OPINION: The Minimum Wage Hike Is Already Costing Missouri Jobs, And $15 Will Make It Even Worse | Business

Table of Contents $20,000 $1,295,000 $444,000 $259,900 $49,900 In the news in recent months, President Biden pledged to enact a nationwide $15 an hour minimum wage. As of January, the minimum wage in Missouri, automatically increased from $9.45/hour to $10.30/hour. This was the result of a measure Missouri voters passed […]

In the news in recent months, President Biden pledged to enact a nationwide $15 an hour minimum wage. As of January, the minimum wage in Missouri, automatically increased from $9.45/hour to $10.30/hour. This was the result of a measure Missouri voters passed in 2018 titled Proposition B. Proposition B, also known as the “$12 Minimum Wage Initiative” mandated an increase in the minimum wage from $7.85 to $8.60 on January 1, 2019 followed by incremental increases of $0.85 annually until it reaches $12/hour in 2023. This is more than a 50{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} increase in the cost of labor. As with Biden’s pledge, the same concepts apply at the federal level which could likely make Proposition B and many other state measures moot.

Hikes in the minimum wage, or any minimum wage for that matter, cost jobs. A mathematical certainty. As an economist, I cringed and felt sorry for all the low paying jobs that would be lost. Proponents of higher mandated minimum wages (virtually all who do not have a deep understanding of economics) argue emphatically against such a notion, but they are wrong. Here is why.

Although such measures are almost always well intentioned, their effect is negative for most of the very workers they are intended to benefit. In Missouri, the measure passed by a margin of two to one, which means two out of three Missouri voters voted in favor. When I first read Proposition B, I predicted it would, unfortunately, pass and by a substantial margin. I wish I had been wrong. It seems so easy, just mandate by law the lowest paid among us get a higher wage. It will improve their life. After all, who can be against such a thing?  Let’s start with myself and virtually every person who has a true understanding of the economic impact. It is not because such opponents are not in favor of helping the lowest paid among us. On the contrary, our opposition comes from understanding the true damage that will occur – much of it not visible. It is an unfortunate mathematical certainty that raising the minimum wage decreases the number of jobs overall. Period. And the number of jobs lost can be significant. The supply and demand curves for labor are based on mathematics, not emotions.

As for the Lake of the Ozarks area, some local business owners have been quoted in the media that they are already paying hourly rates greater than the new minimum since the labor is so scarce in the vacation/tourist area. Moreover, some have stated that they still have trouble filling open jobs at the higher rate. It is true that in markets where the actual real wage is already higher than the new minimum, no jobs will be lost. While that may be true in the unique microeconomy at Lake of the Ozarks, I assure you this is not the case in many, likely most, of the state’s local economies.

It is true that one can assume or even know an individual (let’s call him Vince) working for minimum wage who will get a nice government mandated raise when the law goes into effect. And Vince didn’t lose his job either, you say. See it works – all that happened is the greedy employer was forced to give his most lowly paid employees a bigger share of the pie. This is exactly the result the well-intentioned person desires when they vote for such measures as Proposition B or a $15/hour Federal Minimum Wage. But it is ill conceived and wrong. While Vince might be slightly better off temporarily, another Vince (let’s call him Victor) somewhere will either lose or be unable to find employment as the aggregate number of people that businesses can afford to employ decreases. And even your Vince might also become unemployed in the long run. Once again, it is a mathematical fact. In a free market, companies will not simply eat the added cost however bad you wish it. They may be forced to in the short run; however, they will have no choice but to raise prices, reduce employment, cut margins, add automation, or a combination of these in the long run. Anyone notice how Walmart has replaced many of its checkout lanes with self- serve kiosks for you to scan and bag your own items?

A real world example: A small local landscaping company that I do some consulting for is owned by a husband and wife. The company currently has gross sales of $540,000. They currently have 10 employees earning between $10.30 (the current MO Minimum) and $15 per hour. The Foreman is the highest paid at $15 per hour. This equates to an annual labor cost of $240,864 or just under 45{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of Gross Sales (a common ratio for the industry). The other annual expenses (trucks/trailers/mowers/fuel/insurance, etc.) add up to $268,964 leaving a small profit of $30,172 for the owners.

For illustration purposes, let’s suppose the Federally Mandated $15 per hour Minimum Wage is enacted. The new $15 per hour wage rate would raise the annual cost of labor by nearly 13{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} to $312,000. Moreover, this would push the small company into a net loss position of $(40,964) at the same sales revenue. This likely underestimates the true impact as the differential between employees vanishes. Stated differently, every employee would suddenly be earning the same as the highest paid Foreman. Would he continue to work under this scenario?  Doubtful. Other more costly differentiations would be needed.

When I ran this scenario by the owners, they stated they have already been planning for it. Their solution will be to lay off two laborers and drop the contracts of some of the lower margin jobs decreasing gross sales by about $40,000. They would also cut the bookkeeper’s hours in half and one owner would take over certain bookkeeping functions. They also would eliminate the Supervisor position and give those duties to the Foreman, a long-time employee. The other owner would pick up some of the Foreman’s duties. This would put the company back to approximately the same marginal profit level – sans three and a half full time equivalent employees. The owners also said they are also considering just liquidating the business and retiring a few years sooner. Under this scenario, all ten employees would lose their job. The same scenario would play out across the entire country – a certainty. The rational thinker can see how minimum wage increases cost jobs, especially in the small business sector. The number of jobs lost will be in the millions if a mandated $15 Minimum Wage is enacted. The small business sector in the US employs nearly half of the entire workforce.

Although it is not the purpose of this article, many observers correctly point out that the vast majority of workers who earn minimum wage do so only for a relatively short time – usually in entry level unskilled jobs. In most cases, this allows the individual to enter the workforce and utilize the opportunity to gain some basic skill and work experience. Although there are exceptions, almost all apply themselves and gradually move up the wage scale. Many will describe this period of their work career as a “stepping stone” or “foot in the door” opportunity. By raising the minimum wage, such jobs and the associated opportunities disappear.

The effect described above is not just for raising “minimum wages,” it is true for any other “mandated wage” that is higher than the marginal product of labor. The most glaring example is what happened to the auto workers of Michigan. Look no further than Detroit to understand the tragic consequences. Auto Industry Labor Unions mandated ever increasing wage rates which ultimately destroyed an entire industry. It took barely 50 years. The decline is shocking. From 1990 to present, Michigan lost two-thirds of its auto industry jobs all the while labor unions pushed wages ever higher. Drive past any auto dealership; it is obvious that automobiles for purchase are in abundant supply. Unfortunately for Detroit auto workers, very few are being built in Michigan. A trip through downtown Detroit resembles a war zone – all from ill-conceived, yet good intentions. Please consider this the next time you vote in favor of such measures. You may be putting your child, neighbor, or friend out of work.

For the economic geeks and number crunchers among us, the effect of raising the minimum wage to help the least paid in our economy is depicted graphically below.

The Aggregate Labor Market & Effects of Minimum Wages

The Y Axis (left vertical) denotes the Real Wage Rate. The X Axis (bottom horizontal) represents the Aggregate Quantity of Labor Employed, or stated more simply, the number of people working. The straight declining line depicted as DL represents the Demand for Labor and the rising curving line depicted as SL represents the Supply of Labor. The intersection of supply and demand curves is determined mathematically and indicates the natural/free market equilibrium; hence, supply and demand curves do not change (they can’t mathematically.

Lines depicted as We and Qe represent the Wage and Quantity of Jobs at the natural market equilibrium, respectively. The newly mandated higher Minimum Wage (depicted by the horizontal line denoted as Wm) intersects the demand curve up and to the left which forces the aggregate quantity of jobs lower. Note the new point Qm (where Wm intersects DL) to the left of Qe. The distance on the X axis between Qe and Qm represents the number of jobs that will be lost (or as previously noted, an economist might refer to it more technically as a decrease in the Aggregate Quantity of Labor Employed). At this point, it is important to reiterate that the above depiction is a mathematical certainty.

To summarize the effect of the mandated higher minimum wage, any worker whose marginal product of labor is less than that wage will either lose their job or not be able to find employment in the economy – maybe not on day one, but certainly in the long run. It is a simple yet harsh fact that some workers’ marginal product of labor is below the minimum wage; and therefore, as a group their employment prospects shrink. Proponents of a higher minimum wage may wish such individuals to have a higher marginal product of labor, but only the individual can raise it via education, training, experience, innovation, etc.

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