By Sean Covell
CEO Fitness System
Bachelor Degree UC San Diego
As an employer and resident in California, I have had to hold my nose for the past decade as it becomes increasingly difficult to do business in the Golden State. While California has many things going for it–beaches, Hollywood, Silicon Valley–it does not have a friendly business climate. This state ranks 32nd on Forbes’ Best States For Business in 2015. The $15 dollar an hour minimum wage law, recently passed by the California Legislature (a gang of people dedicated to fundamentally altering the role government has with its citizens and non-citizens lives) and Governor Jerry Brown, will cause California to be ranked dead last.
My goal is to have as many politicians read this as possible and knowing that most politicians have an aversion to reading (especially their own legislation), I’m going to keep this brief. What follows are eight reasons why the new minimum wage law is damaging to the freedoms and pocketbooks of all citizens.
The minimum wage artificially increases the price of labor. That’s right, labor has a price and the higher that price becomes, the result will be less overall labor participation. This is basic supply and demand. Most economics professors would agree. The tragedy is that workforce participation is already at a 32-year-low! What will it become after the $15 minimum wage? It will be even lower. Some economists may dispute this, but the honest ones will admit that, all things being equal, there would be more labor participation without a minimum wage. This cannot be refuted. It’s a simple truth. If the price of labor is lower, more people can be hired. The other real irony is that government loves to artificially increase the price of things it doesn’t like through fees, fines and taxes as to reduce their use– cigarettes, alcohol, big screen TVs and heavy vehicles are all subject. I guess the government doesn’t much like laborers either.
The cost of living will necessarily be higher. A big argument from proponents of this law is that while the cost of food, tuition, rents and other consumable goods has increased, wages have not. Leaving aside all the other reasons why this could be–tax policy, subsidies for tuition and rents, people dropping out of the workforce and electing to receive welfare, inflated stock and real estate prices, inflation of the money supply– this is a classic example of the seen versus the unseen. What is seen is that prices have gone up. What is unseen is that government policy has contributed to this. What is also unseen is that forcing employers to pay more for labor will result in them having to raise prices to cover the costs. This will adversely affect the consumer. Ironically, it will mostly affect the very people this law aims to help, the minimum wage employee. They will not be able to absorb the inflated prices as well as other income groups. So while they may get a pay bump, they will not come out ahead.
The minimum wage unfairly targets low-skilled and entry-level employees. The minimum wage on its face is really an unemployment law. It states that an employer like myself cannot hire anyone under the price the government sets. Therefore, anyone who could have been hired for $14 dollars an hour or less cannot be legally hired. Thus, unless they are deemed to be at least producing more than $15 an hour in revenue, they cannot be hired. The reality is that not all entry-level jobs produce the same amount of revenue. As a result, those who would have been hired for, say $12 or $10 or even less will have no job. Unemployment will rise among the groups that currently make minimum wage.
It violates private and mutually beneficial contracts. If I want to wash windows for $5 an hour and an employer agrees to pay that $5 an hour in return for services rendered, why does the government get to tell me that’s not legal? In this instance, the government is violating basic agreements that allow the free market to function. The state is now a hindrance to free market exchanges and productivity. So what am I to do? If I cannot produce at least $15 an hour in value I must go to the state to receive welfare. This places the burden on the taxpayers across all income groups.
The minimum wage unfairly targets smaller businesses. While politicians love to express their love for small business the truth is they much prefer large businesses to contribute to their campaigns. And while people think some chain restaurants and other businesses are large, in reality many are franchisees (small businesses that pay a fee for the Taco Bell or McDonalds name). These businesses, like my own, offer flexible hours and the opportunity to gain skills in the marketplace for entry-level workers and people who would simply like another part-time job. The net revenues of these business is not such that they can afford large salaries, high hourly wages or other perks afforded to state employees and employees of larger businesses. The employees and employers who will suffer are the local mom-and-pop-shop and the kid next door. They will be the ones to be out of business or out of a job.
Price controls do not work. Look throughout history to regimes that have tried to impose price controls. They have always failed with many unintended consequences. Only entrepreneurs in the marketplace, with market indicators, can properly price goods and services. They are also the only ones who can truly determine how much someone should be paid in the enterprise that they built. Every time price controls show up, a black market pops up. This is the real economy.
The cost to employers will be higher across the board. Few remember that what an employee is paid in their paycheck and what the employer must pay to employ that person are very different. The employer cost is much higher. In fact, the burden for almost everything from taxes to child support falls to the employer. When the minimum wage goes up, the employer cost for taxes, unemployment insurance and disability will increase as well. Moreover, workers compensation insurance is billed by the total dollar amount of wages worked by all employees in a tax year. This is yet another cost increase for the employer. Furthermore, and perhaps the biggest problem with this law, is that employees who now make $15 per hour or above will demand more money because they have a more refined skill set. How is it fair for an unskilled worker to make $15 when someone who has worked at a business for years makes the same? It’s not. And employers will be forced to increase wages across the board. Some businesses, because of market forces, cannot just go raise prices to cover the increased costs. The result? Less employers. Less employers=less employees=more people on government assistance. Simple.
There is no requirement for increased productivity. Money is not wealth and it’s not what makes the economy run. If money was wealth, the government could just print us all money and we would be very wealthy. The problem here is obvious. More money in circulation will not result in more production. Increased wealth comes from an increase of productivity (output) and value in the marketplace. From an early age we are told to go to school and graduate so that we can learn more skills and produce more in the marketplace. Want a raise? Become more valuable to the marketplace! Refine your skills. Learn something new and apply it. The government and supporters of the $15 minimum wage do not believe this. They think workers deserve to make more by fiat. So they petition to government to make it so. Does the employer receive more value for the additional wages paid? No. Does the customer receive any more for the higher prices paid? No.
And there you have it. Eight examples of the “tyranny of good intentions.” This is what government does best. It only focuses on what it sees instead of the consequences of action. Let me be very clear: I believe that everyone should be paid more in every country across the world. I believe this can only come through adding value to the marketplace and increasing productivity. I do not know for sure how this will all play out long term. I do know that as an employer and entrepreneur, other states are looking much more “golden” than California.
One thought on “An Open Letter to Democrats & the Supporters of the $15 Minimum Wage”
Thanks for this blog post regarding a $15 minimum wage; I really enjoyed it and am definitely recommending this blog to my friends and family. I’m a 15 year old with a blog on finance and economics at shreysfinanceblog.com, and would really appreciate it if you could read and comment on some of my articles, and perhaps follow, reblog and share some of my posts on social media. Thanks again for this fantastic post.