In 2016, the metropolis of Seattle decided to enact a societal experiment. Namely, Ordinance 124960, § 45, 2015 codified into law a regulation that raised the minimum wage in the city from $9.47 per hour (above the federally required $7.25 per hour) to $13 per hour, and eventually to $15 per hour. One year later, we see that the higher wage has not met the expectations of those who enacted it.
As one might expect, support for the bill was starkly partisan. According to the Pew Research Center, “52% of respondents favored increasing the federal minimum wage to $15 an hour, but that idea was favored by just 21% of Trump supporters (versus 82% of Clinton backers).” Minimum wage regulation has long been a darling of the Left, going back to the Fair Labor Standards Act of 1938 (a full history can be found in this article from Heritage). Hillary Clinton carried 54.4% of the state of Washington during the 2016 presidential election.
When adjusted for inflation, $11.12 previously set the high-water mark for Seattle’s minimum wage in 1968, nearly 35% lower than the current rate. Though an increase in pay superficially seems like it would benefit those who previously fell under the threshold, recent data (and long-held economic theory) has shown that the rise in minimum wage is in fact detrimental to those it intends to help.
According to a working paper published by the National Bureau of Economic Research, the “wage increase to $13 reduced hours worked in low-wage jobs by around 9[%], while hourly wages in such jobs increased by around 3[%].” In total, the statute essentially lowered low-wage earnings by an average of $125 per month.
Why the downturn?
Capital IQ reported in 2012 that the average profit margin for fast-food chains has sunk to 2.4%, which was lower than the reported profit margin of 3.2% in 2009 at the end of the most recent recession. McDonald’s, a chain heavily cited by labor groups as one that can afford to raise the wages of its workers, had a profit margin of 19.8% that year, far and away better than any other measured corporation. That being the case, it is worth noting that most McDonald’s stores are franchises; an investor buys the rights to use the McDonald’s trademark, logo, brand, etc., and set up a shop, in turn sending part of the proceeds to the larger corporation. Each shop, then, is its own business in a sense. The profit margins of the corporation have little to do with the financial power of each individual owner.
Margins are more important to consider than gross revenue, which does not take into account the cost of overhead to simply break even in a fiscal year. For example, if Company A earns $1 million in revenue, but the cost of its operations reaches $900,000, the company has only actually made $100,000. If Company B earned $200,000 in revenue, with only $50,000 in operations costs, then Company B has actually made more money. Payroll is counted when measuring operating costs. Though a million sounds like a lot of anything, revenue is entirely contextual. Despite one company likely being able to handle an increase in payroll costs, a company earning less profit would be unable to, and minimum wage laws are not selective.
One of the commonalities between successful companies is the ability to grow, adapt, change, and offer a better, wider range of options. This is directly affected by the company’s ability to invest in itself. Reinvestment of profits is not measured in the expense report. For example, Koch Industries was ranked second on Forbes’s list of America’s Largest Private Companies for 2016. At the end of the 2015 fiscal year, Koch made a revenue of $100 billion. In his book, “Good Profit,” Chairman and CEO Charles Koch stated that the company reinvests 90% of its profits back into the company. The company operates under the framework of “Market Based Management,” which prioritizes worker loyalty by finding people who fit well with the company, and by keeping those people happy and productive by investing in them. It should come as no surprise that Koch Industries boasts one of the highest rates of employee retention of any U.S. company.
Unlike Koch, which carries a high profit margin, industries with thinner profit margins like fast food have been forced to cut hours or even lay off workers outright in order to meet the new minimum wage requirements. The Washington Examiner reported that “[t]he city’s unemployment rate was 4.3% percent in April 2015 when the $11 wage went into effect. By May of this year, Seattle’s unemployment rate had climbed to 4.8%.” This rate does not include those workers who have not lost their jobs, but have had their hours reduced.
The Bureau of Labor Statistics reported in 2016 that over half of all minimum wage earners work in the service industry, mostly in food service, and that another 3.75 million food service workers are considered “near-minimum.” Increasing the minimum wage for those workers could put their jobs in jeopardy. The chain plans to add automated kiosks in 15% of its stores, reducing the cost of labor for the company, which saw a 0.3% profit margin in 2012 according to the Capital IQ report cited above.
Despite sounding like a good idea, forced increases in minimum wages result in major losses for those that rely on them most. Rather, wage increases should be allowed to occur organically through the labor market, on a per-company basis. For those who managed to keep their jobs after the pay hike, the raise has been a welcome increase. For those who were not so lucky, it seems likely that some pay would be a preferable situation than no pay.
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