In the past I’ve provided an analysis of why places like McDonald’s couldn’t pay $15 per hour to everyone. There I showed that if you took the entire profit McDonald’s makes and you divided it up by all of the employees, you’d only have about $13 per employee per hour. Because McDonald’s only makes about $13 per hour per employee, meaning that the average employee only produces $13 per hour, they couldn’t pay $15 per hour no matter what living expenses are. This would be like having each person at a farm growing an ear of corn per week, but then saying they should get two ears each in payment because they need it to eat and be full. And if they paid out even the full $13 per hour that they make per employee, this would leave nothing for the stock holders, which means the stock would become worthless and they would not be able to borrow money or otherwise use the equity markets for things like expansions or even to pay their bills during downtimes in business. If you look at the compensation shareholders receive in the form of dividends, it is on the order of 2-3%, which is certainly reasonable given the risk they are taking. No one pays them back if the company goes out-of-business.
Let’s look at it another way. In the Democratic debates, Bernie Sanders and Hillary Clinton said we could pay a $15 per hour minimum wage, along with free college, free healthcare, and increased Social Security and Medicare. All that we need to do is “level the playing field” by taking money from the evil rich people and giving it to the noble poor people. They happily cite how the high earners make so much more than the low earners, and that if we would just take their wealth and dole it out, everything would be wonderful. Really?
Let’s say you have a CEO making $10,000,000 per year, or about $4800 per hour, assuming a 40-hour work week. It is probably really a 100 hour work week, but humor me for a minute. Let’s assume that the company employs 10,000 people at $7.25 per hour. If you took the CEOs entire paycheck and divided it up among the hourly workers, what would they get? About $0.48 per hour more. That’s far from $15 per hour. If you include all of the other executives in such a company, you might get another $0.48 per hour. The money is just not there.
And now you’re assuming that the CEO would keep working just as hard for no pay and that the company would continue making just as much money. But why would someone get up early, take on all the stress of having everyone in the company relying on them, spend time doing hard things like doing planning for the direction of the company and making tough decisions, not to mention firing people and deciding on layoffs to preserve the company when needed, when he could make the same amount just doing whatever someone tells him to do and nothing more? In actuality the CEO would quit to do something more personally rewarding. Without someone with sufficient skills to run the company, many of those $7.25 per hour employees would just lose their jobs.
While the CEO is making a lot of money, and probably more than he or she really needs to be paid (I’ll bet you could get a lot of great CEOs for $1,000,000 per year or even $500,000 per year), the amount of the wealth generated by each of those 10,000 employees that the CEO takes in pay is miniscule. He just takes a little bit from each person working for the company in exchange for providing an environment in which the employees can make more than they could on their own. The individuals working the jobs keep the vast majority of what they make. In fact, they make more working for the company than they would be able to make out on their own, so paying the CEO his cut is well worth it for them.
So what would happen if you demand a company pay $15 per hour when the workers aren’t producing enough income to cover their salary and the other costs of running a company? You’d either see the entire company close down (you can’t keep paying your workers $15 per hour when they’re only producing $13 per hour) or you’d see all but the most productive workers laid off and technology used to replace the functions those workers provided. Note you’re already seeing self-serve kiosks and phone apps at fast food outlets and self-checkout at grocery stores. Trying to get a first job without a college degree would be all but impossible because few people would hire someone without demonstrated skills. Making it difficult to fire people, as was done during the Great Depression, would make employers even more reluctant to hire. Note that this and wage controls were a big reason the Great Depression dragged on so long.
So, I’ve shown that both you can’t pay $15 per hour to all workers out of profits and you can’t pay it by reducing executive salaries – the money just isn’t there. I’m not the only one who can do math, so why all the calls for $15 per hour wages from people who should know better? Well, like the CEOs, union bosses get really rich by collecting just a little from each employee. If they can form a huge union and collect $0.48 from each employee, they could make $10,000,000 per year. The fact that many people would be laid off and others would not get a job at all would be of little concern to them because they would still make plenty of money and they would be putting themselves into a position of power. Likewise, other people use the issue as a way to get elected and gain money and power.
No matter how great you feel the need is, you just can’t defeat basic economics. You can’t have people, on average, producing $13 per hour worth of income and being paid $15 per hour. If you try, you’ll just have layoffs and real misery. The way to make more money is to produce more. It is as simple as that. Learn, develop skills, and be willing to step up and produce more for your company and your customers. That’s how you make a living wage and beyond. Then take that wage and start investing so that you too can have financial security.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.