October 22, 2015

Presidential campaigns mean we are subjected to a variety of economic “facts” and statistics. If positions become policy and law, many of these will have effects on your business. We have some thoughts on all this, and we hope you will contribute yours.

Ever since the “Occupy Wall Street” movement of a couple of years ago we’ve heard a great deal about the minimum wage and income inequality. There are some who believe a major increase in the minimum wage is an important weapon in the inequality battle. Increasing the progressivity of the income tax is another such weapon. Major changes to the tax system are proposed by others.

Other than the obvious fact that our income (revenue) situation is improved when you give us an opportunity to demonstrate value, we do not advocate any particular position in these matters—at least publicly. However, we can present some information that you will hopefully find thought provoking. We also hope you will contribute to our blog in the comments.

The federal minimum wage is currently $7.25, and many states have a higher rate (https://www.ncsl.org/research/labor-and-employment/state-minimum-wage-chart.aspx). There appears to be some momentum to establish a $15/hour rate, which some claim is an important weapon in improving the economy and improving income inequality. We know many small manufacturers, and a very large increase in the minimum wage will have some effects. Here are some we can identify:

  • Many hourly wage structures are built with specific gaps between the various wage levels. In general, these gaps exist to incentivize people to move up. Each wage level usually entails more valuable responsibilities. Therefore, a big increase at the bottom will cause a significant upward ripple effect throughout the entire hourly wage structure.
  • As the cost of labor increases, increased use of automation (to replace labor) is more easily cost-justified.
  • If the increase is large and abrupt, surely this will reduce the number of minimum wage jobs available, unless the marginal companies can find savings in other areas. It would seem unlikely that all will be successful. Thus, we wonder if the post-increase total dollar labor spending will be more or less than before. Or, will FICA receipts be greater or less than before?
  • Firms with significant labor costs will obviously be squeezed.   There is no force that will decrease costs, so the price of manufactured goods must increase. This cannot be all good, especially where cheaper labor foreign competition is involved.
  • If it turns out that a large and abrupt increase in the minimum wage causes a noticeable drop in employment, it will obviously not help income inequality. In fact, it could increase inequality by creating more folks at the bottom—those that lose jobs due to the minimum wage increase. Both sides of this issue have considerable supporting documentation.

An interesting example is the Seattle experience. There, the minimum wage was rapidly increased to $15/hour in 2014. In March, 2015, there were articles in Forbes that dealt with the effects of this change in the restaurant business. Although the results were difficult to quantify precisely, it appears there was evidence of some job loss and an increase in restaurant prices.

The restaurant business is all local. Foreign competition is not a factor, nor is there effective competition beyond a relatively small distance. So while this means there are fewer variables, it is difficult to distill the consequences of a single factor from the “clutter” or other things, like the overall economy. Nonetheless, here is the first such article:   https://www.forbes.com/sites/timworstall/2014/06/03/we-can-predict-the-effects-of-seattles-15-an-hour-minimum-wage/

In manufacturing we will find wages probably above the minimum wage level. This does not mean a minimum wage will not have much impact. To the extent overall wages are influenced by an abrupt and significant rise at the bottom, manufacturing costs will be affected. Because there is global competition in many cases, the implications could be profound.

Please let us know your opinion on all this. If we can find some interest, we will address other business-related economic issues in the future.

About the author 

Charlie Harte

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