I’ve been hearing the catchphrase “living wage” come up more and more lately. I’m sure part of that is due to the recent Citizen’s Initiative in Maine that will raise the minimum wage by more than 50% over the next few years. Even so, the topic is on the minds of families across the country.
As a family of six, with two self-employed parents, we’re no strangers to the struggle to make ends meet. Believe me, I have nothing but empathy for the folks who are trying to figure out whether to pay the electric bill or the heat bill because they just can’t pay both this month. I know what it’s like to have your only car suddenly break down and need thousands of dollars of repair work at a time when you can least afford it. I’ve been there, done that, and was too broke to buy the t-shirt. I don’t say all of this to elicit sympathy. (Truly, I don’t feel sorry for myself when I’m still better off than 95% of the people in the world.) I say it to make the point that I understand where people are coming from when they talk about wanting to make a “living wage”.
Would it surprise you to hear that I oppose mandatory minimum wage increases?
We’ve barely started to see the effects of the new increases here in Maine. Some small businesses have been forced to cut employee hours and even lay off some of their employees because they just can’t afford the increase in pay at the current number of hours that they’re paying for. Hiring employees is expensive any way that you look at it. Not only do you have the cost of the hourly wage, but you also have to pay worker’s comp insurance, health insurance, vacation pay, and so on. You’ll need to either do the payroll yourself of pay someone else to do it for you. That’s more than just writing a check every week though. There’s a lot of tax paperwork and withholding payments to the IRS that need to be taken care of. (Heaven help you if you make a mistake on any of that!) If you have 4 employees who each work about 30 hours per week, you are looking at paying out an additional $28,000 per year in wages by 2020. Keep in mind that this does not increase the number of employees or the number of hours worked.
When you’re a small business owner, $28,000 is nothing to sneeze at. Most of these business owners are not rolling in the dough. Where will this extra money come from? Well, they can reduce employee hours by enough to negate the extra wages. This also means that they’ll either need to cut the hours that their business is open, or fill in all of those extra hours themselves. (This is on top of all of the other work that they’re already doing to keep their business going.) Or, they can increase their profits to cover the cost of the additional wages they need to pay. How does a business owner do that? By raising prices, of course.
So, while Maine workers will be making more per hour, they’re going to have to contend with reduced hours and an increase in the cost goods and services that they need. Those who are working fewer hours could pick up a second or third job to make up for that. If there are jobs to be had. With businesses cutting hours and reducing staff to be able to afford to make payroll though, that’s potentially a pretty big if.
We’d like to think that these mandatory minimum wage raises are no big deal to the businesses who employ us. It’s big corporations, and they have plenty of money, right? The truth is, it is a big deal to the small, local businesses! It’s these businesses and the people they employ who will be hurt most by this sort of law.
The raise in pay only applies to those who are employees of a business, but what does that mean for the self-employed folks? Will it have any impact on them? Glad you asked! Come back next week to read the answer in Part 2.
If you’re interested in learning a bit more about economics, then the Mises Institute is a great website to start with. A few books that I’d recommend are The Creature from Jekyll Island by Edward Griffin, and End the Fed by Ron Paul. Wealth of Nations is considered a classic on the topic, and you can find a digital copy for free on Project Gutenberg’s website.