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Good Intention, Bad Idea

Updated 1.29.2014 - Last night President Obama stated in his state of the unior address that he believes that minumum wage should be increased to $10.10 an hour. This is a biref illustration to demonstrate what this action would do

Hey y'all, today I've got another post about the math of politics. So pay attention or leave now.
If you keep up with the news at all you'll know that President Obama proposed a minimum wage increase . Although in theory this sounds like a great idea it's really not and I'm going to break down why. My first job out of college was in staffing so I'm pretty familiar with the type of work and pay rates that might go on in a typical warehouse - an example of a work environment where you would find minimum wage employees. We're going to go with the tried and true business school scenario that our warehouse is for a widget company. So here goes . . .
Here is the list of positions, the pay rate, # of positions and annual position cost for the warehouse:

movers $7.75 20 $322,400.00
packers $9 40 $748,800.00
forklift $12 8 $199,680.00
team lead $14 10 $291,200
office support $16 5 $166,400.00
area manager $18 4 $149,760
warehouse manager $24 1 $49,920.00

This widget warehouse has a 35% wages to sales ratio and sells 1 million widgets a year - without overwhelming you with too much math this means that the price of a widget is $5.55.
Congress then enacts legislation that the minimum wage be increased to $10.10 an hour. Hurray, all the movers get an increase! But it's not that simple, because packing is harder than moving - so the packers get an increase and so on and so on. So now the wage costs looks like this:

movers 20 10.10 $420,160.00
packers 40 $12.00 $998,400.00
forklift 8 $14.00 $232,960.00
team lead 10 $16.00 $332,800.00
office support 5 $18.00 $187,200.00
area manager 4 $20.00 $166,400.00
warehouse manager 1 $26.00 $54,080.00

Although wages have increased the company will maintain a 35% wage to sales ratio - because that's what companies do. The price of a widget is now $6.69.
You'll notice that although each position got a raise, the increase was smaller and smaller as the position rank increased, this is how it works in the real world - do not expect a raise if you make above minumum wage anbd it is increased.  This is how it happens in the real world - everyone will not get the 28.77% increase the movers got.
So now we can do a comparison of every one's current annual earning and their new earnings with the increase and we can see how many widgets everyone can afford.

Now Minimum Wage Increase Widgets Per Year
movers $16,120.00 2904 movers $21,008.00 3140 236
packers $18,720.00 3373 packers $24,960.00 3730 357
forklift $24,960.00 4580 forklift $29,120.00 4352 -228
team lead $29,120.00 5247 team lead $33,280.00 4974 -273
office support $33,280.00 5996 office support $37,440.00 5596 -400
area manager $37,440.00 6746 area manager $41,600.00 6218 -528
warehouse manager $49,920.00 8995 warehouse manager $54,080.00 8084 -911
37841 36094 -1747

Notice that although the majority of the employees can now afford more widgets the total number of widgets sold went down as the higher earning individuals did not receive an earning increase that matched the increase in widget cost. Since less widgets are being sold the company will now reduce their staff. As a result of all of this here is the final result:
5 movers and packers lost their job - they now get $ from the government to buy widgets
55 movers and packers can afford more widgets and are better off
28 "skilled employees" received pay increases but can afford less widgets and are worse off
So, while a majority of the people are better off, the widget society as a whole has declined in it's position. And again, as I stated in my conservative values post, the more skills one has and the harder one works to increase standing - the more one is punished by government's policies. And since to read this blog you must a. know how to read b. work from or possess a computer / smart phone chances are one of those skilled workers is YOU!









  1. That Sucks..... Why did we pay for a college education again?


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