Saturday, February 28, 2015

The Panic Over $15 Per Hour

The following article came across our desk this afternoon:

SEATTLE’S MINIMUM WAGE CRASH: $15 to ZERO! Profits Tumble!

I wanted to take this opportunity to look a little more closely at the issue, and refute some of the points made in that piece.

To start, it is not surprising that profits will take a hit from any wage increase. After all, the money to pay workers has to come from somewhere. Right? But ask yourself this question. Should you, the taxpayer be the one paying for the labor costs of a private company? Or should that private company, in business to turn a profit, be paying their own labor costs?

Even in the era of slavery, the business owners were responsible for maintaining the basic needs of their labor force. This included food, shelter, clothing, and even medical care for the sick and injured. Contrary to the popular notion of slaves being disposable and abused on a whim, slaves were actually a valued commodity. This is not to say that abuse did not happen, or that slaves lived a good life by any means, but at the same time they were an expensive component to the enterprises for which they labored. The purchase value of a slave at auction might be compared to the cost of a new work truck in the modern day, and then all the additional expenses to maintain that "equipment" for the duration of service.

Whether through charity or taxpayer supported welfare subsidies, should you be paying the expenses for private businesses? It is my position that employers should be mandated to pay a wage which is sufficient for a worker to maintain their own basic necessities (or have those necessities provided directly by the employer.) Taxpayers should not have to pay to feed the workers of a private company any more than we should be expected to pay for the fuel in their trucks, or the mortgage on their building. And just like gasoline has a price tag, so too should the cost of labor.

How do we set the price for labor in America? Well, here is one good example of how it could be done:

Analyzing a Practical Minimum Wage

Business should pay their own actual labor costs, not the taxpayers, and not charities. If it costs "X" amount of dollars for a person to subsist, that is, to get by with the basic necessities of life in modern America, then employers should be mandated to pay "X" amount of dollars, broken down hourly. Socialized labor is not the answer to our economic woes. Mandating a living wage is essential for true capitalism to thrive.


In short, yes, profits will take a hit. As they should. Just like business profits will take a hit here in the Hudson Valley when Central-Hudson raises their rates on electric soon. A business expenses should be drawn from their own profits, not from the wallets of taxpayers.

Now we will dig into the article itself, starting with this excerpt:

According to the National Review Hotline, Kathrina Tugadi owner of Seattle’s El Norte Lounge, no longer hires musicians for her restaurant, she said she can’t justify expenses that don’t directly “add to the bottom line.”

What concern is that of mine whether or not she hires musicians for her restaurant? Is she in show business, or the restaurant business? Now granted, it's nice for musicians to get work wherever they can find it, but eateries are hardly the backbone of the music industry. If she was not getting some value from those musicians to begin with, it was already a poor business choice to be hiring them in the first place. A waste of money. Is she a charity contributing to starving artists, or a business? No savvy entrepreneur pays for workers they don't need. And to cut workers you do need, only lowers reduces your customer service standards, while doing a favor for your competitors.  

She likely hired those musicians to provide a certain ambiance, and to draw in customers who would pay to eat there, while enjoying the band. So by eliminating the musicians, she is slashing service to her customers, and eliminating an entire demographic from her customer base because it doesn't add "directly" to her bottom line. Many of her customers may have been there for the music as much, maybe even more than the food itself. This is a classic example of the old "penny wise and a pound foolish" that we often see in debates regarding wage hikes. Or the old "cut off your nose to spite your face" routine.

It sounds like maybe the musicians really were the only thing keeping her business alive in the first place, as the article continues:

And, she says, hours will have to be cut: El Norte Lounge plans to stop serving lunch and only serve dinner.

Don't blame a wage hike for the fact that your restaurant doesn't know how to turn a profit on the lunch crowd, and don't expect taxpayers to subsidize your failing business model. If she can't afford to open for lunch and can't afford a band now, then it was only inevitable that those cuts would have been made soon anyway, with or without a wage hike, as she struggles to keep a failing business afloat in an economy where inflation is ever-present for any and all business costs. The article then goes on to say that she may not even be able to stay in business at all.

So in other words, this article is citing a failing business, with a flawed business model, as a reason why workers should not be paid a living wage. It's time to sort the wheat from the chaff. It sounds to me, like her business is already dead, and she just didn't know it yet. Life-support by way of artificially depressed wage standards is not the answer to create a thriving business.

Business doesn't make money based on what it can save, or shave off from their expense budget. It doesn't make money by passing along costs to taxpayers or consumers. A business makes money by bringing in people through the front door. Which clearly she is not interested in if she is firing the band that draws customers, and closing her doors in customers faces.


Now the article brings up another form of job loss, thus:

Even Pagliacci Pizza, a Seattle-area pizza chain, is considering moving its call center and some of its production facilities outside the city. That’s a lot of job loss, a lot of new people with a new wage of ZERO.

This is also nothing new. Companies have been moving out of cities, out of states, and right out of the country in order to streamline their costs for as long as I can remember. Should we all be paid a dollar a day, eat nothing but ramen, and live in a cage like a Chinaman because a business doesn't want to invest in their own community? If you want to outsource your labor, fine, go invest in some third-world hell hole, but don't let the door hit you in the ass. If I lived in Seattle, that pizza chain would never get another dollar of my business after such a move. Especially now if I was one of those workers they just laid off and didn't have the dollar to spend even if I wanted to thanks to their poor business savvy.

This pizza company is using the same bad business ideas as the small independent restaurant owner. Divestment is not good business. Whether you decide to pull the plug on the band or pull the pizza dough from out of town, this is just another threat that is actually bad business. Shutting down their call center and production means closing the door on all those workers as customers, with a rippling effect throughout the economy of the city that will only circle around in the long run to shrink their own sales rather than actually grow their business like true capitalists.

The author of that article goes on to proclaim:

Do our politicians really not understand that our standard of living is the direct result
of one thing . . . the vitality of our businesses?

And do business not understand that their vitality is based solely on consumers, rather than what they can "save" on the payroll account? This is a concept the author of this article does not seem to understand when he goes on to say:

Where do you think every paycheck every employee has ever received came from?

Yes, Kshama, they came from business, all of them. And where do you think these businesses came from? They came from regular people like you and I who took a chance, rolled the dice, worked hard and were able to provide the people with something of value. All of them, that is where every single business you deplore came from.

Talk about an inflated sense of self-worth. I see this too often with business owners. But as a matter of fact, no actually, every single business came from the consumers who decided that decided that entrepreneur had something of value to offer. The business owner does not print money. Gambling is not a good business model, and frankly a good business owner should not have to work hard at all if they have a good business model and a good product or service to offer. That is not to disparage the value of hard work in growing your business, but if you are relying on brute force to squeeze a few dollars out of the market, you might as well go pick up a gun and start poking it in people's backs. Which is essentially what many business owners are doing, by forcing taxpayers to feed and shelter their workers.

I have been a small business owner myself. And yes, I always looked for ways to do things cheaper, and more efficiently in order to maximize profits. But at the end of the day, it didn't matter how savvy I was with the books or how many hours I put in at the office, the viability of my business came down to consumers. No customers, no money. Which means you could be paying zero dollars per hour, and still wind up being forced to close up shop for good. If no one in that city has a job, if no one in that city can afford to go out for a bite to eat, if everyone is buying all of their food on their SNAP card because they are paid little or nothing, you no longer have a customer base. Time to close your doors, thanks to your own divestment and poor business choices.

What makes an economy hum? Two words. Market liquidity. This means that all the businesses in town are paying all of their workers well enough to actually participate in the economy. The more people you have participating, the more customers you have, more frequently, and with more money to spend at each visit. I pay my workers enough to buy the products I am paying them to sell, and pay them enough to afford the product you are selling too. You do the same, and the workers at your pizza shop are coming to visit my movie theater. Round and round it goes, and suddenly we see a thriving economy buzzing with consumer spending. Divestment, does just the opposite. Might as well throw sand down the engine block.

In debates on the topic, I often see people arguing that wage increases drive inflation. That higher wages will simply mean higher prices. This is actually completely untrue, and all historical data shows the exact opposite. Citing again the Analyzing a Practical Minimum Wage article:

Using data by the U.S. BLS, the average productivity per American worker has increased 400% since 1950. One way to look at that is that it should only take one-quarter the work hours, or 11 hours per week, to afford the same standard of living as a worker in 1950 (or our standard of living should be 4 times higher). Is that the case? Obviously not. Someone is profiting, it’s just not the average American worker.

Based on consumption growth since 1968, the minimum wage today would have to be $25.05 to represent the same share of the country's total consumption. Based on national income growth, the minimum wage should be $22.08. Based on personal income growth, it should be $21.16.

After adjusting for inflation, minimum wage workers today are paid about 26 percent less than they were in 1974.

At the top 1 percent of the American income distribution, average incomes rose 194 percent between 1974 and 2011. Had U.S. minimum wages risen at the same pace as U.S. maximum wages, the minimum wage would now be $26.96 an hour.

What do facts matter though to knee-jerk reactionaries, bad businesspeople, the politicized and the ignorant? The article we are examining cites a poll by the Seattle Times saying of businesses:

60 percent planned to pass on what they could to customers through higher prices.

If a business can charge more, they will use any excuse in the book to do it. Just like a business doesn't hire workers they don't actually need, they also don't sell you a better product at a lower cost out of some sense of charity or good will. The market value of a product is what it is. The consumer really could not care less about a business owner whining about their expenses, and in fact will be put off by it. You raise your prices beyond the market value of your product or service, you add a surcharge to your diners' checks, you might as well fly a banner out front that reads "Going out of business soon because I suck at it." So what that poll tells me, is that 60% of the businesses polled, do not have a viable business model. Either they were foolishly charging less and not making hay while the sun was shining so to speak, or they make their business decisions based on panic and a deluded sense of self-worth.



We touched on this point already once, but we will hit it again, with the article saying:

In Seattle, 42 percent of surveyed employers were “very likely” to reduce the number of employees per shift or overall staffing levels as a direct consequence of the law. Similarly, 44 percent reported that they were “very likely” to scale back on employees’ hours to help offset the increased cost of the law.

So again, as I said above, these business are penny wise but a pound foolish. Either they were paying for workers they did not need in the first place, or they will now be giving inferior service and driving their customers toward the majority of Seattle business who were not stupid enough to make either mistake.

Don't put off your poor business decisions onto the backs of your workers or the taxpayers.

At this point, let me say that I am not insensitive to the needs of small business. I believe that wage hikes should impact larger businesses first, with more than 100 employees, while allowing small business a little more time to adjust to the new market. Unfortunately, that is something we never see with minimum wage increases. It doesn't matter if you are a multi-national with hundreds of thousands of workers, or if you have a kiosk at the mall with 3 employees. All business is expected to adjust at the same time. This dynamic puts small business at a distinct disadvantage to larger companies who can much more easily absorb any new added business expense, whether it be labor, increases in utility costs, etc. Generally speaking, I would say that small business should be given an extra six months to adjust to and wage hike mandates. But short of that, this country has to get with the program of a living wage.

Today, half of all people on welfare have a job. That is pure insanity. Work has been a mandate for assistance since 1996. There is no reason in the world why a person who gets up and goes to work everyday should still be forced beg for a handout in order to put food on the table that night. It is bad for our country morally, and it is bad for our country economically. Feeding the profits of companies like Wal-Mart with foodstamps is bad business for everyone, except the Walton family who run Wal-Mart, and control more wealth than the bottom 40% of all Americans combined. By putting labor costs where it belongs, on the expense reports for the businesses which profit from that labor, we could cut welfare in half, right now, today.

American labor should be contributing to the vitality of our economy, not putting us further in debt.



- J. Marcellus VanWagner

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