There are lots of people out there every day, working hard to support their families, and through no fault of their own they get paid a really low wage.
Let’s assume we agree that we need some kind of minimum wage, to ensure these guys are able to do a fair day’s work for a fair day’s pay, without some fat cat paying them a pittance and waltzing off with loads of profit without lifting a finger.
The most popular model amongst the well-meaning is for the government to get involved and change the law, so that you can’t legally pay someone less than a set amount of money for an hour of their toil.
An industry with lots of low-paying jobs is the fast food industry – loads of young people working in hot kitchens for eight hours a day for maybe £5 an hour.
Let’s assume we think they deserve a bit more, and see if changing the law to try to help them actually works.
Let’s imagine the Prime Minister stands up tomorrow and says “For too long our young people and low skilled workers have had a raw deal, earning too little working for businesses that profit too much. I am proud to announce that effective tomorrow, the minimum wage in the U.K will rise to £10 an hour for all workers. Thank You.”
She sits down.
As journalists sharpen their pencils and young people watching at home heave a sigh of relief that they will get a little help to get on, some ominous noises are already coming from the business machinery.
And here’s one reason why.
A typical fast food restaurant might have 100 employees.
To keep the numbers easy, let’s say perhaps eighty of them will be on the minimum wage of £5 an hour. Taken as a team, their combined hourly cost is therefore……….
Another ten might be junior managers on £10 an hour………..
There might be a few middle managers on £20 an hour……….
And then a senior manager running the joint……..
Add this labour force together – £500 to run the show for an hour.
Now let’s look at what impact the Prime Minister is about to have with her Minimum Wage sledgehammer.
The eighty on the minimum wage just got a pay rise, from £5 to £10 an hour.
£400 has become £800.
Hang on – we have a problem.
The guys flipping the burgers are now earning the same as the junior managers. Before, they were earning double what the burger flippers were. The junior managers are going to want pay rises too. To keep things fair we put them back as they were, earning double…….
£100 has become £200
Hang on – we have another problem.
The middle managers are unhappy – to keep it fair we give them a pay rise too, back to earning double their more junior colleagues……..
£60 has become £120
The guy running the show is up in arms – he thinks it’s all unfair too:
£40 has become £80
We just doubled the cost of the entire workforce.
But hey – all the workers are now a lot more cheerful, and the customers are happier as a result. The place soon gets a reputation for treating its staff well, and more customers start arriving to give the place a try. More customers equals more staff and more tills ringing, so the owner of the place is happy too, right?
Somewhere many miles from the restaurant, some joyless accountant is fiddling with a calculator and looking sad.
He calls the owner.
“Er…….you have a slight problem.
Total labour costs before were 30% of revenue.
Profit margin before was 10% of revenue. All was well.
Total labour costs now are 60% of revenue!
Profit margin now………..well it’s gone. You’re 20% underwater. Byeeeeee”
Restaurant closed – everyone fired.
Oh very good Prime Minister.