By Luke Johnson, Published The Straits Times, 7 Feb 2014
THE hue and cry has gone up on both sides of the Atlantic among the righteous: Raise the minimum wage. This ideological chant is considered an answer to poverty, inequality and even the route to productivity growth. But it is none of them: It is populist politics and bad economics.
If the price of labour rises, demand is likely to fall. That means fewer jobs. In the 21 European Union countries with a minimum wage, unemployment is on average almost 50 per cent higher than in the seven countries without such legislation. Obliging businesses to pay staff more does not increase economic activity; it is merely redistribution, but with added collateral damage.
Fantasists and fanatics believe that across-the-board pay increases suddenly improve staff productivity. Sadly, it is not the case: Employees are doing the same job, just being paid more. Minimum wage increases are not performance-related - so why would anyone work harder if given a fixed, statutory increase?
Fantasists and fanatics believe that across-the-board pay increases suddenly improve staff productivity. Sadly, it is not the case: Employees are doing the same job, just being paid more. Minimum wage increases are not performance-related - so why would anyone work harder if given a fixed, statutory increase?
When wages at the bottom rise, they push pay up through the entire system because employees want to keep differentials. Sharp wage increases lead to inflation. This all pushes up costs for companies, without higher sales or profits. Since returns must fall, these actions discourage investment. Through the downturn, I invested to develop companies and help to create jobs. A large increase in the minimum wage in the United Kingdom would immediately freeze our hiring plans and cast doubt on future investments.
One of the tragedies of the minimum wage is that it is a tax on those companies that are large employers of the least well educated and those who do not possess scarce skills.
Citizens at the bottom are further squeezed out of the market because they have become more expensive. It is a form of punishment for that cohort. Minimum wage increases positively encourage companies to seek alternatives to labour, such as outsourcing or automation.
Even restaurants can move in this direction. If restaurateurs are obliged to pay more, then watch them adopt technology such as computerised ordering and buy more ready-made, prepared dishes made in industrial plants with lots of machines.
The cheerleaders for minimum wage rises are typically academic economists. Most of them receive salaries from the taxpayer, directly or indirectly, and have never built a business or met a payroll. Their chief worries are publishing arcane papers; many can be wrong all their lives and never lose a penny of their own money.
By contrast, entrepreneurs are the job creators and are the ones who go bust or give up if costs go up too much. They know the answer to being stuck in a low-paid job is not coercion of the employer by the government to pay more, but improved education for workers. Of course, that is a difficult and lengthy task to undertake: whereas a simple jump in the minimum wage seems quick and easy policy - but it actually undermines overall prosperity.
By contrast, entrepreneurs are the job creators and are the ones who go bust or give up if costs go up too much. They know the answer to being stuck in a low-paid job is not coercion of the employer by the government to pay more, but improved education for workers. Of course, that is a difficult and lengthy task to undertake: whereas a simple jump in the minimum wage seems quick and easy policy - but it actually undermines overall prosperity.
In Britain, we have the nonsense of a national minimum wage, which means the same price for labour despite vast regional differentials in the cost of living, unemployment levels and so forth. The supposed science of a precise minimum wage is entirely undermined by this unfortunate truth. Implementing various minimum wages would be complicated - but it is ever thus when arbitrary regulations interrupt voluntary market exchanges.
It sounds a lovely gesture to raise low pay. Impractical romantics see it as the moral thing to do. Who could possibly object, save a rapacious capitalist? What such theorists fail to realise is that it restricts opportunities, fuels inflation, discourages investment and promotes labour substitution.
If governments are so keen on the idea, then they should exempt more low-income citizens from all income and payroll taxes. That would help make work more rewarding and make it more attractive to work than claim welfare.
Working almost invariably offers more dignity and superior health outcomes than a life on benefits - which is why it is so important to defeat unemployment and support job creation, rather than hinder it.
Raising minimum wages would hit the unskilled poor and inexperienced young hardest by killing job opportunities. How does that reduce inequality?
The writer is chairman of Risk Capital Partners, a private equity firm, and The Centre for Entrepreneurs. This piece first appeared in The Financial Times on Wednesday.
Minimum wage hike war in US
Some businesses fear being squeezed, others back move
The Straits Times, 7 Feb 2014
Some businesses fear being squeezed, others back move
The Straits Times, 7 Feb 2014
NEW YORK - On Jan 1, 13 US states raised their minimum wage, while an additional 22 and the federal government are expected to consider increases this year as well.
President Barack Obama is backing a Bill to raise the US$7.25 (S$9.19) federal minimum to US$10.10 an hour, to be put into effect in three stages, with annual adjustments indexed to inflation. And in his recent State of the Union address, the President said he would raise the minimum paid to federal contractors by executive order.
There is widespread disagreement about the impact of the increases.
Economist Paul Ballew says some small businesses are more sensitive to policy changes than others. That said, he added: "There remains a lot of economic pressure on small businesses... They've had a really rough go of it the past six years, and they have already squeezed out a lot of the fat."
Others point out that the proposed increases barely keep up with inflation. The current federal minimum of US$7.25, when adjusted for inflation, is about 23 per cent lower than it was in 1968. In addition, the increases do not reflect an evolving labour landscape in which the number of minimum-wage earners who work full time has increased substantially.
But with income equality a political issue and with some studies challenging the notion that minimum-wage increases damage small businesses, there are also business owners who support the increases. These owners suggest that businesses benefit from paying higher wages because of reduced turnover and the additional money that goes into local economies.
Here's a look at the two sides.
A SLIPPERY SLOPE TO BANKRUPTCY
MS CHARLENE Conway is watching her numbers. For 22 years, she and her husband have run Carousel Family Fun Centres in Fairhaven and Whitman, Massachusetts.
The business has annual revenue of less than US$500,000 and depends exclusively on part-time minimum- wage earners, mostly teenagers, to handle tasks such as running the snack bar and maintaining the games.
This year, Massachusetts is considering raising its minimum to US$9 an hour, from US$8. Should that happen, Ms Conway said, she will probably need to reduce her staff of 20. Her employees currently make an average of $9 an hour, with managers earning from US$10 to US$15. She says an increase in the minimum would force her to raise pay across the board.
And she is reluctant to raise prices again. In 2011 and 2012, she increased admission fees by a dollar - they generally run from US$5 to US$10 now, based on age and time of day.
In the past, Ms Conway responded to minimum wage hikes by increasing her workers' minimum age from 14 to 16. "I'm not going to pay a 14-year-old US$9 an hour with no experience, maturity or work ethic," she said. More recently, she has been hiring 18-year-olds. Pay hikes "eliminate the opportunity for young people to get started in the workforce".
Should minimum wage reach US$10 an hour, she says she would cut her staff to 10 employees and double up on duties. It is "a slippery slope that could absolutely cause me to shut down and force me into bankruptcy".
Should minimum wage reach US$10 an hour, she says she would cut her staff to 10 employees and double up on duties. It is "a slippery slope that could absolutely cause me to shut down and force me into bankruptcy".
HAPPY STAFF BETTER FOR BUSINESS
MS AMANDA Rothschild, co-owner of Charmington's, a cafe in Baltimore, calls the arguments against raising the minimum "short-sighted". Since opening in 2010, the cafe has paid new hires US$8 an hour (they also earn tips).
"I think those against increases underestimate how business success is tied to employee satisfaction," said Ms Rothschild, who employs 11 people full time and three part time. She said her employees were part of the reason her cafe's revenue increased to US$600,876 last year, up 31 per cent from US$457,940 in 2012. She expects another increase this year.
Paying higher hourly wages was part of Charmington's business plan from the start. "We felt that we would end up with more dedicated employees, who would be happier, and we found that to be true," Ms Rothschild said, adding that she had a 22 per cent employee turnover rate, compared with a restaurant industry average of 50 to 75 per cent. A stable staff, she said, helps productivity, saves her money on training and food waste, and leads to better customer service.
With Maryland looking to raise the state's minimum to US$8.25, Ms Rothschild said she was considering several plans, including raising all base pay to US$8.25 in preparation. She believes it is possible to increase wages and still keep her payroll within 35 per cent of operating costs without cutting hours, jobs or benefits. "I believe part of our costs in running a business includes investing in employees," she said.
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