Kate, Allie, and the Fight for Fifteen

15

If only it was that simple

“I’ve been at Burger King since I was 14, now I’m 19 and still making $9.75,” said Alexis Collins at a protest outside the north Minneapolis fast-food restaurant where she works on Monday. This was another battle in the long running battle to have the minimum wage raised to $15 per hour.

The problem with this view is that a worker’s wage is not a simple function of how long they have worked at a company. Nor should it be. Neither is it a function, at all, of the cost of living or what other people are earning. Nor should it be.

To see the truth of this put yourself in the shoes of an employer named Kate for a second. Kate has the opportunity to hire Allie and thinks that Allie’s work will add $9.75 per hour to her company’s turnover (its income). Assuming for simplicity that Allie’s wage (the businesses’s expenditure) is the only cost that Kate faces, it will make sense for her to employ Allie at any wage up to $9.74 per hour. That is because at any wage up to that, hiring Allie adds more to Kate’s company’s income than it adds to its expenditures.

So what happens if the wage is suddenly raised by government edict to $15 per hour. That means that the cost of hiring Allie has risen by nearly 54%. So, if Kate still thinks that Allie’s work will add $9.75 per hour to her company’s turnover, she will be faced with a choice of adding $9.75 per hour to her income and $15 per hour to her expenditure.

What business would take a decision expecting it to add more to costs than to income? What would happen to a business that did so? Businesses that spend more money than they take in go bust. Knowing this, Kate just won’t hire Allie.

This is why the Fight for Fifteen’s argumentation is composed of irrelevancies and its demands actually counterproductive.

A protester in Minneapolis on Monday said “It’s hard for mothers, single mothers, two parent homes, single fathers, families period to live off the wages we’re making now”. Quite possibly, but, as we can see, Allie’s (the employee’s) cost of living is no part of Kate’s (the employer’s) calculation whatsoever.

Let’s say that initially Allie can get by on the $9.75 per hour Kate pays her. Now imagine that, for some reason – kids or a rent increase – Allie needs $10 per hour to get by and asks for a raise. If Kate still thinks that Allie’s work will add $9.75 per hour to her company’s turnover, she will be faced with a choice of adding $9.75 per hour to her income and $10 per hour to her expenditure. As before, Kate wouldn’t do it. She couldn’t.

What matters for Allie’s wage is Kate’s estimation of the amount of turnover she will generate. No government order will make Kate pay Allie a wage above what Kate thinks Allie will add to her turnover. That is the real iron law of wages. If government arbitrarily raises the minimum wage to $15 per hour, all that will do is exclude those workers whom employers deem to have low (sub $15 per hour) levels of productivity from the legal labour market.

If activists are really concerned about raising wages they need to raise the estimates that the Kates of this world make of the productivity of the Allies. This requires that Allie have better skills which needs better education and on the job training. It requires that she have more and better tools to work with which means more capital investment. And it means that Allie’s labour and Kate’s capital should be brought together as efficiently as possible, which demands better entrepreneurship.

This a longer shopping list of actions than simply jacking the minimum wage up by government diktat. It doesn’t fit into a tweet like #FightFor15. But it does take economic reality into account and it has more chance of helping Allie make $15 per hour.

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One thought on “Kate, Allie, and the Fight for Fifteen

  1. Pingback: Whoever won the debate, economics lost | Phelanomics

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