The Federal Minimum Wage

Here in just a few weeks, on July 24, 2008, our country’s minimum wage will be going up again from $5.85/hr to $6.55/hr. That will be great for our economy. Employees who are struggling to support themselves and their families at jobs that only pay them minimum wage will have a little more money in their pockets at the end of the week. That money will enable them to better pay their bills and make a more comfortable lifestyle for themselves. Also, that money can be used to take care of the various needs and wants that have been, up till now, sitting on the back burner. And this doesn’t just apply to the people making minimum wage. A number of workers stand to benefit from an increase in the minimum wage. That’s not true for everyone, mind you, just those who work for employers who see the minimum wage increase as a reason to increase their wages, so those other employees maintain a higher pay rate over those making minimum. So, from the looks of everything, an increase in the federal minimum wage looks like it’s going to do a lot of good for a lot of people. NOT!! Wake up, people. This is just another outrageous act by the United States Congress that makes you think they’re doing something useful for you other than wasting your tax dollars on “pork barrel” projects. What are they truly doing for you or the economy at large? Literally NOTHING!

Of course, one has to wonder how increasing the minimum wage can do absolutely nothing for the economy. More money will be going in to the pockets of employees all across the nation. They’ll have more money to spend. They’ll be able to pay their bills, purchase new goods and services in our economy. So how does all of this add up to doing nothing for the people?

Let’s take a retail grocery store owner. Right now, with the current minimum wage, he can maintain his payroll of 5 minimum full time wage employees his current 10% gross profit margin on the products he sells. We will assume there are other employees at the store, but we’ll just deal with the 5 minimum wage employees for the purpose of keeping our example simple.

5 employees x 40 hours per week x $5.85/hr = $1,170.00 per week (or $234.00 each)

For purposes of this example, an item with a 10% profit margin means that 10% of what it is sold for is profit. On a $1.00 item, 10¢ would be profit, while the other 90¢ would go to whoever supplied the merchandise. So, for every $1.00 rung in at the register, 10¢ would go to payroll expenses. So right now, the owner needs to sell $11,700.00 per week in merchandise just for these employees.

Milk 2000 units x $4.50/unit = $9000.00
Bread 1000 units x $1.50/unit = $1500.00
Ground Beef 700 pounds x $2.00/lb = $1400.00
TOTAL REVENUE=$11,900.00

So right now, the owner sells sufficient merchandise to cover a payroll up to $1,190.00 per week. We will also note that at the current rate of pay and the current retails, a given employee can afford to buy 3 gallons of milk ($13.50), 5 loaves of bread ($7.50), and 6 pounds of ground beef ($12.00) out of their check and still have $200.00 left over for other expenses.

Now, in July, the minimum wage will go up 70¢ per hour to $6.55/hr. For a full time employee, that’s an increase of $28.00 per week that has to be added to the weekly payroll budget.

5 employees x 40 hours per week x $6.55/hr = $1,310.00 per week (up $140.00)

So where does that $140.00 come from? Well, the owner needs to keep his payroll budget at 10% or less of his gross sales. This will require an increase in sales at the register or someone will have to be laid off from their job. In order to keep all of these employees, sales will need to increase $1400.00 to $13,100.00 per week. In order to do that, the owner raises his prices to cover the gap between his current revenue and his payroll budget. So, now he has to sell his product to his customers at a higher price.

Milk 2000 units x $4.85/unit = $9700.00
Bread 1000 units x $1.75/unit = $1750.00
Ground Beef 700 pounds x $2.45/lb = $1715.00
TOTAL REVENUE=$13,165.00

In order to be able to afford this store owner’s increased prices, his customers will now have to either buy less or have more income. The customers go to their employers (assuming they haven’t received pay raises as a result of the minimum wage increase) for raises. To afford to pay these raises, the employers of the customers must also increase their revenues (if they haven’t already done so), most likely by raising their prices charged to their customers. This cycle will continue to repeat. Now, everyone has raised their costs to be able to pay their employees increased wages.

The employees of the grocery store are also spending more of their income ($262.00 each) as a result of these higher prices. At the new retail prices, each employee spends the same $33 per week to buy their groceries. Now, however, while they can still afford 3 gallons of milk ($14.55), now they can only afford 4 loaves of bread ($7.00) and 5 pounds of ground beef ($12.25) for a total of $33.80. To buy the groceries they had in the past would have cost them $38.00. Even though the employees are making more money, they have to spend more money on their basic needs. Also with the prices of these items, we can also understand that many of their other basic expenses have gone up as well.

The increase in the federal minimum wage is ultimately a washout. While employees are getting more money in their checks, they inevitably end up spending that money on their expenses. It doesn’t really improve their standing in life; their ability to do substantially more for their families is little more than smoke and mirrors.

Furthermore, let’s look at who’s generally benefitting from the minimum wage increase. Most of your minimum wage employees are teenagers working their first jobs. After that, we’re looking at young adults who may be new to a specific company, but who will eventually work their way up after they have demonstrated their value to their employers. Another group of minimum wage employees are those who work basic jobs in fast food and retail due to issues in the job histories which make them higher risks to hire (short times at previous jobs, quitting for weak or questionable reasons, etc.). Since the second group will likely remain at minimum wage for only a short period of time, that leaves the first group (new, inexperienced employees) and the third group (employees who have trouble staying employed). The new, inexperienced employees don’t really need the increase in pay. Part of their compensation in the big picture is experience. An employer is taking the time and expense of teaching this employee things which will benefit them down the road throughout their life. The employees who can’t hold a job don’t deserve to see an increase in their bottom line either. These employees haven’t put forth the effort to work a job with the diligence required. They have instead put their priorities on calling in sick when they’re not, quitting jobs over petty things like their bosses expecting them to do their job properly and arriving on time or because they moved a mile and a half further away from their jobs (as though driving that extra two or three minutes would do real harm to them), or getting fired for being insubordinate or unreliable or because they’re rather “par-tay” on Friday night and show up late on Saturday morning.

In the grand scheme of things, very few of the truly hard working people out there will actually see an increase in their paychecks, as most are not working for employers who will simply raise their wages to maintain the certain gap between long-term employees and minimum wage employees. What these employees will see instead, a more coming out of their budgets for necessities and less flexible (“disposable”) income. In the end, whatever benefit the minimum wage workers see will be negated by the negative impact on the workers who won’t be getting raises to deal with the higher expenses ultimately created by the increase.

All that increasing the minimum wage has done for anyone is make some Congressmen look like they’re really trying to do something. They know that what they’re doing is merely a hollow gesture on their part, just a whole lot of smoke and mirrors. If you want people to do that for you, go to Vegas and catch a show with Sigfreid and Roy. You won’t get any richer there than you would with the minimum wage increase, but at least you get to see some cool looking white tigers for your money.

OK, now back to the readers. What do you think about it? Is the increase in the minimum wage a benefit for our nation or an illusion of benefit? Be honest -- let's talk about it.