Debate rages. President Obama has urged raising the minimum wage to $10.10 an hour and, in the absence of congressional action, has mandated that federal contractors begin paying that amount immediately. Will it kill jobs for America’s 16 million minimum-wage workers? Or, by enhancing their spending power, will it boost the national economy. Let’s take a look at the underlying economics. Let’s do the math.
Most people (business owners and wage earners alike) rarely associate the minimum wage issue with fixed costs. Yet, rising labor cost is among the more significant issues for a business owner, and not having enough money left over to pay bills is the most significant issue for the worker.
Rising fixed minimum wage rates push out a business’s breakeven point. Any business will find itself out of business within two to three years unless greater customer volumes and higher customer receipts materialize to offset rising labor costs. Quickly, entrepreneurs learn the precise point at which their business breaks even. At that point, the entrepreneur neither earns nor loses a penny. The entrepreneur is simply swapping dollars, acting only as a money handler among suppliers, customers, and local, state, and federal governmental taxing authorities. Thus, who with a sound mind would ever argue for an increase in the hourly minimum wage?
Yet seldom does an entrepreneur think in the macro sense or consider what good would inure to society by paying a just wage. Some states mandate a higher minimum wage than is, in fact, required by federal law. Regardless, the issue addressed here is should the federal government increase the federal hourly minimum wage of $7.25 to a higher level — let’s say as an example to an hourly rate slightly above the United Kingdom’s current minimum hourly wage rate ($8.76 or higher).
Globally, costs are relative. A minimum wage of $7.25 in America may seem like a rich hourly wage compared to Mexico’s $0.89 per hour. American companies have in the past moved jobs across borders and overseas to lower minimum wage paying nations (China ($1.73) and India ($0.61)) in order to save on labor costs and thus lower the breakeven point, thereby earning higher and higher profits. Shareholders are happy and CEO’s get paid higher salaries and bonuses.
In fact, many CEOs of publicly held for-profit companies get paid over 500 times the federal minimum wage. But the point here is this: Wage gaps between the top 10 percent and the bottom 10 percent of American workers are widening.
Pick a number, any number you choose to justify as acceptable in America for rewarding work, effort and talent. Perhaps, it does not make sense to put a ceiling on anyone’s hourly wage rate. Regardless, does it not make sense to put a floor? Shouldn’t economic justice in America call for narrowing wage inequalities? You be the judge.
How many restaurants and service businesses will go broke because the minimum hourly wage rate went up? Should they be in business anyway if they cannot pay their workers justly? How much of that minimum-wage increase will be passed on to consumers in the form of higher prices? For many people, any minimum wage increase just seems like a zero sum game.
Yet, gasoline costs have risen; flood insurance rates rise, some at 15 percent per annum; gas and electric utility rates increase, sewerage and water rates increase, property taxes rise — yet the minimum wage rate in America, after taking inflation into account, is just about where it was in 1968. For 45 years real hourly minimum wages have either stagnated or declined. Had the federal minimum wage been adjusted upward at 4 percent per annum from its 1968 level of $1.60, it would be $9.34 per hour in 2013. Nonetheless, I am sure that there are some hardline business owners among us who may say that $7.25 per hour is sufficient. I am not one. Seventy-five thousand workers in the hospitality industry in New Orleans deserve better.
Entrepreneurs should pay a “just” wage. Given the rise in fixed costs in America, the current federal minimum wage does not allow a person receiving that level of pay to “break even.” Shouldn’t workers break even too? A worker earning $7.25 per hour cannot afford to pay both rent and utilities on a decent home; and certainly, cannot afford to purchase a car and a home and upkeep both, or pay tuition at a public college or university.
Paying a just wage means that a laborer ought to be paid sufficient to his or her “value-added” productivity. I have seen businesses that fail to do that, many of them with incredibly loyal workers who seldom complain. In fact, American workers are among the most loyal and productive in the world. If America is going to continue to lead the world, that kind of cooperative workforce has to be sustained. Paying a just wage sustains productivity.
The additional truth is that minimum-wage earners have the highest propensity to spend what they earn. Historically, consumption accounts for nearly 70 percent of gross domestic product (GDP). If Congress wants to stimulate job creation, increase GDP, and increase tax revenues to reduce deficits, then the minimum wage ought to be front loaded to increase at 6.5 percent per annum for the next three years then at 3.5 percent per annum for the next five years. Start now while interest rates are at historical lows and commodity price inflation is not significant. With current labor productivity benchmarked at 2.42 times every $1 spent, GDP growth will ramp up faster and unemployment decline quicker than any cut in federal taxes on incomes over $200,000 could achieve.
In conclusion, breakeven-point logic supports systematically raising the federal minimum wage and growing the economy. An urgent need exists to increase America’s propensity to consume. Paying just wages enables consumption.
The low rate of commodity price inflation presents a rare opportunity for hourly minimum wage rates to increase without exacerbating overall inflation. Front loading a catch-up rate increase of 6.5 percent per annum will lift the floor rate in the federal minimum wage to $8.76 by 2016. Continuing the increase thereafter at 3.5 percent per annum will establish the federal minimum wage at $10.40 per hour by 2021.
Justice requires establishing a floor. The free-market economy will determine the ceiling. If properly implemented, state and federal tax revenues should grow; government deficits should shrink.
Edgar “Dooky” Chase, a member of New Orleans’ famous family of restaurateurs, retired as vice president of facilities planning and management at Dillard University. He is a trustee of Loyola University where he earned both his undergraduate and law degrees.