California has just passed into law a minimum wage of $15 per hour to be phased in over the next 5 years. This increase will be paid for by either the business, the customer, or the government (taxpayer). California calculates the cost of this increase to the state budget alone at $3.6 billion. New York has passed similar legislation.
Nevada’s current minimum wage is $7.25 or $8.25 without certain benefits. But it could go up if a potential ballot measure passes this fall.
Raising the minimum wage may sound like a good idea, but here’s why it’s not:
A government set minimum wage is counterproductive to a free market capitalist economy. Wages should be set by the market, supply and demand. Government set wages create serious consequences, such as higher prices for goods and services, and can actually increase the number of unemployed people due to layoffs. When the market sets wage rates they are sustainable. The market can support those wages. Government dictated wage rates are not sustainable nor based on any logical indicator.
Minimum wages are for entry level jobs, jobs that can lead to better paying opportunities. However, boosting those entry level wages to $15 an hour doesn’t just affect those jobs, there’s a ripple effect. If job level 1 is $8 per hour then job level 2 might be $10, level 3 might be $12, and level 4 might be $14, and so on. When the entry level wage is raised every other level must go up as well. Companies must raise the higher wages by appropriate amounts as well to keep the playing field fair and create incentives for employees to move into more responsible jobs. So when you take that into account the cost impact becomes dramatic.
Someone will have to pay for these wage increases. Local businesses most likely will pass on the cost to their customers, which means you and me. Few companies, if any locally, make enough profit to just absorb this large cost increase. A restaurant meal will go from $10 to $13 or more for lunch. Consumers will decide if the product or service is worth that increase.
Companies that export their products or services to another area or country with lower wage rates will be forced to absorb the increase, reduce the number of jobs (layoffs), or move to a lower rate area. Government most likely will pay the increase for health care workers through Medicare or Medicaid and for federal, state and local government workers. This means a significant portion of tax dollars will go toward employee pay rather than government provided services and projects like roads and other infrastructure.
A $15 per hour wage for a person will make labor saving machines more attractive to businesses. This will cost jobs.
Setting a universally the same minimum wage fails to account for differences in the cost of living. In San Francisco a $15 wage doesn’t go as far as it might in Julian. Wages must be determined by local market conditions.
This wage also will make us even less competitive with China, Mexico, Vietnam, etc. Manufacturing jobs, not only won’t come back, but more jobs will leave. A $15 minimum wage is in direct contradiction to bringing jobs back to America.
Let’s take an example of a fast food restaurant in Carson City.
20 people make $8.25; 17 people make $10; 15 people make $12; 4 people make $14; 1 person makes $24.
To keep the same wage structure, everyone would get raises of $6.75 per hour. This works out to an 82 percent increase in labor costs. Labor in this case is about 30 percent of total costs. The cost of a signature hamburger will have to be increased by 25 percent to recover those costs.
The owners’ alternatives are:
1. Pass that large increase onto customers, potentially losing sales; 2. Absorbing that cost which greatly exceeds annual profits; 3. Eliminating jobs potentially affecting service; 4. Buy labor saving devises, also eliminating jobs.
The impact on this business is dramatic.
Now let’s look at a manufacturing operation, which are important to our local economy.
1 plant manager makes $36 per hour; 1 office manager makes $25 per hour; 1 shipping receiving manager makes $17 per hour; 2 department supervisors make $15 per hour; 10 laborers make $15 per hour; 4 entry workers make $9 per hour.
Most everyone but the plant manager would have to get a 66 percent increase to maintain the wage scales. Maybe the office manager would get only a 30 percent increase. This would necessitate a 7 percent increase in product cost in a low profit margin business. This wouldn’t be sustainable if competitors are located in other areas or overseas where market labor rates are paid. Jobs will be eliminated to save money or the company would be forced to leave our state.
Let’s look at a hospital. If you think healthcare is expensive now, just wait. The increase in labor costs will be dramatic. Hospitals can’t absorb these kinds of cost increases. Medicare/Medicaid and insurance companies will have to pay more. Those increases will be passed on to us through insurance premium increases, so we will pay for it, even if we don’t use any hospital services.
Municipal government budgets will be affected in similar manners. Higher employee wages will result in fewer services or higher taxes.
A recent article by investors.com points out Labor Department statistics show job growth in cities that dramatically increased minimum wage has stalled.
In summary, while it seems like a good thing to do and will garner votes at the polls, a dramatic raise in the minimum wage will have a devastating effect on our manufacturing and other employment. It will not increase the quality of life for minimum wage workers because the cost of living, such as food, housing and healthcare will go up accordingly. Nothing is free.
Larry Messina is a Carson City resident.