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Posted by on Dec 30, 2008 in Economy, Politics, Society | 27 comments

The Minimum Wage – Bad for the Middle Class

The theory behind the minimum wage is simple; to make sure that everyone with a job makes at least enough to get by. It is the right thing to do, right? Everyone needs a livable wage, right? Sure, but only if they earn it, right?

Basic Economics: A product’s price is determined by the market, not the cost to make it. The profit a company makes on the product is determined by the difference between the price the market allows and the cost to make it. A company must make a certain profit on every product or it makes no sense to make it.

Competition increases the supply of products. This lowers the market price. Lower prices squeeze profits. Lowering costs is a requirement to maintain profitability. This applies equally to services.

Labor is a cost: Each product has a finite allowable labor cost to remain profitable. The minimum wage, by definition, is a wage paid to the workers at the very bottom who would be paid less if the market were allowed to operate. The employer is forced by law to overpay these workers.

Artificial Overpayment Hurts the BEST Workers Most: If you artificially force overpayment of the lowest value employees, this money must come from somewhere else. Where?

It must come from the wages and salaries of those who are pulling their weight. It comes from the hard working middle class people.

Your company makes a product. Buyers will pay you $120 per unit for it. At $121 you cannot sell any because they can get a competitor’s model for less. Your overhead accounts for $15. You need to make $5 profit or it is not worth making at all. $120 – $15 – $5 = $100.

So, you have $100 to build your product. $20 goes to component parts, energy usage, etc. $80 is left to pay workers.

Worker A is on time every day, works all day and churns out top notch product. Worker B is on time every day, works pretty hard, and churns out good work, but not as good as Worker A. Who is more valuable to YOUR company? Who would you pay more? Worker A, of course.

You also employ Worker C. He is late rather often, does menial labor and does not aspire to do anything more to help drive the company’s business. He is clearly worth the least, but you need someone to do this work. Unemployment is low for those willing to do this work and he is better than the drug addict you had doing this work last year, so you keep him around.

Worker A’s hard work should be worth $40 and at that wage she drives $43 in value. Worker B’s good work should be worth $30 and at that wage he drives $32 in value. Worker C’s shoddy menial work should be worth $10 and drives $10 in value. $40 + $30 + $10 = $80 and this maximizes everyone’s pay versus the budget dictated by the market and provides the required $5 minimum profit required to continue to make the product in this plant.

Ahh, but there is a minimum wage, so you have to pay Worker C $15; $5 more than he is worth. That means that you can only pay Worker A $37.50 and worker B $27.50, or reduce benefits or outsource the entire process to a foreign country and fire all three workers. You cannot afford to overpay your workforce or the required profit will be lost.

Who paid worker C the extra $5 required by the minimum wage? The government? The company?

NO, Worker A and Worker B pay him or they lose their jobs entirely!

So, to artificially help out the lazy disinterested Worker C, we take money from hard working Workers A and B so that they have a more difficult time feeding their families and paying their mortgages.

Does this make any sense?

How should wages be determined? By each person’s value to the company. That way Worker C is incented by the fine example set by Worker A to improve his lot in life.

But, you argue, the minimum wage is so little. How can it matter that much? Well if you are OK with giving part of your wages to that guy in your place of business who makes minimum wage, and you know who that is, then please share away, but it should be your decision. It should not be forced on the guy next to you.

But isn’t it true that few actually make minimum wage anyway? Certainly, most workers are worth what they are paid plus their contribution to the overpayment of the few that make minimum wage. Is that OK with them? Ask their spouses and children?

But people can barely live on minimum wage. How can you pay them less? People can barely get by working really hard and showing up on time and earning their living. How can you take money from them involuntarily and give it to others who do not care so much?

But, let’s have management make less and use that to pay the minimum wages. Sure, or they can be paid what they are worth and move the whole operation to India and everyone loses his or her job.

Reconsidering the minimum wage is just one step in making the US more competitive in the world markets.