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Who Pays For A Higher Minimum Wage?

protesters holding signs that read 'Strike For Higher Pay For A Stronger New York'
New York City protesters, July 2013. Photo by Annette Bernhardt.

None of my employees make the minimum wage, or anything close to it.

Even the person who answers the phones or runs to the post office makes at least $16 or $17 per hour to start, plus overtime, bonus and profit sharing, as long as they work full time. But there is a catch: You can’t get one of those full-time jobs at my company without a college degree.

At my company, we don’t have “unskilled” jobs. The person who answers the phone will also spend thousands of dollars of the company’s money booking travel, arranging conferences and ordering supplies. He or she is the face of the firm that we present to the outside world, so strong communication and interpersonal skills are essential. This administrative employee may even get involved in doing some financial analysis for the firm.

Because my standards, and wage scales, are this high, I don’t have any direct concerns about minimum wage legislation. The changes that are set to arrive in New York would not affect my business, even were those changes not confined to fast-food restaurant workers.

But I do take an interest in the minimum wage from a broader point of view: What happens to all those people out there who don’t have the strong skill sets I demand? They need to work someplace, but the value they can offer - at least at first - doesn’t command the sort of wage I pay, and the economics of the work they can do might not support it.

The minimum wage is an artificial constraint on the supply of, and demand for, labor. It restricts the supply of very cheap labor, as intended. But it also restricts the demand for labor that lacks the skills and value-added potential to warrant higher pay.

We are likely to see this play out in New York. A panel appointed by Gov. Andrew Cuomo voted last month to recommend a minimum wage increase for fast-food workers, raising the benchmark to $15 per hour in New York City by 2018, and in the rest of the state by 2021. As Ben Casselman of FiveThirtyEight observed, applying the new minimum wage statewide will likely have vastly different effects in upstate communities, where the cost of living is dramatically lower than it is in the five boroughs. Tim Worstall, a Forbes contributor, has predicted that the state’s new minimum wage will shift food service workers away from chains large enough to be subject to the rule and actually create more jobs at the lower pay scale smaller enterprises are still allowed to offer. Irene Tung, a policy researcher for the National Employment Law Project, suggested to The New York Times that the move will put other industries, such as retail, under pressure to compete for that pool of workers.

Consider a hypothetical example on a larger scale. Suppose, for argument’s sake, we established a national minimum wage of $25 per hour. Most people in most places would call that a “living wage,” which is what advocates of higher minimums often claim to want. Suddenly, the sort of administrative associate I hire at my company has another option: She can go work at Wal-Mart for $25 per hour. When my sharp, experienced, college-educated former employee goes up against an inexperienced worker with a GED for that Wal-Mart position, who do you think is going to get it? Hint: It won’t be the applicant with the GED. And Wal-Mart may expect my former employee to be so productive that it won’t need to hire both applicants, even if it has the budget to support them.

The myth is that bosses or owners pay for higher minimum wages through reduced earnings. That is almost entirely false. Bosses make far more than the minimum as a rule, and they don’t compete in the same job market as minimum-wage earners. Owners and managers can, and will, adjust cost structures in the long run to make their profit targets. If businesses must pay more for entry-level jobs, they will create fewer jobs, hire stronger employees with higher potential and hold down other labor costs so they end up with a smaller but more productive labor force. They may also turn to technological solutions to make their existing workers more efficient or eliminate their lowest skilled jobs altogether. The higher skilled workers will do OK; it is those who lack the skills to win that competition who will suffer.

Wal-Mart’s work force has intuitively sensed this. The company has boosted its minimum wage internally, but it has generally not increased existing workers’ wages to preserve the wage hierarchy that formerly existed. The least-valuable workers will earn more, but to keep costs in line, the more-valuable workers within the lesser-skilled range will earn relatively less. Morale has dipped in consequence in many stores, as Bloomberg recently reported. Yet overall profits, which are higher management’s responsibility, won’t change much in the long run. Senior management’s earnings, or the value that accrues to shareholders, won’t either.

Of course, not all higher labor costs must be balanced by offsetting cost reductions. Some can be recovered through higher prices. If Wal-Mart raises its prices, will rich people who happen to shop at Wal-Mart feel the pain? No; they mostly won’t notice. But budget-conscious shoppers trying to secure basic necessities for their families certainly will. The same holds true for McDonald’s menu prices in New York.

The irony of this whole debate is that minimum wage levels don’t really affect affluent people, or those with the earning power to become affluent. They affect the people who rely on low prices both to win employment and to meet their families’ needs. When we raise the floor on prices - whether for goods or for labor - it isn’t the wealthy who suffer.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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