As liberal ideas go, the minimum wage sounds (on the surface) better than most. We have all been told that it protects those working at the bottom of the work ladder, without influencing the wages of the more experienced workers. All minimum wage does is ensure that manual labourers, new immigrants, and those without a high-school education are able to provide some level of support for a family. The assumption our society has accepted is that living on a minimum wage income won’t be comfortable, but it is possible. Liberal academics [read: Socialists] argue that we need a living wage — a wage that enable people to live at least a middle class lifestyle, as the minimum wage.
And if we accept the premise that raising the minimum wage has no consequences, they’re right.
Today, I’ll show you the impact that the minimum wage has on employment, and the direct correlation between a high minimum wage and unemployment.
Let’s begin with recent history of the minimum wage in British Columbia, Canada (That’s where I live, so it’s where I have the most familiarity. The same principles apply to any society with a minimum wage).
In March 2011, British Columbia released a structured plan to raise the minimum wage from $8.75/hr to 10.25/hr by May 2012. Christy Clark, the Premier of BC (the Canadian equivalent to a governor), said her reasoning for raising the minimum wage was “Wages for workers must keep pace with the challenges average British Columbians face”. Again, to most people’s first look, this makes sense. If people aren’t able to afford to live somewhere with a minimum wage, you simply raise it. Problem solved, right?
However. Once you look at it with an eye to how economies work; it begins to fall apart.
Think of it this way, using the hypothetical Company A as an example.
Company A has 100 full time workers. As they are the most EVIL business around, literally every worker makes minimum wage, and cannot make more. (For the purposes of this example, I will use $8.75 as minimum wage)
Let’s say they have a profit margin of 30%, similar to that of McDonalds.
Let’s say Labour Costs are 30% of their total expenses, similar to McDonalds.
Accepting these numbers, the company has gross annual revenues of just over $6 million. [A]
Now. Let’s raise the minimum wage to $10.25, and see how that affects the company.
Profit margin shifts from 30% to 25%, as labour costs increase from 30% to 35% of revenues. Now, you may be saying that a 25% profit margin isn’t bad; and you’re right.
Scenario A: You are a massive corporation like McDonalds, and these are the numbers from one of your many stores. Profits drop 5%. Does your stock price stay up? Does it rise at the rate you want? Do you raise prices on your goods in order to make up the shortfall? Do you lay off employees? No matter which option is chosen; even with the most understanding shareholders around, the company cannot grow at the same rate.
In fact, by having 5% more of your total revenue tied up in labour, you’re slowing the growth of the company by 16.67%. [B] (As you can only grow a company using profits. The rest of the money is tied up in running the business.)
Scenario A isn’t a death blow, but it is ethanol fuel in the engine of economic growth (i.e. it degrades it, and runs less efficiently).
Scenario B: You are not a huge corporation with massive buying power. You are a new start-up, a growing independent business. Replace the 30% profit margin with say…15% (Which is still more than Exxon Mobil).
Your profit is all the money you, the small business owner, make. The government raises the minimum wage, and you now lose 33% of your income. That income goes to expanding your product’s reach, growing your company, paying back any debt you incurred when starting the company, keeping shareholders happy (if you’ve gone public), keeping the Board of Directors happy, and keeping you and family living comfortably.
Again, in Scenario B, the company doesn’t die. It survives. But maybe you can’t open that second store. Or the third.
Scenario C: You are a small business that is barely scraping by. Your profit margin is 8%. You lose. You lose everything.
Now look at the entire economy. Any business that is hiring people for their first job has their labour costs increase by 17%. [C]
I’m not even going to get into the ‘argumentum ad absurdum’ portion of this issue (i.e. If raising the minimum wage is good, and doesn’t hurt businesses, why isn’t the minimum $15 an hour? Why not $45 an hour? Why not $1,000 an hour?)
When you increase the cost of operation, in any sense; either prices go up, or growth goes down.
Raising the minimum wage will stifle the engine of economic growth that is capitalism.
Any questions, leave me a comment. I’ll do my best to answer it.
A: 8.75/hr * 40 hours per week * 52 weeks a year * 100 workers = $1,820,000
$1,820,000 / 30% = $6,066,666
B: Total Revenue of $6,066,666 * 30% = $1,820,000
Total Revenue of $6,066,666 * 25% = $1,516,667
$1,820,000 – $1,516,667 = $303,333
$303,333 = 16.67% of $1,820,000
C: 8.75 * 1.17 = 10.23 (close enough)
Luke Stibbs // University of the Fraser Valley // @LukeStibbs