Tuesday, November 28, 2006

The implications of the "Living Wage" concept

Read this excellent post by Jay Reding.

Excerpt:

"At any given moment, any given employer can only spend so much for wages. That figure may vary over time, but a “living wage” means that employer has to make do with the same amount of money, but much higher costs. That means fewer jobs, and that means that employers are going to want to take as few risks as possible with the people that they do hire.

The “living wage” sounds good in principle, but the reality of the situation is that it would be devastating to the least fortunate among us"

12 comments:

  1. I don't think the author has had to hire anyone that is in the hands on area.

    I'm not positive but believe minimum wage is around $5.50.
    Maybe we should start with those jobs that pay minimum wage....the author may want to call McDoodles before speculating...or the clerk stocking shelves at the local grocery store...maybe
    (bet he would find $7.50 to $9.50 an hour)

    In our company we are a couple/few dollars above minimum wage to start and struggle to find good people. We wonder if we don't have to raise the starting rate even higher.

    Said another way....I would fully support raising minimum wage to $7.50 per hour as it would have virtually no impact on our starting rate of pay and some of the jobs that we have would equate to the above descriptions.

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  2. From what I've read, many advocates of a "living wage" are clamoring for a $11-12/hour figure, plus benefits.

    If forced to pay wages/benefits at those rates, how would that affect your business, meb?

    How would it affect larger businesses?

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  3. The problem with that analysis is the premise that a "fixed" amount is available for wages. That is a wrong premise. Businesses have to handle increasing costs all the time. Energy, health care and materials costs, for example, often increase and businesses usually respond by finding efficiencies or raising prices to accomodate their increased costs. They don't respond by reducing their production or service because they only have a "fixed" amount available for a particular cost.

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  4. "If forced to pay wages/benefits at those rates, how would that affect your business, meb?

    How would it affect larger businesses? "

    Our average wage is greater than $11/$12 per hour. I think that another thought might be......
    The largest employer is small business...so...lets pick a number....hmmm 20 people. 20 people at $8 per hour vs $10 per hour would cost the company $40,000 per year total. If the average 20 person company is generating $2,000,000 in sales then the increase would = 2% of sales. With that said, it does not sound like much coming off the top....same company working from 5% pretax income just saw profits move from $100,000 to $60,000...therefore...as Roch commented..raise prices 3% to offset paying a better wage. By paying a higher wage one would hope that the quality of labor is greater therefore creating adding cost savings. The snag is that there are plenty of $12 folks that should be fired. It is a tough problem. Minimum wage can be raised and I don't believe it would have any impact on my business up to maybe even $8.50 per hour.

    My guess is that large business is similar just a larger macro. I hear that large business pays a higher rate than small for unskilled labor.

    Excellent post..thanks

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  5. Of course the minimum wage can be raised to around $8.50 an our without significantly effecting businesses. It has not kept up with inflation let alone competition in wages, so there is no good reason not too.

    Funny too because Bubba was arguing just a few months ago that ANY raise in the minimum wage would cost jobs. Which is in fact not true. And the opposite is actually happening.

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  6. "They don't respond by reducing their production or service because they only have a "fixed" amount available for a particular cost."

    The "fixed amount" mentioned probably refers to budgeted revenue. In many companies, personnel costs dominate the budget, so any increase has a more dramatic effect than in other companies.

    Everything else being equal, the business must resort to increasing prices to maintain budget margins, find something else to cut in expense, or lower the income statement margin.

    The latter action is sort of thing that doesn't happen in publicly traded companies which are accountable to shareholders. In this day and age of accountability, expenses in most places have taken it on the chin. The "three martini business lunch" is LONG a thing of the past.

    Plus, what do you do if you're no longer competitive in the market, or worse, the general economic picture takes a nose-dive, and your debt service burden blows up?

    Trust me on all those items mentioned above, from first hand experience in the corporate world.

    Generally speaking, companies have a set program for wage increases which fits into the budgeting process, but an increase of 60 percent or more to accommodate "living wage' increases may be a BIG DEAL, depending on the size of the bottom rung of a company's work force.

    In privately held smaller companies, the thinking may be different.

    "I hear that large business pays a higher rate than small for unskilled labor."

    Mostly in the form of better benefits, based on the economy of larger buying power among providers.

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  7. Kirk says:

    "Of course the minimum wage can be raised to around $8.50 an our without significantly effecting businesses."

    Then you'll be shattered to hear that one of your heroes disagrees with you.

    Quote from Reding, in the comments:

    "Even Paul Krugman (back when he was a serious economist) scorned the idea that raising the minimum wage had no effect on unemployment. Even minor ones produce significant increases in unemployment against the most vulnerable low-skill workers."

    Here's what Krugman actually said:

    "So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment."

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  8. The history of minimum wage increases and effect on employment, from Cato.

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  9. Bubba,

    Ask around but I don't know of anyone that is paying anywhere near minimum wage. $7 per hour is the lowest that I have seen.

    I just hired a new person today with hope of paying around $10 within 90 days and $12 plus within a year. (far distance from min. wage and this is a ground floor position)

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  10. In my experience there are several who pay minimum wage.

    I left one such company's employ at the beginning of the year, after three months of putting up with their nonsense in several areas.

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  11. I have spoken to a few human resource persons and they have been offering min. wage at $9.00 per hour and cannot find EE's because most of the people applying cant pass the very strict drug testing these companies administer. These are for entry level positions.

    It just goes to show you, no matter what is offered, some people will never be able to work.

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  12. Yeah, this sounds like Walmart's employees are just thrilled to be there.

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