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Exploring Minimum Wage

A friend of mine recently suggested he thought the national minimum wage should be immediately increased to $15 an hour. This caused me to do some quick, back-of-the-envelope calculations based on a hypothetical $15 minimum wage, through the lens of two large companies:

  • Walmart generated about $17B in profits off $469B in revenues for FY2013. If they had boosted their employees to a minimum rate of $15/hr it would cost about $32B. This means instead of a profit they would have generated a $15B loss. Given their cash on hand, they could last about 6 months before running out of cash.

  • McDonalds is another good example, they generated $5.5B on $27.6B in revenues. If they boosted everyone to a minimum of $15/hr they would have generated a $16.375B loss, given their cash on hand they would run out after 2 months.

In the real world these companies would raise prices and/or cut staff rather than go out of business. If we assume for the sake of argument that both companies would maintain price parity (obviously, they wouldn’t - but it’s useful for our little hypothetical scenario) then increasing the minimum wage would mean they would shave approximately 1.3 million jobs from these two companies alone, which would bump our national unemployment rate to a little over 10% overnight. Again, this is just two companies– in our little scenario, the new minimum wage impacts only Walmart and McDonalds.

Looking at the other extreme, if these companies increased prices instead of laying people off then cost of living goes up, a price paid disproportionately by the poor.

Personally, I think minimum wage is best set at the local level. $15/hr is probably too low in NYC or SF, yet $10 is probably too high in most of South Dakota. A rash move like bumping to $15 across the nation over night would have difficult-to-predict consequences, and not all would be sunshine and unicorns. Instead, I suggest we increase gradually and based on local initiatives. In a perfect world, a minimum wage would be unnecessary. Indeed, it creates some perverse incentives. However, from a practical perspective I don’t suggest it should be removed either: we don’t live in a perfect world, and it would be difficult to legally define and prohibit certain forms of slavery without a minimum wage.

This post is licensed under CC BY 4.0 by the author.