Not a Rising Tide

I do not object to raising the minimum wage. It benefits those who work for minimum wage, and for a liberal that should be a sufficient reason. Liberals, however, can never be satisfied with doing good for its own sake, because the modern convention is that voters should vote only in their own self interest.

(I actually reject the concept of voting only in one’s own self interest, but that’s a different subject for a different time.)

The only voters whose own self interest supports raising the minimum wage, however, are those working for minimum wage, and they don’t make campaign contributions. Nor are there enough of them to assure the reelection of liberal politicians, so the assistance of economists is secured to tell us that raising the minimum wage “injects money into the economy,” thereby increasing consumer spending and raising the GDP, which is in everybody’s self interest.

Sort of “the rising tide that raises all boats,” but does it actually work? Lets look at Dean Baker’s example of the roofer in Nebraska, who he suggests should raise her workers’ wage from $17/hr to $20/hr and thereby gain more business and enrich the economy by increasing the GDP because the workers will have more money to spend.

The average roofing job takes about 150 man-hours, so each for job the higher wage will enrich the workers by about $450, typically about $90 per worker. This is where the difference between economics and business enters the picture, because Dean Baker thinks that the discussion ends here, with telling us that the economy has been enriched by $450 per roofing job, the additional amount that the workers have been paid.

There is, however, the issue of payroll deductions which usually run about one third of gross pay, so the economy is actually enriched by about $300 per roofing job, which is the increased spending power that is realized by the workers due to the increase in wages. That’s a good thing, of course, but it’s still not the end of the discussion.

The roofer’s cost to do the job has increased by $450, and Dean Baker will tell us that the roofing company can just absorb that additional cost and move on. Any business that allows its cost to increase without a consequent increase in selling price, however, is all be certain to be going out of business in very short order. That’s not economics, so Dean Baker would not know anything about that. It’s basic business management, which a kid selling lemonade on the street corner figures out pretty quickly.

And the direct wage increase of $450 is not the whole story either. There are costs related to wages, such as workers’ compensation insurance, unemployment insurance tax and payroll tax. There are others, such as sick pay, vacation pay and, increasingly, mandated maternity pay, and they all usually add up to about 30% of direct wages. I suspect that the rate for a high risk business such as roofing is a little higher than that, but we’ll stay with the average and say that this factor bumps the average cost increase to about $585 per roofing job.

And that’s without the roofer adding anything for profit on that increased cost, which is actually a must if she wants to stay in business, not to mention applying a factor called “burden” onto the additional cost. The latter is a factor to cover the fixed overhead of the business, and companies who do not apply it regularly on job costing fail every time. I have seen it more than once. Profit and burden add another 20% at the very least; it is usually a percentage significantly much larger than that.

So the increased sale price of the roofing job is some $700 due to the $3/hr wage increase that Dean Baker urged the roofer to award her employees. That means that five employees have a total of $300 more spending money from this roofing job as a result of the wage increase, while the homeowner has $700 less spending money. The economy, then, had a net loss of $400 in consumer spending power.

I suspect that somebody is going to say that the homeowner is so wealthy that the cost of the roofing job does not affect his spending habits. I will prevent that person from looking foolish by reminding him of the “American dream” of every person a homeowner, and that over 50% of the population has already realized that dream. I would not for a moment suggest that 50% of the population is indifferent to spending resources.

That argument is beside the point anyway, because the “injection of money into the economy” is not about how much will actually be spent, but is about how much will be made available for spending, and we have shown that the economy did not realize any net benefit from the Nebraska roofer raising her workers’ wages.