Minimum Wage Arguments: Job Loss

This is the first of what will hopefully be a series of articles. I’m hoping to address the major arguments against raising the minimum wage from a rational perspective.

Bit of background before we get started; I’m a writer professionally but a business major by way of education. That included a lot of economics courses, and I spend a lot of my professional life reading up on world issues for my own writing.

Moving on to the main attraction, then.

While not the most prevalent argument against raising the minimum wage, I find that the job loss argument is the one that trips up intelligent folks the most. It seems to make sense, on the surface; force companies to pay their workers more and they’ll employ less workers.

The truth is actually quite the opposite.

For today’s example, we’re going to take the Starbucks corporation. Everyone is familiar with Starbucks and the kind of work their employees are doing, and they’ve just posted record profits, making them a good subject for us.

Starbucks can absolutely afford to pay their workers more. Wikipedia tells us they employed 191,000 workers in 2014, so let’s pretend that they all earn minimum wage (most do, or started at minimum wage with percentile raises) and round that off to an even 200,000.

So how much will a wage hike cost?

The current federal minimum wage is $7.25, so let’s go with that. and let’s assume that we’re giving workers a raise straight to $15.25 without any increments, an increase of $8 per hour. We’ll also assume each worker is a full-time employee at 40 hours/week.

This gives us 8 x 40 x 52 x 200,000, or 3.3 billion.

Wait, what? Holy crap! That’s a huge number! That’s more than Starbucks’ total net profit of 2 billion in 2014 by a wide margin! They can’t afford that!

Except that, with the magic of economics, they absolutely can. Because Starbucks isn’t the only company paying the new minimum wage; every company is.

To explain this next bit, I need to tell you a bit of a story. See, I like a fancy coffee drink as much as the next person. Unfortunately, my income is tight. I can’t exactly justify dropping seven bucks on a hazelnut latte, and I haven’t been in a Starbucks in a couple of years.

Now here’s where the magic happens.

See, if I started earning enough to actually have some disposable income? I probably would drop in on coffee shops and have a latte now and again. People who already do so would be doing so more regularly; maybe a latte is a once-a-week treat for them now, and with extra income they’ll choose to get one every day.

This increases Starbucks’ income, sure, but it misses another vital point; you see, Starbucks, as a major corporation, is already employing the minimum number of workers necessary to run its business. As wages increase, they still can’t afford to cut back on employees — and the new increased income balances this out in any case.

But more to the point — now that their business has increased, Starbucks has to hire more workers to handle the load.

Here’s the takeaway. On the surface, increasing minimum wage significantly increases operating costs for businesses, but it also increases their profits and forces them to hire more employees, not lay workers off.

This effect branches out everywhere. Disposable income is what makes most retail businesses viable; more money means more people buying electronics, luxury food and drink, better/newer cars, etc. When those businesses grow, they end up paying more to the companies that service other businesses; Starbucks needs more napkins, receipt papers, drink cups, so on.

The more disposable income people have, the stronger the economy becomes. Keeping the money in play is the entire point of the system.

Higher wages today means a stronger economy tomorrow.

Lastly, bear in mind, these changes won’t be coming all at once, as in our example, and the numbers have been exaggerated for simplicity. Businesses will have time to grow and adjust, and the actual impact on operating cost will be far less than illustrated here.