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devil duck

Yet more armchair economics: the minimum wage

The simple right-wing argument against minimum wage laws says "they make it more expensive to hire people, so any given company can't afford to hire as many people, so jobs will be lost."  (There are more sophisticated arguments, but I want to address this one now.)

The above reasoning is valid under the tacit assumption that everything else in the company's finances is unchanged, and the only thing changing is per-person labor costs.  In fact, several other things will change too.  For example, if your company pays higher wages relative to the market, your employees are less likely to leave for other jobs, so you save money on training and job churn.  But that's probably not a big effect if every low-wage employer's wages rise at the same time.

More interestingly, all of your employees are also somebody else's customers, and their employees are also your customers; if your customers suddenly have more money in their pockets, you'll sell more than you did before, so your revenues will go up at the same time as your labor costs.

So what kinds of businesses would see what kinds of effects?  Country clubs and luxury-clothing manufacturers won't benefit at all: they have low-wage workers, but no low-wage customers, so it's a loss for them.  Fast-food joints and big-box discount stores, OTOH, have both low-wage workers and low-wage customers, so it might be a wash, or even a slight win.

If it's a win (between job-churn and richer-customers) for those companies, why haven't they adopted higher wages already on their own?  Because it's not in any company's interest to be the first or only company to raise wages (at least in a low-skill sector where there's no shortage of workers); it only works if everybody does it.  Hence a law.

But a minimum-wage increase isn't going to pass a House of Representatives in which 20% of the members, in safe seats, don't want government to do anything, while another 30% won't vote for government to do anything out of fear of a Tea Party primary challenger.  So in keeping with Obama's pledge to use his own power to do what Congress won't, how about this:

Obama calls the CEO's of McDonalds, Burger King, Wendy's, KFC, Domino's, etc, puts them all in a room together, and says "I want you to all raise your bottom-end wage.  None of you will lose competitive advantage to the others, because you're all doing it simultaneously.  And since a lot of your customers are one another's employees, you'll all see increased revenues.  I'll be sure to mention in public which companies signed on, and which didn't."  Then he does the same with Walmart, Target, etc.

An interesting question: what kind of business would see a clear win from an increase in minimum wages?  Ideally, one that had high-paid employees (hence not affected by the increase) and low-paid customers.  The only way to pay for high-wage employees with low-wage customers is to have a LOT of low-wage customers -- to be on the long tail, making a little bit of money from lots and lots of transactions.  For example, Big Data companies: Google, Twitter, Facebook, Netflix, etc.  (Those don't make money on customers who are so low-wage that they don't have or use computers, but they would make a lot of money from people moving up into the computer-using echelon.)


This does explain a lot of the seemingly nonsensical behavior we see at the corporate level...