"We seldom get into trouble when we speak softly. It is only when we raise our voices that the sparks fly and tiny molehills become great mountains of contention."
- - Gordon B. Hinckley
February 25, 2014
Introducing People to Work
by Adam Smith

Back in the not-so-long-ago middle-ages, parents would farm their kids out to craftsmen. The children would work long hours for these craftsmen. And the amazing part (at least for us) is that the children got paid nothing. Zero. Nada.

Now to us this seems very unfair and really somewhat abusive to the kids (child labor laws, anyone?). But a few hundred years ago, having enough food to feed your family for most people was very difficult and this situation was a win-win-win.

The family unloaded one of their kids and no longer had to provide for their needs.

The craftsman got someone that could help with the work, and as the kid gained more experience could increase the amount of work (revenue) the craftsman could generate. Even though the craftsman would lose money when the child first came to him, he thought of the child as an investment that would pay off in the future.

So what did the kid get? He got a skill. And when he was older he would be able to use that skill to produce something that people would be willing to buy. It meant that he would have the money to get married and have his own family.

So what are we to make of this current proposal to increase the minimum wage to more than $10 per hour?

First, the increase in minimum wage will increase the amount of unemployment in the country. The Congressional Budget Office said that the increase in minimum wage will likely cost 500,000 jobs.

Second, the elevated wage will help some people live better lives.

In our current economy there really are not that many jobs (1-2%) that pay the current minimum wage. At the company I work for, I doubt there is anybody at the corporate headquarters that makes $7.25/hour. A business does not like to spend time recruiting and training new people. It takes time and resources and really is not enjoyable.

The minimum wage is any entry level wage into the workforce of a company. It is comparable to the zero amount of money the children apprentices used to make. Even at the minimum wage, it may take a while before the person really starts contributing and making money for the employer.

We have all had experience working with people that are new to the workforce. On average, their work ethic is not the best, they like to talk a lot during work, and they do not know how to stick with the task.

In my line of work, errors are not permitted. So an experienced person has learned how to put checks in their work to make sure they have not made a mistake. When there is a new employee it requires consistent review of their work and constant reinforcing of the importance of no mistakes.

Once someone has entered the workforce and shown that they are a reliable, hardworking employee, then a smart employer quickly increases their pay to try and keep them happy. Constant turnover is expensive for a company.

Since it seems everyone has an opinion about what will happen if the minimum wage rate is increased, here is my assessment looking into my (very cloudy) crystal ball.

The impact on unemployment would be more dramatic than even what the Congressional Budget Office is predicting. The raising of the wage would ripple throughout the economy. Those employees that were making $10/hr will now be asking for more since they would not feel (correctly) they should be not be compensated the same as someone who has no skills at the job.

This rippling through the economy would absolutely be devastating for any company that is marginally staying in business. The impact on small businesses would exceed the impact on a large employer. For example, McDonalds will survive, but all the small landscaping business you see working on people’s yards would be severely affected by the increase.

The increase in labor costs in the long run will force employers to look for more ways to automate so they can reduce their level of employment. Or another likely possibility is that some companies will look to send more jobs overseas since the government has just increased the wage differential between the U.S. and developing countries.

The unemployment rate for youth (already at a horrendous 16%) will grow much higher. Frankly, there are not that many teenagers that are worth $10/hr. Why would anyone hire a teenager when there will be plenty of older adults looking for a job that have worked before and you do not have to put up with so much immaturity?

All of these things are easy to see and easily predictable. But what 95% of the media will focus on are the lucky few that get the wage increase. How many articles or reports do you see or hear about talking about the chronic long-term unemployment problem and the 20 million still looking for work? These people out of work will not be found by the media until there is a Republican in the White House.

For total disclosure, I am for a minimum wage and think there are times when it can be increased without such deleterious effects. When the economy is booming and wage rates are increasing anyway because of the demand for labor, then make the increase in the minimum wage rate (though not this large).

Also, while the Middle Ages example of kids working for free is not one to follow, a reasonable teenage wage policy by the federal government would be a welcome relief.


Bookmark and Share    

Why Economics Matter
- - October 20, 2015
Profits
- - December 30, 2014
The Chance
- - November 18, 2014
Changing Perceptions
- - October 7, 2014
The Threat
- - August 26, 2014
The Danger of Inversions
- - August 12, 2014
The Wait
- - July 15, 2014
East vs. West
- - June 3, 2014
Let Them Eat Cake
- - May 20, 2014
Ridiculous Averaging
- - May 6, 2014
More by Adam Smith

About Adam Smith

Adam Smith is obviously not the actual name of the author of this column. The real author has worked for two Fortune 500 companies, one privately held company, and a public accounting firm. His undergraduate degree was in accounting, and he earned an MBA for his graduate degree. He also has completed coursework for a PhD. in finance. He continues to be employed by one of the Fortune 500 companies.

The author grew up in the Washington D.C. area but also lived for several years in Arizona. He currently resides with his family on the East Coast.

The author has held various callings in The Church of Jesus Christ of Latter-day Saints.

Copyright © Hatrack River Enterprise Inc. All Rights Reserved. Web Site Hosted and Designed by WebBoulevard.com