In the End, Economics Wins Out


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A few years ago there were rallying calls of “Fight for fifteen!” The idea was that the minimum wage should be raised to $15 per hour so that anyone working any job could make enough to afford the basic necessities of shelter, food, clothing, etc… for a typical family. Advocates said that corporations could just pay more and all would be better. Well, now we’ve seen wages increase where a lot of places are paying $15 per hour or more for entry level workers. What has been the result?

Back in 2018, an entry-level fast food worker made about $10 per hour. A typical meal at his restaurant at the time was about $7, so he could buy about 1.5 meals per hour with his wages. Today, entry level workers make $13 to $15 per hour. But a meal at his restaurant runs $10 to $12, so he can still only afford to buy about 1.5 meals per hour. His wage has indeed increased, but the cost of everything else has also increased, meaning that he has no additional spending power compared to where he was before.

But it actually gets worse for two reasons. The first is that to try to keep costs down, restaurants are investing more in technology like apps and ordering kiosks, making things a lot more self-serve. This means there will soon be fewer entry level jobs than there were, so while you may get paid more if you find a job, they won’t be as easy to find as they were in the past. This will mean getting that first job so that you can gain experience and move up to a better job will be more and more difficult, trapping people in poverty.

The other thing that is happening is that while the entry level worker may be getting paid more, at least numerically, the people in jobs beyond entry level that have traditionally been paid more are not. Eventually they should see their salaries increase as well, but right now bosses are trying to keep their costs down to make up for the higher cost of goods and entry level work by limiting raises to their salaried workers. These workers will eventually see bigger raises to make up for the loss in spending power at their current job if enough people start leaving (or if their bosses realize that they’ll lose people if they don’t pay more to cover inflation), but this will take at least a year or two.

In the meantime, their salaries may increase by a few percent this year, but they’ll effectively be making 5-8% less than they were last year in terms of spending power. So, someone making $80,000 would need $88,000 to just have the same spending power as last year, but they’ll only be getting maybe $82,000. This means they’ll need to cut back on their spending until their salary finally gets raised enough to make up for the loss in their spending power. And where are they most likely to cut back spending? Going out to eat or swinging by the drive-thru for a coffee or a snack. This means restaurants will make less money and need to cut costs or close outright. That means fewer shifts for entry-level workers. That means you may lose your job and have no salary instead of $10 per hour.

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Raising minimum wages will never work

Entry level jobs were designed for people new to the workforce to learn skills and get the experience needed to move up into a better job. People in these jobs would be teenagers or young adults still living at home, or maybe single adults living with roommates or just renting a room. A person will never make enough at an entry level job to cover things like a house, a family, health insurance, and other aspects of a full adult life. These are jobs you take for a while and then move through, either through experience gained or by improving your skills in college or a trade school.

Unfortunately there are people who end up stuck in these jobs. Sometimes this is because they just never moved up because they weren’t looking for the next better job and were not seeking out the training they needed for the better job. Other times they find themselves needing to go back into the workforce later in life after being out of the workforce for a long period of time due to loss of a breadwinner or other circumstance. It would be great if these jobs could be made to pay more and become jobs people could keep their whole lives and raise a family with, but that would defy the law of economics where people trade their labor for what they see as fair trades. Requiring people to just pay more for minimum wage work would force them to trade their labor for less than they provide.

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Think of it this way: if someone were holding a $10 bill, would you trade $20 for it unless there were something really special about that $10 bill? Would you babysit for 8 hours in exchange for someone watching your kid for five hours? Would you provide lunch for someone for five days in exchange for them providing an equivalent lunch for four days? You wouldn’t do any of these things as long as there are enough people out there to trade with for you to find someone who would give you an amount at least equal to what you were trading them. You might do it occasionally for charity, but if you were forced to trade that way, you’d stop working as hard because you would see your labor stolen from you if you did.

Through the free enterprise system, people have placed a value on things like a fast food meal. If they needed to pay significantly more for that meal, which means that they would need to spend more time providing the goods and services they provide in exchange for that meal, at some point they would either not get the meal or go somewhere else that was charging less. If everyone were charging more, they would change their habits and bring food from home or just go without the meal. Maybe they’d get something from the vending machine. You might be able to raise prices and make it work for a short period of time, but people would quickly decide it wasn’t worth it and cut back or change their habits on how they eat entirely.

In the end, there would be fewer of those jobs since fewer people would buy them at the unfair prices. Management would need to provide the service with fewer people to keep prices for the meals from rising to the point where they lose customers, so they would cut jobs. This does not help out people who need these jobs for a family. No matter how much you want to, you can’t just raise the minimum wage and expect people to actually make more in terms of spending power. You’ll see fewer jobs or inflation to the point where the spending power of the people you’re trying to help remains the same.

Can’t you dip into company profits?

Often advocates will look at the profits of a large company like McDonald’s and say, “This company made $2B in profits last year. They could just take a lessor profit and pay workers more. Maybe they could become non-profit and just pay everything to the workers.” Again, this idea defies economic laws and will therefore fail.

Any company exists because the owners make a large enough profit to justify their investment in terms of money and time. Think about opening a restaurant. Let’s say you do so and you invest $200,000 to buy equipment, remodel the space, buy tables, chairs, dishes, silverware, etc… and buy initial food, power, and water. Let’s then say that you as an owner spend 80 hours per week at the restaurant managing staff, doing all of the extra jobs that no one does or workers fail to do, and doing payroll, ordering, paying bills, making improvements, etc….

If you had just invested the $200,000 in the stock market, you could average about $20,000 per year in returns. You could have also gotten a regular job and probably made at least $60,000 per year in salary for performing the same sort of work. This means that it would make no sense to go through all of the trouble of opening and maintaining the business unless you could make at least $80,000 per year. (Note, this would be less that $15 per hour since you would be working so many hours, so your servers would be making more than you did to start out at current wages.) You might do with a lot less in the beginning because you’d know it takes time to get a business going (many owners make nothing for a few years), but you would close down eventually if it looked like you were not going to see at least this amount in take-home pay. Really you want to see the business become very successful and be able to make $150,000, $200,000, or more per year. You would also want to be able to cut back your hours after a while and not work 80 hour weeks your whole life.

Unless people who start businesses and are successful make a large enough profit to take the risks and spend their time, there would not be any businesses for people to go to for entry-level jobs, so there would be no jobs available. The same thing happens with big companies. Here you have shareholders who invest their money for a share of the profit. The share of the profit they get must be large enough to justify their investment, otherwise, they’d put their money elsewhere like rental buildings or just spend it. This profit level is also set by free enterprise, meaning they are already at the minimum acceptable level. Historically it has been about 7% after inflation, which is very reasonable given the risks you are taking. If they were taking unreasonable profits by underpayng workers or overcharging customers, another company would either hire all of their workers away or undercut their prices and drive the company out of business. That’s the beauty of competition.

If you tried to take some of these profits to raise wages, the amount of return investors could get would dry up, so they would stop investing. When this happened there would not be enough money available to start as many businesses and those that existed would have trouble expanding and improving. Once again, this means fewer entry-level jobs. You would also quickly find if you did try just distributing profits that even if a large company has large profits, the profit per employee isn’t that much since they have lots of employees. So, you might be able to raise wages by a dollar or two if you took the entire profit (which would end investment in the business), but you wouldn’t be able to raise wages by enough for people to cover a family.

Can you cut executive pay?

As a shareholder, I believe many executive pay packages are absurd. I think you could find people to run a company for $1M or less per year. Maybe even $500,000. I also don’t see why a company needs to provide perks like use a the company jet, company cars, mansions, etc… to people already making millions of dollars per year. I really think there are lots of people who would perform just as well who would be willing to take a lot less.

But this is really between the shareholders and the board of directors and has nothing to do with hourly worker pay. Just because a CEO makes way too much doesn’t mean you could just cut their salary and pay entry-level workers a lot more. The issue is that there are way too many entry-level workers per executive, so the difference would be maybe a dollar an hour (probably far less) even if you cut CEO pay to nothing and directed that money to entry-level salaries.

So, what is the answer?

Think about what you’re saying in expecting someone making an entry level wage to pay for a family and a full, middle-class life with that salary. You’re expecting someone to be able to just work 40 hours per week standing at a counter or over a grill and in exchange for them to receive the mortgage on a home, power, water, sewer, cell phones for everyone, a car, car maintenance, care and home insurance, medical insurance and medical care, food, school fees and costs, and everything else that comes with owning a home and a car. Do you really feel that the amount of effort that someone puts forth in an entry level job is worth all that? Think of the amount of effort it would require them to provide all of those things on their own if they were pioneers and isolated. They would work a lot harder and for a lot more than 40 hours.

When people are trading their services for the things they need, the amount of effort they put forth and/or the value of the goods and services they are providing needs to be equivalent or the economic laws are violated. Would you give someone all of these things, a package of goods probably worth on the order of $6,000 to $8,000 per month, in exchage for standing at a counter, taking orders for 40 hours per week? You would rightly think that you could find someone to do the same job for far less since the amount of skill and training required is very small. Most people coming off the street could perform the job with only a few hours of training.

Now, if someone had the ability to fix your drains when they were clogged or build a house for you, that would be far more valuable. So would someone who was able to perform surgery to save your life or just know what prescription drugs would help you recover from an illness. If someone provided those kinds of services for 40 hours a week, that would be worth at least $6000 to $8000 worth of goods and services to you. Of course, they wouldn’t do all of these things for you in particular since it is unlikely you’d have 40 hours per week worth of work for them, but they would provide them for a large number of people, each of which would pay them a portion of their monthly income. One answer is therefore to learn to do something that will provide the income you need for your necessities and luxuries you desire.

Another possibility is to save up some of your income and invest it. By delaying your use of some of the work you performed in the past, you allow services to be provided to others. In exchange, you get a portion of the goods and services they provide. This extra income is in proportion to the amount of money you invest because the more you invest, the more people you are helping. It usually starts out small, but if you regularly spend less than you make and put some money away, you can get to the point where your investments can provide enough income to cover a middle class lifestyle. For most people, this doesn’t happen until retirement (if even then), but it can happen far sooner if you learn skills to make more than minimum wage and you put money away regularly and invest it correctly. I cover how to do this in detail in FIREd by Fifty, where being FIREd means Financially Independent, Retired Early. It is the “how to” manual for replacing your income with investment income and being able to go without a job by the time you are in your mid-forties to early fifties.

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(For ways to increase your free cash flow and use it to build wealth, check out FIREd by Fifty, How to Generate the Cash Flow You Need to Retire Early.) Y.

To ask a question, email  smallivy@smallivy.com or leave the question in a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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