By: Wayne Brown
Apparently the goal of the State of the Union Address for 2013 was to make sure the President appeared to be focused on the problems at hand. As one might expect, the president continued his mantra for continued growth in an already enormously over-grown federal government emphasizing the need for continued federal spending. By the way, that spending either requires more taxation, more money printing, or more federal borrowing…none have any positive effects in terms of economics but they sure sound good when the president stands up there and challenges Congress to act on his suggested measures with great expediency and then threatens to take matters in his own hands if they do not.
One does not have to watch this president and listen to him for very long to realize that he has no head for business or the successful sustainment of a business. It is very easy for him to suggest that the minimum wage be raised from $7.50 an hour to $9.00 an hour with just the wave of his hand. That is all that it really takes and things work just fine. The worker does the same level and amount of work and the employer pays him $1.50 more an hour for that effort. Is that about right? Not really but in Obama’s mind it is that simple. Let us take a closer look at what the president suggests and see how realty simple it is to do in the business world.
First, let us talk about minimum wage a bit. Somewhere back in time, someone thought it might be a good idea to have a minimum wage restriction so that workers could be insulated from those who would demand a hard day’s work yet pay a miserly sum for that effort, thus the minimum wage law. Ultimately the law did more to suppress entry level and part-time job opportunities for many young people as the required wage was set relatively high for the duties and requirements of the job. Once the standard was set, it then became the reference by which other things are measured thus creating the pressure to continually raise it. Unions caught on quickly and tied their contract clauses to the minimum wage rate guaranteeing that everyone got a raise if those on the low end of the scale received one. In the case of Obama’s proposed raise in the minimum wage, the escalation is 20
% so one does not have to think about it too long to realize that union workers up the pay scale spectrum will benefit greatly by such a change.
For the purposes of our discussion, let’s say this is Joe’s Widget Shop. Joe owns the place and employees 15 people to make his widgets. There is some turnover among the employees since all of them are always looking to better themselves so at any given time, Joe has about one-third of his workforce at the entry or training level and receiving minimum wage pay for their efforts. Joe’s widgets are part of a sub-assembly of parts used to make larger machines. Joe has to bid contracts with those he supplies his widgets to annually. The competition is heavy and the margins are thin. On average, Joe is recovering about $10 per widget unit in sales revenue. The Widget Shop turns out and ships 100,000 widgets per year yielding sales revenue of $1 million dollars annually.
From that annual revenue Joe must pay his capital improvement costs, his material/inventory costs, his operating and labor costs, taxes and fees, and a living income for himself with the hope that there is a little left over as retained earnings in the coffer for a rainy day. Joe pays himself $5,000 per month or $60,000 a year….just slightly more than the national average household income. Joe’s business runs 50 weeks per year logging 40 hours per week per employee. All employees are paid on an hourly rate. At present, 5 of the 15 employees are being paid at the current minimum wage of $7.50 per hour. Another 5 are at $10 per hour, and the remaining 5 of the 15, his longer term employees, earn $15 per hour.
Joe just received notification that the Minimum Wage Limit has now changes to $9.00 per hour for each employee effective the 1st day of the next month. This change will not only affect the wages of Joe’s five employees making the minimum wage rate but will cause Joe to have to adjust his pay grade up and down the scale in order to maintain morale in the shop. Obviously all the employees will be aware that those earning the lowest wage in shop just received a $1.50 per hour raise. They too will expect something extra in their pay envelopes.
The increase in costs at the minimum wage level appears to be 20% but Joe realizes that the figure is much greater. With the mandated increases also comes the expected increases of other shop employees paid at the higher levels. In addition, the employer’s share of Social Security and Medicare Withholdings will increase as well. Joe sets about the task of calculating his new labor overhead knowing full well that there is no promise of increased sales revenues or new contracts in this operating year. His projected cash flow of $1 million dollars in revenue is what it is and that is all.
The increase in minimum wage will add an additional $3000 per employee for a total of $15,000 to the hourly payroll plus another $1150 in annual SSI/Medicare Employer payment for a total of $16,150 annually over previous costs. If Joe gives his mid-range employees a .75 cent per hour raise and his top employees a $1.00 per hour raise to sustain morale, the move will cost an additional $18,839 annually. Total cost driven by this shift in minimum wage will be $34,989 annually. In round numbers, Joe’s annual payroll outlay just went from $350,000 per year to $385,000 annually or the equivalent of giving each of his employees a 10% raise in pay. Who gets a 10% pay increase in these times in one year?
The Widget Shop has historical had a net profit bottom line of 3.5% on average in the last five years of operation. This is the money held in the liquidity by the company for a rainy day and the rainy days always come sooner or later. With no increase in annual revenue, and assuming all other expenses remain at historic levels, the change in annual wages will take just about every dime of the reserve leaving no safety net for the company at all in terms of unexpected cash flow requirements. While Joe could operate under those conditions for a short time, eventually there will be problems.
Joe has two choices to sustain his business and the income producer for his employees. He can cut his own salary by more than one-half but then with two kids in high school and one in college, he will not be able to even keep his head above water. In fact, he would be able to earn a better living by working for the other guy. The other alternative is to lay off two of the minimum wage workers and try to make the production numbers with less people. If everyone in the shop knows what is on the line that just might be possible.
Joe has found a solution but he is not happy because he must to let two good employees go thanks to the new Minimum Wage Law in order to sustain the status quo of the business. Those employees will not be happy either and certainly their families will not be any better off as a result. While lower level wages do not always provide enough, it does provide more than no wages at all which is what these employees will be faced with for the time being. No, Joe is not happy with the solution but these are the decisions that every businessman has to make when the government attempts to run the show. In the end, there are no winners.
This same scenario can take place in Corporate America with the impact of the minimum wage on union contracts as well as employee morale. Like Joe, Corporate America takes a look at its circumstance realizing that those who run the operation must answer to the stockholders’ Board of Directors. Choices will be made. In some cases, the price of goods and services will go up to the consumer, in others, cutbacks in the workforce will offset the impact of the increased expenses across the board. In either case, those on the low end of the pay scale will suffer either in higher prices or loss of jobs. Given that outcome and the potential impact, one can easily see why the president calling for an increase in the minimum wage would be a time for celebration…at least for some.
Whether this president knows it or not, most small business are hurting in the dismal economy of the past four years. The next four years looks like more of the same. These are businesses that struggle to pay much above the minimum wage but they do provide jobs for some who cannot otherwise find work, especially in small town America. When the minimum wage requirement takes a 20% jump, many of these businesses have little recourse but to close their doors as eliminating one or two job positions will not close the gap. Rather than improving the lives of those now struggling to hang on to their self-respect in a anemic economy, the president is calling for someone to drive that final nail in the coffin which will line the union contract employees pockets at the expenses of those on the low end of the spectrum. Of course, that should not come as a surprise to anyone for this president believes that in order for things to improve, someone must suffer.
©Copyright WBrown2013. All Rights Reserved.
13 February 2013.