A $15/Hour Minimum Wage Is Bad for Business

Moreover, the consequences could be dire for American investors

   

Nick Hanauer’s perplexing Politico article regarding the minimum wage exemplifies the fact that achieving wealth does not necessarily endow one with special knowledge about market forces.

dunce cap 300x225 A $15/Hour Minimum Wage Is Bad for BusinessTim Worstall does a great job of setting Hanauer straight on the “facts” that the letter presents in his article. He also torpedoes the notion that a $15 minimum wage is a good idea.

Indeed, Hanauer refers to himself as “not the smartest guy you’ve ever met.” So maybe that explains how he could get so many things wrong about basic concepts regarding wages and employment.

I’m going to boil things down to the simplest concepts as to why a $15 minimum wage is a terrible idea, just so supporters of the concept can understand what will result.

Seattle

Hanauer says that, hey, Seattle already raised its minimum wage to over nine bucks and now it’s the fastest-growing city in America. Maybe. It is according to Paychex’s small-business measure, and it is by population — but not every measure puts Seattle on top. And while he points to Seattle as having the fastest job growth, there is no evidence that a higher minimum wage is the result of this. Correlation does not equal causation.

It isn’t hard to determine what happens if you raise the minimum wage to $15 as Seattle just did. Some or all of the following must occur when you raise labor costs.

  1. Less money for the owner to return to shareholders (which may include himself)
  2. Raise prices
  3. Layoffs

That’s it. Those are the only three outcomes — some or all of which will happen. Let’s look at each.

  1. Decrease returns to shareholders: If I own a business, the last thing I’m going to do is pay myself less. If I happen to have investors, whether I’m a private or public company, I don’t want to decrease my dividend payout or decrease my share repurchase plan. That’s because I have a duty to my owners — to maximize a return on their investment. This is where leftists tune out. They attach a moral judgment to the notion of profit, and have no understanding of a business owner’s obligation to risk capital.
  2. Raise prices: I don’t want to raise prices on my customers. I’m afraid they will go to a competitor for a lower price. I’m concerned they will curtail their spending with me. If I have no other choice, then I’ll come back to this option.
  3. Layoffs: I will choose this first. I will cut my labor force to the point where I only have who I absolutely need to run the business. I will ask those that remain to do even more than they already do. Check in with me in July 2015. Note how Seattle’s unemployment rate will have increased or the Labor Force Participation Rate will have decreased. Let’s see how many net businesses are subtracted from the city.

The (False) Walmart Argument

Hanauer also points to Walmart (WMT), claiming WMT stock makes $25 billion in pretax profits, so it can afford to pay its 1 million lowest-paid workers another $10,000 per year, and “still earn more than $15 billion per year.”

Of course, pretax profit isn’t what any investor, analyst or economist looks at to see how an investment is performing. They look at net income — as in, after-tax profit.

WMT stock’s net income was $16 billion. Paying $10 billion more in wages decreases net income to $9.8 billion. Why should the owners of Walmart be forced by the government to accept a 40% haircut to their annual profit? Leftists do not understand that this would theoretically cut WMT stock price by 40%, and wipe out $100 billion in wealth, half of which belongs to American investors, including many who are retired.

It gets worse. If Walmart pays unskilled workers $15 per hour, wouldn’t the skilled worker rate have to increase? If unskilled workers got a 65% raise, skilled workers — say, floor, store, district and regional managers — will want the same. The result is Walmart will go out of business.

It drives me bananas that people like Hanauer are so ignorant as to say that Walmart “still has plenty of profit” after a $10 billion wage hike.

Not only is he wrong, but it makes me wonder who the heck he thinks he is, telling WMT stock investors what is and isn’t “enough profit.”

Other Companies

Costco (COST) workers get paid more. Why? COST stock owners are OK with paying employees because of the higher required skill level. Why does Starbucks (SBUX) offer great benefits? The owners of SBUX stock know that being a barista and food worker takes a degree of skill above a McDonald’s (MCD) cashier.

If you want to get paid more, learn a new skill.

Hanauer seems incapable of insisting that it is the worker who must bear the responsibility of making himself more valuable to the market, not the owner who should be forced to pay more to make things less “unequal.” Instead, we get nonsense like this:

“Wal-Mart won’t (and shouldn’t) volunteer to pay its workers more than their competitors. In order for us to have an economy that works for everyone, we should compel all retailers to pay living wages — not just ask politely.”

Bottom Line

I suggest Nick Hanauer use his wealth to start another business and pay people $15 an hour at this one. If his business is so great, I’m sure he’ll attract the best and brightest.

Provided, of course, he is able to stay in business.

The opinions contained in this column are solely those of the writer.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of Asymmetrical Media Strategies, a crisis PR firm, and PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.


Article printed from InvestorPlace Media, http://investorplace.com/investorpolitics/minimum-wage-business/.

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