because Teddy feels guilty about his maid and gardener. So I suck it up, my employer sucks it up and Teddy and his ilk go yachting. Only the names change not the attitude.
I guess I was lucky in my mother a bartender, waitress and cocktail waitress. She gave lots of practical lessons in finance. Though not the lessons you learn in colleges or Universities.
Lynne says:
July 31st, 2010
8:03 pm
As you may have discern I have less than lively respect for those folks that assume to make my life better!
Tex Norton says:
August 3rd, 2010
9:35 am
Carrying the “Union” concept further, Tony, the Minimum Wage is still an additional pay-off to Unions. During negotiations, the unions use the minimum wage increase as a base argument for raising the union pay scale rate. I wrote an article on this a year ago when congress last raised the minimum wage. See
Tex
Tex Norton says:
August 3rd, 2010
9:38 am
I listed the URL of the article I referenced in the above post but it didn’t show up. The article is located on Whiskey&Gunpowder July 31, 2009 under the title Why Minimum Wage Means Maximum Slavery.
Tex
Lynne says:
August 3rd, 2010
6:37 pm
Now i should be considered poor. I’m not, I refuse that designation. I may not have money but I’m not poor. I don’t need anyone’s pity of any sort. I pay my mortgage every month. my power, my car payment, my food and all without government intervention or subsidies. Do I think I deserve my VA benefits or SSD benefits that I paid into for 30 years. Yes I do, I was naive. I assumed a gov’t promise after all I paid in was a promise forever. Silly me, I did not know about expiration dates on promises from the US government. Well I did hope for better and that’s not happening. Well I’m sorry I can’t be polite any longer ” Jokem if the can’t take a F#@*, and F#*$ if they can’t take a joke.
Tony says:
August 4th, 2010
10:07 am
Lynne,
“Yes I do, I was naive. I assumed a gov’t promise after all I paid in was a promise forever.”
Oh ye of little faith. You can trust the gubbermint. If you don’t believe ME, ask the Indians (any tribe). If you don’t believe THEM, ask the “bonus army”–or the South Vietnamese.
We tell the world we are gonna leave a war zone at a particular time and wonder why the local popultion won’t support us. You think it might be because after we leave, they will be at the mercy of the other side? Anyone recomember what happened in South Vietnam after we left? Those in Iraq and Afghanstan do. We tell the world we’re leaving on a certain date. Pakistan thinks, “Hell, after they leave, the Taliban is gonna take control. We don’t need no enemy on that border. Best not support the U.S. too much now and establish lines of communication with the Taliban for the future.
I once went to a town hall meeting with Peter DeFazio (Oregon). He said, “Anyone who thinks the United States can’t pay its bills is crazy.” Two years later, he was talking about “how much trouble” medicare and social security were in.
always,
tony
Desertrat says:
August 4th, 2010
5:25 pm
Anonther in a near-infinite list of appropriate Heinlein comments: “Government does not exist for the benefit of the governed.”
if it did, we’d probably still be drinking nickel coffee and reading 10¢ newspapers. First-class letters with 4¢ stamps.
Linda Brady Traynham says:
August 6th, 2010
3:21 am
My favorite was the Army cutting my tiny pension 40% on my 63rd birthday, explaining that was by act of Congress. Other than that they send me a form every year asking hopefully if I have remarried so they can keep the rest of it. Wonderful folks.
James the Wanderer says:
August 6th, 2010
11:31 am
At the moment, the cycle is on a downswing; things are getting harder, the government is too large and taxes are already unsustainable, and about to go higher. Eventually, a revolt will unseat the ruling groups, change the systems, and things will get better for a while, until the next cycle begins.
I view the start of this cycle as the American Revolution, and the end of it as all too near….
Tony says:
August 6th, 2010
12:47 pm
James,
I’m quite indecisive. I don’t know whether to hope you are right or wrong.
I think you are correct. The question is, “Will it be a peaceful one or will the model be the American Revolution, the American Civil War, or the French Revolution?”
The big eared buy in the White House ain’t no dummy. He can see what’s coming in November. Another question is, “What, if anything, is his plan?”
always,
tony
Linda Brady Traynham says:
August 11th, 2010
8:46 pm
James, love…keep up with me on the Mesh Report. I am VERY concerned about using the remainder of the year to work out how to deal with enormous tax increases and “finish” our preparations. I’m of the opinion that there is going to be a monumental backlash when paychecks come out in January and people understand first hand what higher income taxes and taxes on health insurance plans do to their takehome. Big hug.
Linda Brady Traynham says:
August 11th, 2010
8:49 pm
Tony, dear…the egomaniacal Muslim in residence sees and rejoices; he plans on bulling ahead as long as he can. I expect untold outrages from election day until late January IF the elections are the blood bath they may be. There is NO way to stop those people from passing any bill they want to. The economic news is bad all along the spectrum and something could give any time. I know, I keep saying that, but eventually…
Tony says:
August 12th, 2010
12:28 pm
Linda,
Much like the left didn’t expect Nixon to “go peacefully”, I don’t expect Big Ears to “go peacefully”. I hope I’m wrong.
In terms of passing legislation, the republicans can filibuster any bill, drag the time out and wait for the next Congress. How they act is big on my list of importance. First the election, then how the republicans act, then the election of 1012. Belize, Panama, Costa Rica, and Nicaragua are nice this time of the year–matter of fact, all times of the year.
In terms of warning folks about the sky falling, you only have to be right ONCE.
always,
tony
Lynne says:
August 13th, 2010
10:05 pm
The problem with the “whole bloody system” is we have all paid in and we were told we get the benefits if just agreed to the tax. They lied, or are lying. Now we are going after vets and CHAMPUS for taxes and not those Unions.
26.1 Billion for teachers and administrators and soldiers….
but heck you soldiers will only be declared terrorists by the DHS and you need no cola just like the folks on SSA and SSD. But the Obamas are stressed and need to go o Spain, Florida and Martha’s Vineyard.
Damn I’m trying to feel for these folks that are paid more in year than I have got in 20 years of paying taxes and as a soldier. Yes I do have issues. I have way to cut costs as well.
All of Congress needs to wrap their mind around this idea. It’s not your money. You have no money unless you take it first from folks that work for it. So do not tell me of your sacrifice of tax dollars. You did not earn it. Please don’t drape yourself in flag, you have sacrificed nothing. It’s been the average Americans blood and treasure and not you.
I have no problem sacrificing my COLA to reduce the debt. How bout you Senator, Representative, Government worker? Will you take a 10% pay cut and freeze?
Tony says:
August 14th, 2010
10:38 am
Lynne,
You can trust the gubbermint–just ask ANY Indian tribe. Perhaps you would also like to consult the bonus army or South Vietnam.
In the late fifties, the California legislature make an agreement with the population: “Agree to these taxes, and higher education in California will be forever tuition free.” The people believed them. (That was back in the days when politicos still had some semblance of honor and reputation.) Tuition at the University of California is now over $10,000.
Take it from an old man. If you’re walking down the street and some thug shoves a gun in your face and says, “Gimme your money.” Do NOT, under any circumstances tell him that it ain’t his money. His answer will be, “Not yet.” Do not confuse “right with might”. He has the POWER to MAKE IT HIS MONEY.
always,
tony
Tony says:
August 15th, 2010
2:11 am
Lynne,
Here’s a philosophical thought/dilemma for you.
You’re walking down the street and some guy says, “Give me your wallet.” You do so. He then says, “Do you have any more money?” Are you under any obligation to tell him you have more money in your shoe?
Be careful before you answer.
First of all, if you say “no”, you are lying.
Second of all, doesn’t the Lord say, “Turn the other cheek”?
(that does NOT mean “moon him again)
On the other side,
If you believe it is moral to “lie” in such circumstances, is this not the same argument as “cheating” on your income tax? If you believe the gubbermint has no right to seize your money, is it not legitimate–even moral–to hide it from them if you can?
always,
tony