San Francisco’s minimum wage hike to $15 an hour was followed by a slew of restaurant closures. (Photo: iStock Photos)
On July 12, 2017, Walter E. Williams writes on The Daily Signal:
There are political movements to push the federal minimum hourly wage to $15.
Raising the minimum wage has popular support among Americans. Their reasons include fighting poverty, preventing worker exploitation, and providing a living wage.
For the most part, the intentions behind the support for raising the minimum wage are decent. But when we evaluate public policy, the effect of the policy is far more important than intentions.
So let’s examine the effects of increases in minimum wages.
The average wage for a cashier is around $10 an hour, about $21,000 a year. That’s no great shakes, but it’s an honest job for full- or part-time workers and retirees wanting to earn some extra cash.
In anticipation of a $15-an-hour wage becoming federal law, many firms are beginning the automation process to economize on their labor usage.
Panera Bread, a counter-serve cafe chain, anticipates replacing most of its cashiers with kiosks. McDonald’s is rolling out self-service kiosks that allow customers to order and pay for their food without ever having to interact with a human.
Momentum Machines has developed a meat-flipping robot, which can turn out 360 hamburgers an hour. These and other measures are direct responses to rising labor costs and expectations of higher minimum wages.
Here’s my question to supporters of higher minimum wages: How compassionate is it to create legislation that destroys an earning opportunity?
Again, making $21,000 a year as a cashier is no great shakes, but it’s better than going on welfare, needing unemployment compensation, or idleness. Why would anybody work for $21,000 a year if he had a higher-paying alternative?
Obviously, the $21,000-a-year job is his best-known opportunity. How compassionate is it to call for a government policy that destroys a person’s best opportunity? I say it’s cruel.
San Francisco might give us some evidence for what a $15 minimum wage does.
According to the East Bay Times, about 60 restaurants around the Bay Area closed between September and January.
A recent study by Michael Luca of Harvard Business School and Dara Lee Luca of Mathematica Policy Research calculated that for every $1 hike in the minimum hourly wage, there is a 14 percent increase in the likelihood that a restaurant rated 3 1/2 stars on Yelp will go out of business.
Fresno Bee reporter Jeremy Bagott says that even some of San Francisco’s best restaurants fall prey to higher minimum wages. One saw its profit margins fall from 8.5 percent in 2012 to 1.5 percent by 2015.
Most restaurants are thought to require profit margins between 3 and 5 percent to survive.
Some think that it’s greed that motivates businessmen to seek substitutes for labor, such as kiosks, as wages rise. But don’t blame businessmen; just look in the mirror.
Suppose both McDonald’s and Burger King are faced with higher labor costs as a result of higher minimum wages. McDonald’s lowers its labor costs by installing kiosks and laying off workers, but Burger King decides to not automate but instead keep the same amount of labor.
To cover its higher labor costs, Burger King must charge higher prices for its meals, whereas McDonald’s gets by while charging lower prices.
Which restaurant do you think people will patronize? I’m guessing McDonald’s. What customers want is an important part of a company’s decision-making.
But there are other actors to whom companies are beholden. They are the companies’ investors, who are looking for returns on their investments.
If one company responds appropriately to higher labor costs, it will produce a higher investor return than one that does not.
That means “buy” signals for the stock of a company that responds properly and “sell” signals for the stock of one that does not, as well as possible outside takeover attempts for the latter.
The best way to help low-wage workers earn higher wages is to make them more productive, and that’s not accomplished simply by saying they are more productive by mandating higher wages.
Gary Reber Comments:
Professor of Economics Walter Williams nails it when he concludes an alternative to raising the minimum wage: “The best way to help low-wage workers earn higher wages is to make them more productive, and that’s not accomplished simply by saying they are more productive by mandating higher wages.”
But, as with virtually all articles that address economic inequality, Professor Williams puts forth no concrete policies or financial mechanisms to make people more productive. Virtually every article concludes with either raise the minimum wage or provide an Unconditional Basic Income.
What Professor Williams is pointing out, which should be obvious to anyone with common sense, a minimum wage increase is fundamentally a wage cost increase to business owners without increasing productivity on the part of the people employed.
For centuries technological change has make tools, machines, structures, and processes ever more productive while leaving human productiveness largely unchanged (our human abilities are limited by physical strength and brain power — and relatively constant). The technology industry is always changing, evolving and innovating. And as businesses are faced with increased costs and competitive forces to maintain competitive pricing of their goods, products and services, they are in constant search for solutions to lower their operational costs, which ultimately translates to employing the non-human means of production. The result is that primary distribution through the free market economy, whose distributive principle is “to each according to his production,” delivers progressively more market-sourced income to owners of productive capital and progressively less to workers who make their contribution through labor.
Furthermore, if businesses cannot offset increased costs outside of their control, the result is they raises prices, which results in inflation, and if they lose customers as a result, they face going out of business.
Unfortunately, those who are not business owners themselves say so what, what is a few cents or dollars more?
And while the price of goods, products and services produced by industries that employ low-wage workers isn’t completely determined by minimum-wage workers and what they make, other factors have to do with the cost of building or franchise leases, the cost of raw materials, transport and taxes and other non-human factors. And these other factors are under the same pressure to reduce costs. So, I think that people forget that full employment or paying above market pricing for labor is not an objective of businesses nor is conducting business statically in terms of geographical location. Companies strive to achieve cost efficiencies to maximize profits for the owners, at times, where profit margins are competitively low, thus keeping labor input and other costs at a minimum. They strive to minimize marginal costs, the cost of producing an additional unit of a good, product or service once a business has its fixed costs in place, in order to stay competitive with other companies racing to stay competitive through technological invention and innovation. Reducing marginal costs enables businesses to increase profits, offer goods, products and services at a lower price (which people as consumers seek), or both. Increasingly, new technologies are enabling companies to achieve near-zero cost growth without having to hire people. Thus, private sector job creation in numbers that match the pool of people willing and able to work is constantly being eroded by physical productive capital’s ever increasing role.
The result is that the price of products and services are extremely competitive as consumers will always seek the lowest cost/quality/performance alternative, and thus for-profit companies are constantly competing with each other (on a local, national and global scale) for attracting “customers with money” to purchase their good, products or services in order to generate profits and thus return on investment (ROI).
Over the past century there has been an ever-accelerating shift to productive capital (efficient use of land, structures, mechanism, automation, robotics, computerization, etc.) — which reflects tectonic shifts in the technologies of production. The mixture of labor worker input and capital worker input has been rapidly changing at an exponential rate of increase for over 239 years in step with the Industrial Revolution (starting in 1776) and had even been changing long before that with man’s discovery and use of the first tools, but at a much slower rate. Up until the close of the nineteenth century, the United States remained a working democracy, with the production of goods, products and services dependent on labor worker input. When the American Industrial Revolution began and subsequent technological advances amplified the productive power of non-human capital, plutocratic finance channeled its ownership into fewer and fewer hands, as we continue to witness today, resulting in government by the wealthy evidenced at all levels.
People invented “tools” to reduce toil, enable otherwise impossible production, create new highly automated industries, and significantly change the way in which goods, products and services are produced from labor intensive to capital intensive — the core function of technological invention and innovation. The reality is that most changes in the productive capacity of the world since the beginning of the Industrial Revolution can be attributed to technological improvements in our capital assets, and a relatively diminishing proportion to human labor. Productive capital does not “enhance” labor productivity (labor’s ability to produce economic goods). In fact, the opposite is true. It makes many forms of labor unnecessary. Because of this undeniable fact, binary economist Louis Kelso asserted more than 60 years ago that, “free-market forces no longer establish the ‘value’ of labor. Instead, the price of labor is artificially elevated by government through minimum wage legislation, overtime laws, and collective bargaining legislation or by government employment and government subsidization of private employment solely to increase consumer income.”
At some point, hopefully people will wake up and grasp the wisdom (today’s word for yesterday’s common sense) of what the late labor statesman Walter Reuther pointed out half a century ago in his testimony before the Joint Economic Committee of Congress, February 20, 1967:
“The breakdown in collective bargaining in recent years is due to the difficulty of labor and management trying to equate the relative equity of the worker and the stockholder and the consumer in advance of the facts. . . . If the workers get too much, then the argument is that that triggers inflationary pressures, and the counter argument is that if they don’t get their equity, then we have a recession because of inadequate purchasing power. We believe this approach (progress sharing) is a rational approach because you cooperate in creating the abundance that makes the progress possible, and then you share that progress after the fact, and not before the fact. Profit sharing would resolve the conflict between management apprehensions and worker expectations on the basis of solid economic facts as they materialize rather than on the basis of speculation as to what the future might hold. . . . If the workers had definite assurance of equitable shares in the profits of the corporations that employ them, they would see less need to seek an equitable balance between their gains and soaring profits through augmented increases in basic wage rates. This would be a desirable result from the standpoint of stabilization policy because profit sharing does not increase costs. Since profits are a residual, after all costs have been met, and since their size is not determinable until after customers have paid the prices charged for the firm’s products, profit sharing as such cannot be said to have any inflationary impact upon costs and prices. . . . Profit sharing in the form of stock distributions to workers would help to democratize the ownership of America’s vast corporate wealth.”
Louis Kelso’s Employee Stock Ownership Plan (ESOP) was one step on the path Reuther laid out. Capital Homesteading is another. Perhaps it’s time world leaders took economic reality and common sense into account. . . .
Instead of engaging in inflationary bandaids and capping earnings of workers by solely focusing on wage levels, the logical answers are to think outside the one-factor LABOR/WAGE box and begin to think how to make EVERY citizen PRODUCTIVE through OWNING interests in the corporations growing the economy and employing fewer and fewer people. To acquire OWNERSHIP, financial mechanism are needed to provide interest-free capital credit without the requirement of “past savings” (loan default security), repayable out of the future earnings of the investments in our economy’s growth and the building of a future economy that can support quality, affluent living standards. How to solve the “past savings” security collateral problem to make good on the relatively few bad loans that are inevitable, is to insure banks against such risks using commercial capital credit insurance and reinsurance (ala the Federal Housing Administration concept).
Researchers should start with this proposal and study its impact.
For how to make EVERY citizen PRODUCTIVE see my article “What Is Needed To Resolve The Destruction Of American Jobs Problem?” published by The Huffington Post at http://www.huffingtonpost.com/entry/593adb89e4b0b65670e569e9.
Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice.
Support the Capital Homestead Act (aka Economic Democracy Act) at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/.