The Folly of $15 an Hour

 | May 19, 2014 | 4:00 PM EDT
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Fast food workers around the world took to the streets late last week and this weekend in an effort to get fast food industry and retail giants to raise their minimum wage (to $15 an hour here in the U.S.).

This is the level of pay that has been deemed to be a living wage, meaning that you could provide for a family of four on one wage earner. Simply by naming it a living wage, proponents have garnered much support from the public.  After all, who would refuse anyone the right to work for a living wage?

Well, let's try to look at the situation from the perspective of economic reality.

What is it that determines the pay rate of a particular job? Is it the needs of the employee? Must an employer ask to see the household bills of the perspective employee and allocate a pay rate that will satisfy his or her needs? No. It is supply and demand of the labor force that has the qualifications to fill the job.  The more people there are that are capable of filling the job requirements, the lower the salary for that job will be.

There are tens of millions of people in the labor force that have the skills to work at McDonald's (MCD) or Wal-Mart (WMT), while only a tiny fraction of that number have the skills it takes to be the CEO of those companies.

These jobs at McDonald's, Burger King (BKW), Wendy's (WEN), Wal-Mart, etc. were never meant to be jobs that supported families. Of course, there are people that started out at minimum wage and stayed with the company long enough to move up the ladder and into management positions and build a lifelong career. But most of these jobs used to be filled by high school and college kids who were just looking to earn some money while getting an education or older people looking to supplement their retirement income.  They are low-skill, high-turnover jobs.

I heard a $15-an-hour advocate over the weekend claiming that because the majority of jobs that are being created during this recovery are minimum wage jobs, the companies have a responsibility to pay the employee more of a living wage. That has got to be the strangest and weakest argument I have ever heard.  Let me get this straight. Under this administration, the only jobs that are being created are low-wage, low-skill jobs and somehow it's the fault and the responsibility of the employer. I get it now.

The argument I hear most used is that Henry Ford doubled the daily wage of his employees and look what it did to Ford Motor Company. They claim higher wages by itself, not the assembly line manufacturing process, made Ford (F) successful and Henry Ford the richest man in America at the time (of course by their standard he could have afforded to pay much more, but I digress). Again, a pretty weak argument. Autoworkers then, as now, are highly-skilled employees that require expensive training. The reason Henry Ford increased the wage was to lower the turnover and decrease the expense of training new employees. I also find it funny that whenever the Ford argument is thrown around, they conveniently don't mention that in order to qualify for the higher wage you had to live your life the way Henry wanted you to. That meant no drinkers, gamblers or deadbeat dads need apply. He had a team of investigators making sure of it. How many would sign up for their personal lives being investigated as part of the $15-an-hour deal?

Then there is the simple question of cost. About 30% of MCD costs come from labor. That would mean that on a $3 menu item, $0.90 cents comes from the cost of labor. If you double your labor cost, then that same item would now be roughly $3.90. It is the end consumer that pays any additional cost of production. So, what is now a $15 trip to MCD to feed your family turns into a $19.50 trip.

This doesn't even take into account the fact that the people at these companies that make $15 an hour now will also demand pay increases commensurate with their higher skill set. Keep in mind that this wouldn't just be happening at MCD. It would be happening everywhere. The cost to consumers would be felt immediately and my bet is that all those same people who back the cry for $15 an hour would be unwilling to actually bear the cost of its implementation.

What would happen is companies would lose business. Profits would drop dramatically, stocks would fall and some of the same people we are trying to help would lose their jobs, along with the investors losing money. This would hurt more people than it would help, by far. Telling people to stay where you are in life, don't try to better yourself, government will come to your rescue, is not the answer.

Thriving economies is what raises wages, along with a skilled and educated workforce. Legislation, although it makes people feel good, almost always creates more problems than it solves.

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