Update 1/1/2017
Arizona voters passed an initiative to force an increase of minimum wage on all employers and the front page story told it all, the employer had to raise the pay of some employees because they needed to be paid more than the employees getting a higher minimum wage and some people would be let go. This is one of results of forcing a higher minimum wage.
With every topic, there is bottom line, the place where opinion has a foundation and with this topic the bottom line is whether or not you support capitalism or socialism. This is not a simple question and many people do not fully understand the differences between the two market economies. If you are one of the people that think you have the right and ability to become wealthy, to do better than your neighbor then you support capitalism, if you want everyone to have the same, then you support socialism.
The advocates for an increased minimum wage base their entire argument on their claim that these people on minimum wage are not receiving a livable wage, however, capitalism does not promise that every employee will be paid a livable wage. Capitalism promises that if you work hard and increase your skills and abilities then you will be rewarded with a higher wage.
Let's be clear, a minimum wage is paid to anyone that provides a minimum contribution of value to the company because these people have no skills or abilities that set them apart or above the others paid minimum wage. There are stories of people that have been in the same position and paid minimum wage for years and the question is WHY? If this person is unable to increase the value of their labor then you have to ask why this person should be paid more for being worthless, or as least not worth more anyone else. Back to the topic.
WHERE TO START?
As a teenager, my first job was in a grocery store as a bagger for one of the cashiers and to help people take their groceries to their cars. In truth, I had no experience and didn't understand that there is a purpose in how everything is done. Yes, I was paid minimum wage because I was unskilled, but I was just starting off. I thought
I should be paid more because I was working harder than I had at any other time, but getting a paycheck meant
a lot.
During the first few days, I worked with another more experienced bagger and learned the rules for properly bagging groceries. What I learned is that people want to get their groceries home in the same condition that
they were in when the groceries were selected, in other words, bread should not be mashed or the eggs broken or the produce bruised because of my carelessness.
LESSON ONE: THE SOURCE OF JOBS
The essence of my job was to provide a service for the customer because that was the goal of the business. Here is where I learned that my job was not provided because I was entitled or expected to be hired, I was given
a job because my boss needed labor providing a function that he was not capable of providing because of his other responsibilities. I learned that the most important part of my job was to make sure the customer got the best possible service and in doing so, they would shop at this store again.
It was heartening to know that the way I acted and the quality of my service could have an impact on the future
of store sales. This realization explained why some of the other people that had been hired, had also been fired because of their attitude. Part of my job, for as little as I was paid, was to make sure that the customer had a reason to come back to the store, but of course, I didn't’t do much other than bag groceries and carry them to the car.
It took a lot longer for these revelations to penetrate my consciousness, but, as a teenager, I was pretty full of myself. I figured out the owner could find lots of unskilled people with no work experience to do the job so he
did not owe me any special consideration, it was up to me to prove to him that I deserved to keep the job. In order for me to keep the job, I needed to work towards the same goal that he had for the business, which meant being polite, courteous and pleasant. Frankly, this was not a choice I had, it was the requirement for the job. If
I wanted to keep the job, I must make sure that the owner had no reason to believe his trust in me was misplaced.
Those first few days, where I was under the wing of another worker, were the first indications that the owner had used limited training to invest in me. If I worked out, then the owner would have more confidence in me and, perhaps, offer me an incentive to do better so that he did not need to replace me and invest in someone else. So I combined two concepts into my working – first was the training, anyone can learn to place merchandise in bags and handle them with care, second was the need to be polite and pleasant giving the customer reason to return to the store.
Not to change the topic but to take a quick diversion on this point, recently a fast food customer blogged his interaction with a worker behind the counter. The blogged comments indicated that the employee had worked
for the business, at minimum wage, for more than 3 years. During the conversation, the employee used poor English, made negative comments about the job, got the order wrong and could not count change properly. Based on the interaction with the customer, it is easy to understand why the employee had not received a raise above minimum wage. Actually, the real question is simple, why does this person exist in a society that prides itself on free education? If a person refuses to learn, then there are consequences and those are the result of personal decisions not a failure of society. Just a quick detour, back to the story.
I watched a lot of new people go through that store, many leaving because it was hard work and, sometimes, difficult to deal with people but that paycheck helped offset the frustration. In a short period of time, I became one of the people that trained the new people and was rewarded with an increase in pay. This was motivation
to do even better and receive bigger and better pay increases. As time went by, I shifted from a bagger to a cashier where the responsibility was even higher because I was trusted to provide a new service to the customer and handle money. On top of my other training, I brought my education into the mix to apply accuracy and the basic math I had learned in school doing something very simple – counting change. Here is where I realized the importance of primary education, I was amazed at the number of people with poor English skills and limited math ability.
My job was not something I had a right to, it was something I was required to provide the owner with reasons to keep me when there were others that could be paid less, but did not have the same range of skills. I made a commitment to continue developing my skills and it is often easier than most people think. Each time I thought I had learned a new skill, I asked the owner what I could do so that I could be better and often the answer involved a new skill, moving from cashier to stocker to handling produce and assisting in the meat department. I helped unload trucks and distribute the goods throughout the store for the stockers and, yes, at times I cleaned the toilets.
My enjoyment of every job was not the issue, what I learned is that every job (no matter how unpleasant) needs to be done for the business to run. While I did not enjoy every activity, I learned how all of the activities tie together and at each step along the way, I was rewarded with positive reviews and compensation. The most important lesson of all from this first job was simple: don’t wait to be recognized, ask what you can do better to
be recognized. The owner wants people that want and take direction not just waiting to be pushed.
I learned what it meant to be paid minimum wage and I learned that it is a choice to stay at that level or to grow beyond that level. For me, and many others, minimum wage was an introduction into the concept of working for someone else and this simple idea may be the cornerstone: you are working for someone else, they are not working for you and they do not owe you job. Many of the people I worked with during that first job just wanted
a job, a place to put in time and get paid for the least effort possible. Many of these people did not get replaced because they were right on the line between starting over with a new person and having to provide training or
to tolerate the people you have now.
Consider a social program with one goal: the development of skills and abilities to encourage growth out of the existing economic condition. During the training program, the employee must work at a job while completing training and receiving compensation for the training. Once the program is completed, the employee agrees to relocate if needed to a location where the training and skills will result in a job. If you give a man a fish, you feed him for one day, but if you teach him to fish, you feed him forever.
LESSON TWO: A BUSINESS PRIMER
The primary purpose with running a business is profit, because profit is the motivator to any person in the creation of a business. It doesn’t matter which business is reviewed, every business requires a profit in order to continue to exist, a business cannot exist at a loss. Most people do not fully understand the entire range of
costs and expenses associated with building and running a business, so any simple declaration of “pay them a little more” is uninformed and ignorant.
Profit is the result of revenue generated from the sale of goods or services, reduced by the expenses incurring
in obtaining, preparing or delivering the goods or services. Revenue is based on being able to sell goods or services which are the result of labor hired for the specific needs to reach this objective. In order to have a profit, the costs incurred for the labor must be lower than the revenue generated from the use of this labor.
This is a critical point to understand: what is hired is labor to complete a specific function, nothing more. Labor
is a solution to a problem encountered by the owner but the labor is not the owner of the business.
Each source of labor, the various individuals that offer and sell their labor to the business, offer whatever skills and abilities that come with from the individual based on that individual’s experience and training. Each
individual is hired by the business, another important point in that they are hired based on a selection of the business, they do not tell the business to hire them. The individual brings labor which can perform specific functions and therefore has specific value to the business in that the results of the labor have the potential for revenue to the business. All labor has value based on what revenue may be associated with the results of the labor. Would a business hire labor if it has no value?
From a bird’s eye view, the total cost of labor is based on a percentage of the revenue and all the labor must share this total cost. Some employees are paid more than others due to the contribution of their labor to the business and the revenue. There is constant competition in the market for customer share. Being forced to raise the prices due to increases in the cost of labor means that the buyers will shift to other businesses, revenue will drop and without profit, there will be no business. This simple problem means that solutions are
not as simple as just pay more because one of the options is to fire everyone, close the business and move to
a location that provides better opportunities.
To insure the revenue can be generated, specific members of the labor pool must be capable, through training and experience, of completing the specific functions required. The labor that can provide these services must
be paid more than those members of the labor pool that do not have the required training and experience. So consider, if a business must reduce their labor costs, who goes first?
Each member of the labor pool contributes value to the business through the completion of the specific
functions that they are capable of providing. However, every business has functions that must be performed
in the operation of the business that may not require training. The issue that must be understood is that if the function can be performed with none or minimal training, then the value of this specific labor is limited to the business and can be replaced easily.
It is critical to recognize that each strata of capability, starting at the bottom, provides an increased level of compensation, representing a proportionate increase over the lower strata, with each layer increasing over the next lower strata. It is this stratification that creates the pay structure in each business or market in the economy. This all ties together in just a moment.
The problem with changing minimum wage is that most people fail to grasp the total impact of an increase in
the minimum wage. Activists have distorted the facts and provided misleading conclusions. Assume that the government steps in and declares that every member of the work force that is being paid $7.25 will now be paid $10.75. Activists sell this approach with a simple lie, they declare that only those workers at the $7.25 level are impacted, so the overall economic impact is minimal. However, they intentionally exclude everyone that is paid more than $7.25 but less than $10.75 from the calculation including these workers would shift the numbers up and expose the underlying misconception.
Going back to the concept of the stratification of all compensation, if the lowest level is increased to $10.75 then the compensation of every worker will also be increased in order to maintain the stratification. Those workers that are more skilled than the lowest level workers will expect to have their compensation increased proportionately and this effect will travel up the pay structure until every employee’s compensation will be increased. This is the underlying truth that the activists don’t want you to see, they will misrepresent and lie to keep you from seeing this truth. To be very clear, due to the way a pay structure is defined, EVERY employee’s pay will eventually increase when the lowest level employee is forced to increase. Anyone that says only a
small portion of the labor will be impacted is ignorant and uninformed.
Through all of this shifting and juggling and recalculation, the value contributed by the lowest layer of workers has not increased. The question then exists, if the value generated for the business is minimal, what is the compensation that this individual should be paid for the labor value provided?
LESSON THREE: THE SOCIAL RESPONSIBILITY
We accept, in this country, the need to provide for the general welfare of all citizens. The definition of general welfare has evolved over time to mean “provide for an acceptable standard of living”. While this standard of living was intended to be applied to those that cannot work for a living, just as the definition evolved so did the application.
In the current market, the definition is being applied to everyone including those that have no excuse for not working so they must work. The problem is that these workers are under-educated and lack the skills needed
to earn a wage that is higher than the minimal that can be earned. These are the workers that have no desire
to work harder or learn skills. This is where the social responsibility stepped in. Instead of developing a government program to supplement the income of these workers, it was determined that the best solution was
to place the burden for providing a minimum standard of living on the economy instead of the tax base.
The tax base spreads the cost of providing this support over all workers where taxes are collected, which would be an equal impact across even those people that are receiving support. However, by determining that the burden should be carried by the economy, the thought was that the additional compensation should be borne
by the owners of the businesses. This was accomplished by forcing the businesses to pay employees whose labor is of limited value a compensation at a minimum level, paying them more than the labor is worth. The problem is that this approach fails to grasp the basics of the business primer discussed earlier.
Any business primer explains that when costs are increased, the business increases prices to offset these increases so that the profit will remain static. In other words, the business simply spreads the additional cost
of worthless workers to the customer base through increased prices. Surprisingly, this approach impacts the poor in the economy more than the rich, on a proportional basis. At the same time, the poor that rely on minimum wage jobs will have their hours reduced or eliminated to control costs. Consider if a business finds
one person that is willing to work harder to insure a continued job, other less industrious people can be eliminated and the business would be better off maximizing his utilization and increasing his compensation, however, there would be less jobs overall. This is exactly the results identified in various locales that have increased minimum wage over the federal mandated level.
The question that must be studied is whether or not the economy would be better off by developing a system more designed to increase the value of the worker’s labor instead of increasing the compensation for over-
priced labor? Consider the existing system that has developed with minimum wage. A worker goes to a job
and puts in his time and goes home, collecting his daily allowance. There is nothing in the program that
provides for motivation for the individual to increase the value of the labor which would result in the increase
of pay, you know, a pay raise for better work.
Is there any greater social accomplishment than the conversion of minimum value labor into a positive economic impact? This solution creates self-esteem and provides the worker with a path to continually increase their
skills, experience and compensation. The motivation for growth is the increased potential compensation but sometimes the first step is the hardest, proving to someone that they are better than they believe.
LESSON FOUR: CAPITALISM – AN ECONOMIC SYSTEM
It is surprising the number of people that do not understand the basics of capitalism and the relationship of
labor in a capitalism system. Around the world, every major economy has learned that, on an individual basis, giving freedom to the individual will result in the individual maximize the value of their labor. For many people, their labor is the only means they have to earn more money and when given the opportunity, have grown their personal wealth with their hard work and effort. These examples prove that there are few limitations on the potential of the individual when they make the effort.
Consider the reason socialism and communism have consistently failed to produce superior productivity results. The issue that is constantly ignored in the various theoretical thesis on socialism is simple human nature.
Within the population in the economic system of socialism there will be a percentage of those that over perform, perform on an average basis, those that under-perform and those that fail to perform. Within socialism, the assumption is made that all workers will perform their work at an average level of performance since the basic concept of socialism is that everyone is equal. Within socialism, everyone contributes equally to the social and economic system and the system provides them what they need. Human nature has proven to be less than reliable on insuring everyone works equally. Some people will steal from others so they don’t need to work, others will lie and cheat to get what they need, others will only make the minimum effort needed so they appear to be contributing. All of these people represent the downfall of the socialism system because their behavior detracts from the overall output of the economy and others are influenced by their actions, reducing output.
The single greatest failing are the people themselves.
The capitalism system places the burden on the individual to maximize their own productivity and their own compensation. If you do not like your current level of earnings, you may increase your earning potential
through additional training and education, or there are those that work more by getting a second job. All of
this is intended to maximize the wealth generated from the limited number of hours in the day.
Within capitalism, the value of labor is determined by the market based on a number of factors including skills, experience, scarcity, quality and quantity, all the while throwing in ability to work in a business environment, potential growth options and ability to work independently, providing leadership and direction as needed. The market determines the value by allowing the individual to move from business to business so that they can achieve the maximum value for their labor.
All labor has value, however, that value is defined by three perspectives. The first perspective is the individual attempting to define the value of their own labor, of course this perspective is biased and often completely lacking a connection to reality. The second perspective is the business and the value that the labor contributes to the operation of the business, how much work does an employee actually do and what savings can be contributed to that work? The third perspective is the market determination of the value. The market determination is based on an evaluation of all members of the group. This evaluation takes into account the various other characteristics that each employer uses in selecting which individuals best fill and open position
Bringing forward the concept of contribution of labor in socialism, the same is true under capitalism except it is the responsibility of the business to determine the value of the labor to the operation of the business. All labor contributes in some way to the operation of the business even if that labor is pushing a broom around to
maintain cleanliness, which contributes to a hazard free and safe environment. As silly as it sounds, this contributes to maximizing the productivity of other employees. However, if an individual does not contribute
any value to the business then there is no reason for the business to maintain the position. Ideally, the value contributed to the business is offset by the cost of that labor to the business and this is where minimum wage distorts the business cost structure.
Within a Capital Market Economy, the value of all goods, services and labor are defined by the market. This means that each buyer of any goods or services has the option of buying from another seller so the prices charged must be competitive or the business will have no customers. At the same time, in terms of labor, the value of labor to the business is based on the ability of the business to utilize the labor in the generation of revenue. Remember, the market will determine the maximum value for any labor based on the needs of the market so the business must insure that the labor value and the ability to generate revenue match up. The individual has the option of selling the labor to another business if that business is willing to pay a higher price
for the labor, thereby insuring that the market is maximizing the value of labor.
Of course, the market determines the value of labor when that labor has value due to training, education and experience, adjusted by scarcity of labor with a specific skill set. If an individual has no skill set or limited experience then the market value is adjusted based on the ability of the business to find a replacement. It is
the responsibility of the individual to bring skills and experience to the market to determine the compensation,
the compensation is not set based on the desires of the individual.
The market determines the value of labor based on the value that labor brings to the business. In a
construction company, you have welders and trash collectors. The welders have extensive experience and certifications for the training completed in various welding techniques, however, this work is subjected to intensive inspection and testing to insure the highest quality and those welders that have the lowest re-work ratios will have higher value due to the efficiency of the work. On the flip side, the trash collectors have limited training and skills and can be replaced with minimal effort. The value in the market is a reflection of scarcity
and contribution to the business and the welder would be harder to replace and could take years if replaced
with a novice. The trash collector has almost no value because of the ease of replacement and the
abundance of people that can perform this function.
Across the spectrum, all labor is valued in comparison to the other labor available in the market. To increase
the value of labor, that labor must acquire the characteristics of the labor which has a higher value. This acquisition must be done through training, experience, education and increased performance standards.
None of this acquisition can be done without effort or personal growth on the part of the individual, which is
the underlying nature of the capitalist system.
Around the world, every market economy has determined that individuals that make the effort can be rewarded. Even in Communistic China the government has determined that free enterprise can provide benefits for the individual, the market and the country due to the cumulative effects of compounding market impacts. However, the basis of this growth is the result personal individual growth outside of the benefits and standards
established by the government. All governments have concluded that there is no way to buy the success for
the individual with benefits, success comes from personal initiative, hard work and ambition. These benefits
allow the government to purchase dependency instead of self-reliance.
Part of the problem is the failure to recognize that the individual does not have a right to job. Jobs are
provided by employers with needs that can be filled by an outside labor source. The employer is willing to pay the individual to provide the labor needed to satisfy the business need, however, the compensation will be a reflection of the value that the employer places on that labor. Once the potential compensation for a job is identified, the employer must determine the individual that is capable of performing the desired functions.
The employer may, at any time, withdraw the need for the services of the employee based on any number of factors. The employee does not have any rights to demand the continuation of the job due to personal desire
or demand. During the protests regarding the concept of minimum wage, the protesters are of the opinion that their services are needed. However, the employer determines the need for the individual based on the cost of the services and the availability of other options. In any fast food environment, the food preparers will be compensated at a higher level that the person taking the order because of the additional training and trust placed in anyone that actually handles food.
As the business is forced to increase the cost of the labor, options are considered to reduce or replace the labor. Instead of surly, ill-mannered counter help, the business may consider replacing the human element
with an automated system. Speaking for myself, I often would prefer to simply select the desired menu items without being required to repeat myself because of lack of attention or inability of the parties to communicate.
If the business has the ability to replace or reduce the impact of the minimum wage employees, why would
these employees believe that their contribution demands any significant effort on the part of the business to retain their services? If these employees would put as much effort into working ‘for the man’, there is a
significant chance that they could increase their own compensation through reward instead of demand.
WHY HAVE MINIMUM WAGE?
What is minimum wage, when looked at it from all sides? The basis for minimum wage has nothing to do with rewarding the worker for the labor provided. Minimum Wage is a social declaration of the worth of the
individual based on social convention not based on the value that the individual brings to the market.
Minimum wage provides a way for the government to level the playing field for all workers that are unable or unwilling to develop the skills needed to grow in the market.
Within any market, there are individuals that have no skills or limited skills, no experience or limited experience
or lack the ability to fit within a business environment. This problem is the failure of the government or society
to define the requirements for the individual within the working environment. We have seen a growth in the regulation of interpersonal actions but there is not a concerted effort to define the desired characteristics or attributes of the individual. The minimum wage is a means for the government to insure that everyone working
in any capacity receives the same consideration, without regard to the skill, abilities or quality of work.
While it may seem like a declaration of failure, if the minimum wage must be increased to insure that the worker
is provided with the minimum standard of living, the real question is why did the efforts to motivate the employee through other means fail? In fact, any social aspect of the minimum wage issue (basically all of it) is simply
proof that society has failed to instill in the individual the desire to prove themselves in an economic basis. Society should take the responsibility to instill motivation instead of instilling an opportunity to fail and be rewarded. Recognizing that the greatest opportunity for the individual exists in a capitalistic environment, why does society attempt to create an environment of socialism with all of its failures?
While the concept is never discussed, it must be considered that the individual has an obligation to contribute
to the betterment of society in excess of the support received. This is based on the concept of the ‘village’, in which all members of the village contribute to the welfare of all members of the village. In other words, those of an age where they can contribute to the value of the village must do so to offset the support provided to those that cannot contribute, the old, the young, the disabled. The concept that it is a moral responsibility for
everyone to work that is capable of performing, is lost on anyone living on minimum wage because these
people put in the time to get the pay, they do not earn the pay to prove themselves as ‘providers’ instead of ‘takers’.
Minimum wage takes the place of government provided benefits. There is an assumption that everyone is entitled to an arbitrary minimal standard of living. It is the intention of society to provide for this standard of
living without regard to whether or not the individual makes an effort to earn this standard of living. This
decision by society is based on the popular concept of Robin Hood, in which it is believed that the rich should provide for the less fortunate. In this case, the rich are the business owners providing for the poor by giving them more in compensation than their labor is worth. While this is a questionably noble concept, it is severely flawed.
There is one purpose for a business, to generate a profit that is within specific limits. The intention of minimum wage is that the business owner will pay the extra compensation out of his pocket and reduce his overall profits, however, this is never the case. In order to maintain the profits within specific limits, studies indicate that one
of two things will happen: first, the hours of those on minimum wage will be reduced to overcome the additional cost or some of the minimum wage workers will lose their jobs; or, second, the business will increase the prices and pass the additional cost along to the final consumer, or possibly a combination of the options. Most people fail to grasp that without profits at specific levels, the business has no reason to continue operations and if all options fail, the owner will move the capital to another location.
The need for minimum wage is based on one single flawed thought process – the worker is incapable of adapting, growing or developing the needed skills to provide the owner with the reason to pay a higher compensation or take a chance on the employee leaving and finding alternative employment. It is this thought process that was a poorly conceived solution to a problem. Instead of giving someone additional unearned income, why not provide the encouragement, the motivation, the means to build the skills and ability within the worker? Why does society fail to place the responsibility on the shoulders of the individual that wants to
receive the benefit?
Politicians often speak of developing new job opportunities, growing the technology capacity to provide the
high paying jobs that are not available today. The problem is very simple, these jobs will not be for the existing workers that are being paid minimum wage, they will be for better trained and educated individuals from other areas, often imported as part of immigration programs. However, politicians will distort the truth and imply that these jobs will be there if they are elected to office, but they have no plan to bring the existing labor force to
bear.
THE SOCIAL SOLUTION
As has been said, if it walks like a duck and quacks like a duck, it is a duck. Minimum wage is nothing more
than a social program to transfer the subsidizing of a preferred life style cost on to the economy, away from an expansion of government programs to provide the same life style. Why would our leaders desire an economic solution as compared to a social program? The social program can be tracked and the cost accurately
defined, and this cost would be staggering. On the other hand, if the program is transferred to the economic system then the costs are almost impossible to accurately track and define. We have no idea how much this program is costing the average citizen in increased prices so a business can maintain their profit margin.
This is an attempt to apply a Robin Hood solution by taking from the rich and giving to the poor, however, this solution is a failure. Very simply, the rich do not absorb this additional cost, it is passed along to the customer and there are more poor and middle class customers than there are rich customers. The way this plan works
out is simple, have the poor pay more so they can give themselves a raise for their labor which has limited economic value in the first place.
There seems to be a confusion on the purpose of wages paid to employees. Advocates for minimum wages
take the position that employees deserve to be paid at a level that provides a basis for a standard of living.
This position implies that the employer owes some debt or responsibility to the employee. This is not the case. Wages are paid for labor that fulfills a need of the business owner, at a wage that was established by the business owner, establishing the economic value of the labor to the business. If the cost of the labor is higher than the projected value then the business cannot provide the job without losing money. Here is the basic consideration: it is not the responsibility of the employer to GIVE low value / low production employees compensation which is not in direct correlation to the value provided, it is the responsibility of the employee to EARN a wage. In a capitalistic market, the employee compensation is a reflection of the value contributed by
the employee to the employer. If an employee is paid more than the value contributed then the employee is receiving a form of corporate welfare and this additional cost to the company is paid by every consumer of this business.
Minimum wage is a rallying cry for the unskilled, the uncaring, the incapable. Anyone that cries for a higher minimum wage does so because they have no skills or have no desire to make an effort. The value of a
person's labor are reflective of their acceptance of personal responsibility for their position. Minimum wage will not make anyone successful, it will only encourage a standard performance of mediocrity. Whenever any
leader calls for better paying jobs, the question must be asked: “Who will fill those jobs?” Do you expect the people that are happy with minimum wage to be those workers? These workers will not be paid minimum wage and will require skills beyond those of minimum wage workers.