Maximum WageWritten by Ben Treece | | firstname.lastname@example.org
This week I received a call from a reader asking for our opinions on a minimum wage hike. Most of our readers know that I enjoy discussing topics with readers, engaging in constructive debate and answering any questions that they may have. We wanted to take this week to talk about how raising the minimum wage can have a negative impact on the US economy.
Many readers will remember that several weeks ago Massachusetts Senator Elizabeth Warren made the argument that since inflation has gone up and the dollar has lost some of its purchasing power over the last several decades the minimum wage should have increased as well, specifically calling for $22/hour minimum wage.
What Senator Warren does not realize is that the minimum wage has nothing to do with the cost of goods in the open market and has everything to do with the value of labor output.
For an easy example, we will look at McDonald’s and the price of a Big Mac hamburger sandwich. According to www.BigMacIndex.org
What Senator Warren fails to realize is that one cannot look at 1986 dollars versus 2013 dollars and compare them apples to apples; we must look at real values which factor in inflation, as opposed to nominal values. When put in a constant level of 1996 dollars
How do we determine the value of an employee’s output? Well, it is not as simple as the $4.20 per Big Mac times the number of Big Macs sold per hour. Using simple math, let’s assume a line cook at McDonald’s earns $7.35/hour and hourly overhead equals $50/hour. How many Big Macs whose raw materials cost $2.00 to make and sell for $4.20/burger must be sold in an hour to cover costs? Using these figures, that employee would have to sell 26 Big Macs in one hour just to cover costs.
Clearly McDonald’s sells other food items and covering their costs on simply one product does not make sense, but the principle stands true; an employee’s pay is not based on the costs of goods around them, it is based on the value of the output of their labor.
Peter Schiff of Euro Pacific Capital once wrote an article which we have referenced many times about Starkist Tuna in American Samoa
Unfortunately, Utopia does not exist, and paying someone $22/hour for labor that is not worth that same value or more is not a sustainable system. We tell people all the time that if you want to do minimal work for high pay, you should have started a tech company in the 90’s. Minimum wage jobs should be treated as what they are, a stepping stone and a learning experience before moving on to bigger and better careers, not a long term employment solution that should earn exorbitant pay.
Ben Treece is a 2009 Graduate from the University of Miami (FL), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com