The Case Against Minimum Wage Hike

Before you brand me as anti-labor, back off!

All across the country there’s a big movement, to increase minimum wage (MW) across the board. Several states have enacted laws to make a big jump – from 10% to 100% – spread  over the next few years. Unsurprisingly, California is at the forefront, with a schedule to raise it to $15.00 by 1/1/2022.

I understand the need to increase MW. I totally do. Wages haven’t kept pace with inflation over the years. The MW earners have the same right to basic needs as the rest of the world. All that is great. But there’s another side to this coin. Nobody wants to look at that side.

Let’s first see what industry the majority of MW earners belong to: Retail. Most retail is small business. Small business has been struggling for several years now, under onslaught from technology and eCommerce. The margins have shrunk exponentially in the 21st century. Most consumers do not notice it, because prices haven’t gone up commensurately. Business owners are loathe to increasing prices. It drives customers away. They would rather take a hit on the margin than raise product prices.

Case in point: Third-Party Delivery Vendors (TDV), like UberEATS or GrubHub. TDVs charge up to 30% commission on every order, from the business. Let’s say I am a restaurant owner selling a sandwich combo for $9.99. You come in for a takeout, pay $9.99+tax and leave. If you order that through a TDV, $3.00 goes to them. See the problem? I could raise my pricing on UberEATS. But will you pay $13.00 for that same sandwich combo that costs $9.99 in the store? Thought so!

How is this related to MW hike? Well, labor is a variable cost. Standard labor expenses in retail is between 30 and 35 percent. This, at a time when the Federal MW is $7.25. Increase that to $10 or $15, do the math and calculate the labor expenses for a business. It’ll make it impossible for small businesses to survive.

Now let’s look at your typical MW worker. Who is he or she? Why do they take up this retail job? What’s in it for them?

Traditionally, these were ‘stepping stone’ jobs. College students, looking to pay their living expenses working part time. People looking to learn a few skills and move up, make a life for themselves. Find a corporate job, start a business etc. The whole idea was that these jobs were temporary for the workers. Not many were interested in making a career out of these jobs. They didn’t come with any benefits. Unfortunately due to social, economic and political reasons these jobs have now become more permanent.

Most of the times these temp workers went on to take up a job at a manufacturing unit, thus setting themselves on a path to a career: shop floor technician to lead to manager to hopefully one day a plant manager, or even a corporate executive. Or, they went on to become retail managers, again setting themselves on a more stable career path within the industry. The decline in manufacturing in the US hurt MW workers dearly.

On the other hand, giant retail companies started offering benefits even for temporary and MW jobs, lulling the workforce into being quite happy working as a barista or a burger flipper.

I am not implying these jobs are any ‘smaller’. As a student at Cleveland State, I have been a busboy, a newspaper delivery person, a parking lot attendant, a clothing retail worker and some more. I know and understand the significance of these jobs.

Let’s now look at the other side of the counter. From our scenario before, if MW increases to $15 from the current $7.25, as a restaurant owner I am left with two options.

One, automation: To quote Mark Watney from The Martian, business owners will “science the shit out of this”. You’ll see automation from order taking to delivery systems. Requires tremendous initial investment but the equipment will pay itself off in a few years. Automation Industry 1, MW Workers 0. Game over! (Ever thought why big tech companies push for MW raise?)

Two, price increases. The business owner raises his prices by 10-25 percent to offset his costs. Problem is, his customers’ salaries won’t go up 10-25% over the same time period. As a result, discretionary spending is slowed/stopped. End result, the business closes down eventually. Oh, what happens to the MW workers when businesses shut down? My guess is they won’t have jobs.

Business owners understand the struggles of MW workers. They really do. They need to be involved in any far reaching regulation about wage increase. Their interests need to be taken into account. Somehow they are made out to be the villains in this. They are not. Work with them. Maybe lower taxes. Work with the landlords to lower their real estate taxes, thus enabling lower rents. It’s all about adjustment.

Any unilateral wage increase statue will only end up being a disaster for everyone.

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