$15 Minimum Wage Would Require Price Controls
February 19, 2016
by William P. Meyers

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Minimum Wage workers will get screwed without price controls

I heard it on the radio, probably on PBS. A woman had her wages boosted last year in Oakland, California by the city's new minimum wage law. Her landlord promptly raised her rent. At the end of the month she was no better off than before. It was an anecdote, not a statistic. Maybe some workers got the raise without having their rents raised.

Many businesses in America run on very narrow margins. A margin is the percentage of revenue that ends up as profits for the owner. For instance, if a small restaurant owner sells $300,000 worth of food each year and has a 10% margin, she takes home $30,000 per year, not that much more than her employees. If she can sell more food at the same margin, she takes home more profit. If the margin improves, her profits improve. If margins slip, she may find she is paying herself less than she pays workers. If margins become negative, bankruptcy, closure, and no jobs for anyone is around the corner.

Margins vary greatly by type of business and within types of businesses. Apple Computer has very high margins. The air travel industry typically has low margins. Restaurants typically have low margins.

When a state or locality raises its minimum wage it may have a different effect from a national increase in the minimum wage. That is because if you are in Seattle or Oakland and get $15 per hour, a lot of your goods and services are coming from out of the area. So while rents might go up, lettuce should go up relatively little, just enough to give the food market workers their $15, while the farmer and lettuce harvesters are still down at the current federal minimum wage of $7.25 per hour.

The point of the $15 minimum wage increase is to make our society more equal, and to raise the standard of living for unskilled (or easily replaced) workers.

What will restaurants do when they have to raise wages? Most will have no choice but to increase prices.

On a macro level, what we can expect is price inflation to match the wage inflation.

Even if the economy expands (and there are some reasons to think that sending more money to the bottom tends to help expansions) on the whole the end result, after a year or two, depends on economic power.

Double the minimum wage, double all wages, double CEO pay, double prices, and double stocks, and everyone ends up in the same relative space.

But in rapidly changing environments it is usually the least powerful that lose out. My bet would be that if wages at the bottom double (100% increase), wages among skilled workers will go up by 110%, among executives by 150%, among bankers 300%, and rents and other prices will go up by about 120%.

Leaving low wage workers worse off that before.

Those of us who are older have been through this. It is called inflation, and it is a terrible idea. Oh, inflation seems fine when it starts out is is a percent or two a year, but it tend to build on itself.

So, how do you raise wages for the bottom tier of workers without causing general inflation?

You need price controls. Which is a bear in itself. Because each item you buy, whether rent or grocery or dry good, has a complex set of inputs. You can't just yell "freeze." If you yell "freeze" and the price of producing lettuce goes up, the lettuce disappears from the food store shelves. Ask anyone who has lived in a communist country how well that works.

If you raise wages of restaurant workers and don't allow owners to raise prices, you may cut some fat out of owners who are getting rich exploiting their customers and workers. But in many cases you will force owners out of business.

To lessen income inequality without creating a vast system of price controls, essentially an economy planned by bureaucrats, the government does needs to intervene.

We do need to raise taxes more on people earning over $100,000 per year, and that includes taxing dividends and capital gains. We can raise the minimum wage gradually and appropriately. But with the extra income the government should create jobs that cause shortages of workers at the bottom. Then employers would have to bid up wages in order to keep operating and making profits. This flexible system would allow for income redistribution without inflation.

The ignorance of "progressive" votes about business tends to match the ignorance of "conservative" voters about the fact of the evolution of species. For propaganda purposes the left maintains that all corporations evade taxes and are enormously profitable. But start looking at SEC (Securities Exchange Commission) filings, which are required of all companies that have stock that trades on exchanges, and you will find this is not true. Many big businesses struggle to keep profit margins at acceptable levels. My impression is that most pay about 30% of profits into taxes. Most CEOs would agree that it is not fair that companies like Apple or oil companies pay little or no taxes while their own company has to pay 30% to 35%.

Another, better way to raise wages at the bottom is to unionize. Unions help workers learn to govern themselves. They put workers on an equal level with employers. They don't require micromanagement by government bureaucrats. They are not ideal, and even unions will be helped by gradual increases in the federal minimum wage. You don't need anyone's permission to unionize. You just need to stand up for yourself with your coworkers.

Let me repeat the math. A 10% margin is doing good for most businesses. Wages typically account for about 50% of business expenses (but it varies greatly by type of business). Doubling wages would turn a 10% profit margin into a 40% loss. Either prices go up, which defeats the purpose of doubling wages, or businesses go out of business.

Income can be redistributed, but not by just double the minimum wage. Reducing the number of unemployed, while gradually raising the minimum wage, and empowering unions, is a better formula for income redistribution. The only other realistic choice is price controls.

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