Do minimum wages make a difference?

John Hildebrand
John Hildebrand

Starting Jan. 1, the minimum wage in Colorado will rise from $7.78 to $8 an hour — a 2.8 percent increase. Regardless of the exact numbers, minimum wage remains a political football.

There are those who seem to push for higher minimum wage rates nearly every year. It all sounds good if you’re the one earning minimum wage. But are there other things to consider? Are there consequences beyond simply paying more to folks in the lowest bracket of wage earners?

Let’s take a look at this in a bit more detail. The minimum wage originally was instituted as a labor law to protect workers from abusive employers.  The Fair Labor Standards Act enacted in 1938 set the minimum wage at 25 cents an hour. I still remember my first job as a grocery store bagger and stocker earning $1.57 an hour in 1972.

State and local governments can set their own minimum wages, and many impose a rate that exceeds the federal level. For 2013, the federal hourly minimum wage was $7.25 and the Colorado rate $7.78. The City of San Francisco imposed a rate of $10, which is scheduled to increase to $10.74 starting Jan.1.

Elected officials who push through higher minimum wages likely will win votes from those who think they’re benefiting from the higher rates. If feels good to have a larger paycheck and makes people think they’ll have more spendable income.

 But is that really true? In the very short term, it’s true. The worker will be able to buy incrementally more and some financial pressure will be relieved. But in the long run, does it really help? 

I think we have to go back to the question of why there are minimum wage jobs and what a minimum wage job is. Generally, minimum wage jobs are low-skill, entry level jobs, a place to start in the work force. Minimum wage jobs were never intended to be a place in which workers stay for a lifetime. Minimum wages certainly aren’t enough to support an adult, much less raise a family.

For 2013, the gross annual income for workers who earn minimum wages on a full-time basis is $16,182. For 2014, that income will increase to $16,640, a difference of $458.

Those who oppose higher minimum wages argue that when business operating costs go up, prices generally go up by an equal amount. 

The problem with a minimum wage increase is that it’s arbitrary and not tied to increased profitability. Many workers assume their “bosses” make enormous profits as a percentage of gross sales. This is simply not true. The average profit margin for most business is 2 percent to 5 percent of gross revenues. Wal-Mart, for example, reports a profit margin of between 2.5 percent and 3 percent.

Consequently, a 2.8 percent increase in wages for a large percentage of the work force has a direct and immediate effect on the ability of businesses to survive as an entity. Wal-Mart’s prices will rise and do so quickly.  The same will be true of its suppliers and manufacturers. This will happen all the way down the supply chain and affect all levels of commerce.

On average, payroll represents about 64 percent of a company’s gross cash flow. Rising wages have a massive and nearly instant effect on a company’s ability to remain profitable and survive. This is especially true when you take into account how slim real world profits truly are.  Make no mistake: Without profits, there are no jobs.

The bottom line is that those who earn the least are most affected by small changes in the economy. When wages go up by edict and aren’t tied to increased profitability, the prices of goods and services go up to match those increases very quickly. The net effect on those who got a raise is no net raise.

On the other hand, workers also are rewarded because they’re more productive, acquire new skills or education or innovate with new ideas that help employers increase profitability. Higher wages reward those who make a difference. And because it’s based on profit, it’s a raise workers get to keep. Isn’t that the way it should be?