Saturday, August 24, 2013

Minimum Wage and Poverty


President Obama is supporting a significant raise in the minimum wage, currently $7.25/hour.  The President is advocating an increase to $9.00 an hour, a 24% increase.  The applause line in his speeches on the subject is “no one who works a full time job should have to live in poverty.”  Cue the cheering.
This is actually a claim that can be numerically checked.  So let’s run the numbers.
If you work 40 hours a week for 52 weeks, that comes to 2080 hours.  At $7.25 per hour, you would receive an annual income of $15,080.  But really, nobody gets through a whole year without missing a little work.  Let’s use a more realistic 1800 hours a year for our calculations.  That gives a minimum wage income of $13,050.

Next, let’s check what the official poverty level is.  A quick search provides the following numbers for 2013:
Family of 2: $15510
Family of 3: $19530
Family of 4: $23550


On the face of it, things look like the President may have a point.  Based on the information presented so far, a single mother with even one kid could work full time at minimum wage and still live below the poverty level.

Before we concede the point, however, we need to consider the impact of Federal tax policy, specifically the Earned Income Credit (EIC).  This is money the government gives to low income people, like those making minimum wage.  With $13,050 in wages and one child, the EIC pays out $3169.  With two children, the EIC payout is $5236, and with three children it tops out at %5891.  Things aren’t looking so bleak for our single mother anymore.

But as the old Ronco informercials used to say “Wait, there’s more!”  We haven’t considered the Additional Child Tax Credit yet.  This Federal benefit pays $1000 per child for up to three children.  Once we add the Federal benefits in, the picture changes completely:
Family of 2: $13,050 + 3169 + 1000 = $17,219
Family of 3: $13,050 + 5236 + 2000 = $20,286
Family of 4: $13,050 + 5891 + 3000 = $21,941

The single mother with three children is still below the poverty level, but with one or two children you are now above the line.  Once you plug in food stamps, and maybe even child support (after all, our single mother wasn’t alone when the children were created), and I think you can call the President’s myth busted.

I’m not saying that it wouldn’t be tough to try and make ends meet when you’re close to the poverty line.  I am saying that the claim that you can work full time and still be below the poverty line does not hold water.

Saturday, August 10, 2013

You Want Fries With That?


A series of small strikes occurred in several major cities last week.  Strikes is probably too strong a word, since they were more like protests.  The targets of the demonstrations were fast food outlets.  The demonstrators were employees of fast food restaurants.  The object appears to be both trying to organize unions, and to protest for higher wages.  The target wage desired was an eye-popping $15 an hour.

If by some bizarre chain of circumstances these strikers would actually gain their chief demand, they might not like the consequences of their “victory.”  I have seen estimates for the fast food industry that claim labor costs run from 25% to 50 % of the total cost of operation.  Doubling labor costs would require a substantial increase in prices.  Good-bye dollar menu items.

Axiomatically, when you increase the price of a good, volume sales for that good drop off.  If something costs more, fewer people will decide that it is worth buying.  Economists call this shifting upward on the demand curve.  Now, a drop off in demand for fast food maybe a good thing for society as a whole.  With the obesity epidemic, we could all stand to eat more salads, and fewer French fries.

A good thing for society, in this case, would be a disaster for the fast food restaurants, and by extension, their employees.  If you are selling fewer hamburgers, you don’t need as many hamburger flippers.  Hours would be cut and positions eliminated.  Maybe the demonstrators don’t care.  Maybe they figure that they’ll still be ahead, even if they work less, because of the increase in wage rate.

The next shoe to drop would be management’s response to higher wage rates.  When the cost of a production input rises, a prudent response would be to start working on ways to use less of it.  In Australia, where the minimum wage is significantly higher than over here, McDonald’s is already using touch screens for ordering, eliminating the need for cashiers.  They may bring those over to America anyway, but higher wages improves the case for a faster rollout.  When they arrive, not everybody protesting would survive the ensuing cutbacks.

Certainly demand for fast food workers would drop if wages were to shoot up.  But another factor that I don’t think the protestors have considered in making their demands is that the supply of ready workers would also increase.  Anytime you increase the price paid for something, like an hour of labor, the number of providers willing to supply increases.  Shifting upwards on the supply curve is the exact opposite of shifting upward on the demand curve.  Increasing the price offered leads to a drop in demand.  Increasing the price taken leads to an increase in supply.

Fast food restaurants are both the entry level job and the employer of last resort.  No education beyond the most basic level, and no special skills are required.  The work is not particularly physically demanding.  Increased experience does not benefit you in performing the job.  Flexible scheduling on the part of the employee is allowed and even expected.  All of these factors have allowed fast food employers to keep wages low.  The current fast food employees are the beneficiaries of the low job requirements.  What I am saying here is that these people are working at fast food jobs because they cannot get better positions with other firms.

If you increase wages sharply, however, lots of applicants who would not consider fast food jobs now would give it a second look.  People with better education, better work ethic, higher capabilities.  Now ask yourself: if you were an employer, would you want to retain employees with low capabilities when you could replace them with better employees?  Or would you begin looking for pretexts to trade up?

I don’t know that new employees would squeeze existing fast food workers out if they did get the big raises they’re asking for.  But I’ll bet the demonstrators never considered the possibility.

You really need to be careful what you ask for.  Sometimes you won’t like it so much after you get it.