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……….
£400
Another ten might be junior managers on £10 an hour………..
£100
There might be a few middle managers on £20 an hour……….
£60
And then a senior manager running the joint……..
£40
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
That’s right.
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?
Guess again.
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”
Result?
Restaurant closed – everyone fired.
Oh very good Prime Minister.
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To which many proponents of substantial increases to the minimum wage would argue that business closures are a feature and not a bug because of all the new businesses that will take over the facilities and take advantage of the opportunities to run more profitable businesses enabled due to the increased spending ability of all those workers on higher minimum wage. I kid you not.
I am less charitable than the author. It is not "through no fault of their own" that they earned such little pay. It is wholly their fault that they did not attend night school, learn better English, arrive at work on time, hide their contempt for the customer, show aptitude at doing something higher than flipping burgers, and so on. Some employees' value to their employers is very negative, requiring full-time effort of several good employees to undo. This too is not "through no fault of their own," though after they are fired, they will tell you it was over nothing but Speaking Truth to Power. A government minimum wage (also a labor union) delivers most benefit to bad employees.
Employers do try to set the pay high enough to keep from having to start over retraining a new face. Politicians who want to set the price of various things wrong do not have the well-being of any individual in mind. A significant influence is labor unions whose contract calls for their members' wages to be some multiple of the minimum wage.
PS - Instant bankruptcy is only one end-game. The higher minimum wage also affects the restaurant's competitors. The first move is that all raise their menu prices. It is only after customers begin to elect not to eat out that the bankruptcies begin.
Many such employees are teenagers and are often doing what you advocate. For those, this is a first job and they'll move on. From the US Bureau of Labor Statistics
"Age. Minimum wage workers tend to be young. Although workers under age 25 represented only about one-fifth of hourly paid workers, they made up about half of those paid the federal minimum wage or less. Among employed teenagers (ages 16 to 19) paid by the hour, about 10 percent earned the minimum wage or less, compared with about 2 percent of workers age 25 and older. "
So, even among teenagers 90% earned more than the minimum wage and of those over age 25 98% earned more than the minimum wage.
I agree entirely. By the way, this means that the unions' stereotype of the minimum-wage employee desperately "supporting a family" is a lie.
you'd have to look hard.
Not really, think of all those teenage pregnancies. As an aside the government also loses out when said business goes under - no profits to tax!
The other option of course is automation. Order taking is already automated at McDonalds.
Likewise order fulfillment. "Flippy" the $60,000 burger-flipping robot has been all over the news. We have come a long way since Michael Dukakis disparaged this job and told us that, with him as President, we would have "good jobs at good wages."
Quite.
They've introduced the auto order things at one of the McDonald's in Limassol.
They've also replaced the (excellent) order taking staff with mongs that are completely incapable of taking your order...
Well played!
That reminds me I have to pay the lady that does for me an hours overtime for cos she cleared my drive of snow before I took the dog for walk.
Then there's the other one – the feral one, if you like (feral as in wild and out of control) – existing way beyond the limits of the real economy and only loosely related to it, made up of the enormous financial balances denominated in cash of various sorts, existing only as entries in computer ledgers. Some of these cash balances are backed up by supposed assets, which are at best legal claims on property which may or may not realise real worth, such as shares (whose value usually have almost no direct bearing to the companies that lend them their names), property (which has been priced as a consequence beyond the reach of the real economy) and more obscure derivative products, which few understand and which even fewer trade in ever larger amounts.
This feral economy represents the wealth quite deliberately extracted from the real economy by those who have exploited it over the last thirty years of neoliberal domination by ensuring that the share of real wages in GDP has fallen from about 58% in 1980 to about 53% now (see diagram 1 here for detail) – with the cash they have extracted being stashed as unproductive wealth (often offshore). That unproductive wealth, whether held as cash or placed in assets that have near liquidity such as shares, property, derivatives, hedge fund and other portfolios, has had enormous consequences. There are many; let me just note two.
The first is that the refusal of the owners of this wealth to engage it constructively in the economy has been a contributory factor to underinvestment, stagnant real wages, and the rise in what has effectively been enforced borrowing by far too many households struggling to make ends meet – who have become increasingly indebted to the agents of the feral elite in the process (see diagram 3, here), reinforcing the whole vicious cycle as a consequence and withdrawing yet more and more funds from the real economy and into the free-floating world of feral finance. The relationship of feral finance with the real economy has, therefore, been wholly negative here.
Second, the use of those feral financial balances to undermine currencies in pursuit of short-term gain and maximum income returns has brought the whole edifice to the point of breaking. Breaking the real economy does nothing to the feral economy – downsides can be traded as much as upsides in the feral world of finance: gain is to be had in this world whatever happens in the real one. But the relationship of the feral economy with the real economy is again wholly destructive: those feral deals – done beyond regulation, assisted by the world of secrecy that tax havens provide, are bringing destitution, unemployment, real failure and fear to real lives.
I revisited the piece because I now think that this duality within the macro economy, where there is a ‘real’ economy meeting actual need and a ‘feral’ economy that seeks to extract unearned reward from that process, is exactly matched in multinational corporations.
In those companies there is, of course, an element of ‘real’ economic activity. Carillion, for example, really did build things. But the truth is that laid over this operational reality that may be profit driven, there is a second, almost contiguous, operation that seeks to extract reward from it by gaming contracts, finance, tax and accounting to secure unearned rewards largely paid out to a select few within the company who partake in these rent seeking activities.
It is as if the modern corporation has a split identity. There is a part that is seen on the High Street, or wherever it meets real need, and another part that acts like a parasite sucking the life blood of that real activity by transforming its surpluses into rent for a few.
What Carillion (and others) show is that this parasitical operation can function for a while. And then it kills the host.
That process of death by rent extraction does not happen overnight, but I suspect the outcome is inevitable. If so, no wonder the current form of captilism - which I rightly called ‘feral’ - is dying.
http://www.taxresearch.org.uk
Whole lot of words to say nothing.
Word salad, it is.
I look forward as minimum wages raise to five guys burger and fries rebranding to four guys burgers and fries, though I’m surprised they are allowed to use guys in the business name these days
let’s all worry about robots taking peoples jobs and let’s also make those jobs expensive enough that it’s worth investing in robots....expecting joined up thinking is futile
You can make any point you like with imaginary numbers. In reality, fast food franchises don't have anything like a 100% difference between pay grades.
Not that it matters, because economics happens at the margins. This imaginary example is as absurd and unpersuasive as when my wife complains about the way I might do things she's imagined.
Am I reading the Guardian now? Or is CT going to try and exercise some editorial oversight and prevent arrant nonsense cluttering the pages?
I guess Dave is referring to the interminably dull screed from Twatting.
No, I was referring to the Guardian-quality drivel masquerading as an article. Just because some idiot is broadly following the path one agrees with because it's correct, doesn't mean one should suspend all critical faculties when assessing how well or otherwise they argue the case.
Of course the minimum wage is a bad idea, but this quality of writing actually works to persuade people otherwise. 'Why is he fabricating a case if there's a good argument to make instead?' is the question that springs to mind. Most people will end up assuming there isn't the alternative good argument.
Twatting is getting worse. It only took 3 sentences for me to realise he was way off topic and the mark
"Add this labour force together – £500 to run the show for an hour."
Is this what they're teaching in schools these days? When I went to school, 400 + 100 + 60 + 40 = 600. Oh well, you live and learn.