Thinking About the Minimum Wage

by Glenn on December 29, 2015

The Wall Street Journal yesterday (28 December 2015) had an interesting opinion/commentary article on the minimum wage. The writer, Andy Puzder, is the CEO of CKE Restaurants, which includes Carl’s Jr.

One thing that seems clear to me in the debate over the minimum wage is that those who are not in favor of increasing the middle wage are not people actually receiving the minimum wage.

Puzder reminds readers that earlier this year Wal-Mart began increasing the minimum wage for its workers. The base wage went to $9 an hour this past April and is scheduled to go to $10 an hour by February 2016. He asks the question: “How’s that working out so far?”

His answer is that earnings are down significantly in spite of the fact that Wal-Mart has been buying back shares. 75% of those reductions are due to the wage increase. Wal-Mart is “America’s largest private employer” and couldn’t offset the wage increases by any combination of “increasing prices, automating tasks, or scheduling employees more efficiently.”

One point I both understand and agree with is the fact that “Unlike the government, Wal-Mart can’t survive if it isn’t profitable.” As a small business owner, this makes perfect sense to me. It doesn’t always feel like the government sector is concerned with what the private sector calls best business practice—offering goods and services that people pay more for than what it cost to produce those goods and services.

Puzder writes that if the company doesn’t improve the situation, stockholders will. He then asks this question: “So at what point do minimum-wage increases force employers to eliminate jobs and reduce growth, hurting the working-class Americans the policy intended to help?”

An interesting bit of accounting:
Puzder notes that Apple, “the most profitable company on the Fortune 500,” has $39.5 billion in annual profit and approximately 97,000 employees. This profit amounts to approximately $407,000 per employee.

Retail is different, though. Puzder takes numbers for all the retail industries, which includes Wal-Mart, Target, McDonald’s, Starbucks, and Walgreens. He writes that all the retail industries together generate $36.4 billion in profits. The combined 5.8 million employees only generate $6,300 profit/employee.

These 5.8 million retail employees represent “60 times as many as Apple employs,” but just “1.5% of Apple’s profit per employee.”

Using Bureau of Labor Statistics, Puzder takes the 31.5 hour/week average of the typical retail worker. If you raise their wage from $7.25 an hour to $9 an hour, that “would result in an annual wage increase of $2,730 ,” which “would decrease the profit per employee by 43%.”

His conclusion is that raising the minimum wage will, ultimately, cost jobs. I think this is true.

Here is the tension: The goal of a company is to make money and employees cost money. To the extent that an employee helps the company make money, then they are valuable. But the nature of business is that as soon as you, the employee, cost me more than you make (or at least don’t provide enough value to me as a business owner) I have to let you go. That is the nature of business. (The government seems to operate a little differently, but that’s a different story.)

There are a number of places, though, where I struggle a bit with what Puzder wrote. For example,

“Generally, highly compensated employees contribute more to a company’s success than minimum-wage employees, who are often less experienced and entry-level workers.”

This fails to acknowledge two things:

First, the only reason there is a CEO is because someone is willing to work the drive-through window or operate the cash register stand. Shareholders can receive profits because employees are willing to work for so little.

Second, yes, the CEO is more important to the company’s success than the employee in the drive-through window or at the cash register stand. But just how important is that CEO? If the search results were correct, Puzder made $4.485 million in 2012. If we figure 40 hours over 50 weeks, we’ve got 2000 hours a year, which I think works out to $2,242.50/hour, or 249 times what the $9/hour worker makes. Is the CEO that much more valuable?

Sadly, it wouldn’t make much of a difference, but it seems like part of the CEO’s salary could go to the workers who make the CEO’s salary possible.

Here’s a paragraph I struggled with:

“Apple could absorb a minimum-wage increase easily. Its employees are typically highly compensated and thus not many workers would be affected. Second, each employee produces a hefty amount of profit for the company, on average.”

One thing that isn’t really clear in this recounting is to what extent are foreign workers considered in the numbers. Are the Chinese workers who assembled my iPhone part of the 97,000 employees? I’m thinking, no. To what extent would that change these numbers?

I don’t have an answer for this dilemma of wages. One of my clients has quite activist sensibilities. The last time I saw him he summarized the situation something like this: “We’ve got to pay those McDonald’s employees better. And people say my hamburger is going to cost $15. That’s fine. I’ll just go to the grocery store and make my own hamburger.” It didn’t feel safe to explain that if he is no longer buying McDonald’s hamburgers, then the McDonald’s employee won’t have a job at any wage.

There isn’t an easy “fix” to any of this. Capitalism is better than alternative economic systems at least in terms of how it works out for great numbers of people. I like the ideals of socialism—“from each according to their ability; to each according to their need”—but the working out of it never seems to go so well.

The article makes clear that well-run companies make it possible for some people—stockholders and company operators—to do well, but only because most employees don’t. This is the tension we live with in this country.

I have a lot of reading and learning to do to understand the issues better, but here is where I am today. If we’re doing well financially, I think we make a couple of assumptions and live with a couple of uncomfortable truths:

Assumption 1: It’s easy to find a good paying job. Just get some education and/or training and “you can be anything you want to be.”

Assumption 2: Our economic system is just. In other words, everybody gets what they deserve. If you don’t have much, it’s because you aren’t trying hard enough.

Uncomfortable truth 1: If you’re doing well financially in life, to at least some extent it’s because people who aren’t doing as well allow us to profit from their work.

Uncomfortable truth 2: We offer jobs in this country that don’t pay well. We like to call these “entry-level” jobs, but for many people they are lifetime jobs. Rather than a place to start, it’s a place they stay.