Tuesday, June 11, 2013

Bad Idea Fairy: Living Wage

Obama recently gave a speech concerning wages. He spoke about his plans for increasing minimum wage. He then promoted establishing a "living wage". Then he made some talking points about salary disparity between men and women.

Luckily, the executive branch doesn't dictate any of the above. They are all the responsibilities of the legislative branches of the federal government and the individual states.With a conservative majority in the House of Representatives, attempts to raise minimum wage have been unsuccessful. An attempt in the 112th Congress to raise it to $9.80 an hour went down in flames. An attempt in March by Rep. Miller (D-CA) to raise it to $10.10 through holding hostage the SKILLS Act (amendment) didn't even make it off of the launchpad.

Let's take a common sense look at these issues.

First, increasing the minimum wage sounds, at first, like a good idea. Those working in unskilled, entry level, burger-flipper jobs normally reserved for high school students and dropouts, would make more, before taxes, social security, medicare and Obamacare strip it away.

Ideally, that would mean a higher average disposable income among that rather small demographic. That would mean more people spending money. That sounds great for the economy, right?

Wrong. It would not because the idea fails to take in the costs of human capital to production and marketing. In reality, it would take more money away from every American.

A meal at McDonald's costs about an hour's wages at current minimum wage. The average worker making minimum wage (most are part-time) happens to work the average full-time work-week of 34 hours, according to the latest BLS report. At $7.25 an hour, before taxes, that worker earns $246.5 a week ($12,818 annual). After 14% OASI (Social Security) comes out, the weekly wages are down about $212 a week. After a 10% (lowest bracket) income tax (federal), that drops the weekly pay to $187.35 a week. That is about $9,740 a year after the federal government snags its "fair share".

Now, bump that minimum wage up to $9. First of all, because of the cost of labor, that meal will also cost more, still being about an hour's wage. That is a 24% increase in pay. It is also a 24% increase in production and marketing costs. That will increase the costs of most staple goods (necessities) by 24%. In other words, the cost of living will increase 24% for every American.

Next, at an annual income over $15k, the income tax rate increases to 12%. So, that 34 hour week will gross $306. Subtract OASI and income tax (notice we haven't subtracted medicare or Obamacare!). The wages are $226.44 net. That looks like a nice $30 a week raise, right? Wrong. Remember, the cost of that meal at McDonald's has gone up by 24%. Let's low-ball the average meal at $5 (before increase). That was $105 a week (just to eat) before. Now, it's $130 a week to eat. So, that $30 raise was just reduced to $5.

Then, it amounts to a pay cut for those workers who have earned raises above minimum wage. Essentially, they just got a 24% pay cut. There are more people, even at a minimum-wage burger-flipper job, who make more than minimum wage than there are the entry-level minimum wage.

Where this hits hardest is in the small-business community. Larger businesses, who can afford to, will move production (manufacturing, etc.) overseas where the costs of human capital are lower.

Next, we can look at this "living wage". We already have it. It is disguised as food stamps, housing subsidies, and other federal (and state) level subsidy programs. Adding more in the form of a paycheck in return for no labor is more than foolish. Who will pay for it? Well, those poor saps making $9 an hour minimum wage will. Taxes will have to increase by at least 1% for federal income taxes, across the board. There goes $3 of that $5 raise!

What a "living wage" averaged at $5 an hour for a 34 hour week would amount to about every actual worker having to support one non-worker over the age of 18. So, a $9 an hour burger-flipper now has to hire some slob to sit on his butt for $5 an hour. Of course, that pay is before taxes. It would then become more prosperous to be one of those lazy slobs than to work at a minimum wage job.

Next we can address that gender wage disparity.

There is, on first glance, no reasonable argument in favor of this disparity.

However, there are several reasons. You have to look at the workers on a case-by-case business, as individuals, not as a collective. There is the first problem that must be addressed.

In some cases, a man will hold out for a higher wage during negotiations than women will. Some are just happy to get the job, while the male candidates/applicants may be less willing to take the job at the first salary offered. This may also explain the increase in women being the primary wage-earners in families. The women are getting the jobs because they are not holding out for the higher wages. All qualifications being equal, those willing to accept the lower salaries stand a higher chance of getting hired. It's basic supply and demand.

Seriously, if you wanted to buy a 2013 Toyota Corolla, two were exactly the same except one was orange and one was blue. Would you pay $15,000 more for the blue one?  Some people would. Others would save that $15k, or use it to buy a used motorcycle.

Another reason that could explain the disparity is perception. There is a perception that women have a greater psychological need to feel secure than men. That may or may not be hogwash. However, women tend to take more sick days than men do. Women will take sick days to care for sick children. Women tend to visit doctors more than men do. Also, women get pregnant, increasing the need for time off. All of these push a (false) perception that women may be less productive.

We know the productivity perception is false. During World War II, manufacturing production was at a near all-time high across the nation. Most of the factories were staffed by women, while men were fighting the war.

It isn't an education disparity. A degree in "gender studies" is worthless regardless of the gender of who earned it.

Whatever the reason for the perceived wage disparity, all workers and business owners will be equally ravaged by an increase in either minimum wage or living wages.