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Wednesday, September 23, 2015

The Two Bs

I read this article which includes a link to this article where I noticed this:

Myth: Increasing the minimum wage will cause people to lose their jobs.
Not true: In a letter to President Obama and congressional leaders urging a minimum wage increase, more than 600 economists, including 7 Nobel Prize winners wrote, "In recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market. Research suggests that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front."

Myth: Small business owners can't afford to pay their workers more, and therefore don't support an increase in the minimum wage.
Not true: A July 2015 survey found that 3 out of 5 small business owners with employees support a gradual increase in the minimum wage to $12. The survey reports that small business owners say an increase "would immediately put more money in the pocket of low-wage workers who will then spend the money on things like housing, food, and gas. This boost in demand for goods and services will help stimulate the economy and help create opportunities."

I am perplexed. Here's why.

I've been taking all three of our vehicles to Brian for at least a couple of years. He services the GMC Canyon, the Ford F-F150, and the Dodge Grand Caravan. Over the years, I've had the honor of meeting Ben. He drives me to work in the shuttle. When Brian told me that Ben was moving (I promise I'll get to that), I asked Brian if he was going to hire someone to replace him. Without going into a lot of detail, Brian vented about how the minimum wage increase was making it more difficult to hire people. He said that what he pays his employees is above minimum wage and when calculating what an employee is being paid, it rarely includes when the employer pays for a portion of insurance (health & dental, for example).

That triggered a vivid memory. Several years ago, I was in the CEO's office at a former employer. He held an annual meeting with each of his employees to show each employee the amount of money the company had deposited into our individual 401(k) accounts. Each year, the CEO used a sheet of paper to show me the 401K contribution, the portion of the insurance premiums the company paid, and other "things" I can't recall at the moment. All of those were added to my salary to show me my compensation for being an employee was much higher than my salary. I've never forgotten those yearly conversations with that CEO. It instilled in me the idea that while the minimum wage will help some people, it also means that the prices for services will go up.

Here's what I think about. I am Bryce, a business owner. I have three employees. I pay them $7.25 / hour. For those three employees to work an 8 hour shift, I need $174 in revenue a day just to pay them. That's calculated by this formula:

$7.25 / hour x 3 employees x 8 hours a day x 5 days / week x 52 work weeks / year.

It costs me $45,240 / year to pay those 3 employees to work full-time.

There's a local minimum wage increase where Johnson County will pay a minimum wage of $10.10 / hour. Replace 7.25 with 10.10 and do the same calculation.

$10.10 / hour x 3 employees x 8 hours a day x 5 days / week x 52 work weeks / year. 

The answer is $63,024.

Now, as Bryce, a business owner, I need to generate $17,784 / year more in revenue to pay those employees. How do you increase revenue? Raise prices for your services. Reduce the number of employees. What if when one of the 3 leaves for a different job, I don't replace him? I then have two employees.

$7.25 / hour x 2 employees x 8 hours a day x 5 days / week x 52 work weeks / year.

The answer is $42,016.

Do the same work with 2 people and I save $21,008 in labor costs. How are businesses going to generate $17,784 more / year in revenue without increasing costs?

Today, as I write this, Brian and his staff are doing the following services to my GMC Canyon:
  1. changing my oil
  2. looking at the front bumper to see if it's going to fall off
  3. checking for any codes that would trigger a Check Engine light
  4. checking out a squeak I hear when I turn
  5. checking the life expectancy of the tires
He gives employees of my company a 10% discount.

When I got in the van with Ben, I said to Ben, "What's this crap about you moving out of town?" He knew I was joking immediately. The 10 minute ride to work with Ben is one of the highlights of my visit to Brian's business. Both Ben and I like to talk. I don't think there's ever been silence during the ride to work with Ben driving. Ben and his wife are moving to about 10 miles outside of Kirksville, MO.

I will miss Ben.

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