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Government-mandated minimum wage

By Jim Killebrew

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[December 09, 2013]  Let me see if I understand the government's insistence on requiring a "minimum wage." The Fair Labor Standards Act sets the federal minimum wage at $7.25. The move is on to increase the minimum wage to a much higher level; some say up to $15 per hour.

Let's say I owned a small business like a small fast-food restaurant where I served hamburgers, fries and other sandwiches, and "blue-plate"-type meals. My restaurant might be in a downtown district where I served two meals a day, breakfast and lunch. I am open six days per week, serve as the chief cook and bottle washer myself, along with five employees who are servers and general workers. Each of the five employees receive minimum wage, plus their tips. My salary consists only of the margin of profit gained after all expenses.

With minimum wage at current $7.25 per hour:

Based on 40 hours worked per week for a full 50 weeks (two weeks off for vacation, unpaid), the annual wage for each employee equals $14,500. That is based on working the full 2,000 hours during the full year at the minimum wage rate. My payroll for that number of employees for the full year would equal $72,500.

My average meal price counted as gross income is $7.45. I sell an average of 150 meals per day for a daily gross receipt of $1,117.50. I am open six days per week, or 312 days per year. So my cumulative daily receipts for the full year equals $348,660. It seems like a lot of money for me, especially since I only have to pay out $72,500 in salaries.

But wait a minute. I also have expenses throughout the year. I have to pay rent, utilities, insurance, fees to operate, purchase of food to be prepared and sold, maintenance, repair and replacement costs of equipment. Since my place is in a commercially zoned location, my rent is $2,000 a month. Also there are utilities, $400 a month; insurance, $100 a month; fees to operate, $50 a month; maintenance, repair and replacement, $200 a month. The largest cost, of course, is buying the food that is prepared and served each day. Although I buy from a bulk-food distributor at wholesale prices, I still must supplement occasionally from local grocers when supplies are low. That cost is $15,600 a month. Totally, that represents a relatively fixed monthly expense of $18,350 a month. Annualized, that cost is $220,200 per year.

Remember, I stated above my gross receipts amounted to $348,660 per year. However, when the expenses I have to pay each month are subtracted from that amount, the number diminishes. Subtracting the annual expenses of $220,200 from the $348,660 leaves only $128,460 remaining. Wow! Seems like a lot of profit, right? Well, no, because I still need to deduct the payroll expenses for the five employees. When I deduct the $72,500 paid to the employees it leaves only $55,960 annual profit for my salary. Of course, from that gross "salary" I must pay my own income taxes, Social Security, Medicare, state taxes, property taxes and all sales taxes. That may leave me an income for my family of around $25,300 to $30,000 per year. Seems like as a business owner working six days per week, I'm not getting too wealthy.

With minimum wage raised to $15 per hour:

Now suppose the government wants to use its logic to enhance the overall economy by raising the minimum wage to $15 per hour for my business and all other small businesses like mine. What is the result of that?

My customer base remains about the same. The average cost of the meals I sell to my customers remains the same for only a few minutes, then rises proportionally to the increase in the minimum wage. My expenses  rent, utilities, etc.  all remain the same. Again, only for a few minutes, since all the wages for part-time employees have risen by federal edict to more than twice what they were. That means the employees in the food distribution center got raises; those in manufacturing of chinaware, tables and chairs, etc. all received wage increases too. That means all those services and products will increase in price. But just for fun, assuming that didn't happen and all the prices stayed the same, what would be the effect on my business alone as a result of the federal or state government forcing me to raise my employees' wages by more than double?

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For sure, the individual employee's wages would increase from the $14,500 per year to $30,000. per year. It is in this result alone that government thinkers believe this action is positive. They insist the economy will grow because these folks have more money to spend on products and services. This positive effect for theses employees, however, has deleterious effects for the economy at large. Instead of an annual payroll for my five employees being $72,500, it would rise to $150,000. That means when I subtract my personal services line cost of wages from the gross receipts after expenses, I would have a loss of $21,540. I would be in the hole that much and additionally make no salary for myself. Changes would have to be made somewhere.


Obviously, major changes to my business would have to be made. There is an array of choices I would have to make as a small business owner. I would have to pass along the higher cost of doing business to the customers I have served in the past. My prices would be raised proportionally, which of course would likely double the price for the cost of the meal. How many customers would be lost by doing that?

Secondly, I could lay off two or three of the five workers completely, or perhaps cut down the hours for each of the five workers and operate with a shortened staff, which would likely result in poorer service to my customers. That would not be very beneficial to those who had to be laid off or to all of them whose hours would be cut, and less service to customers might jeopardize my business further by losing customers.

Thirdly, I would have to close my doors by going out of business. That would put six people out of work completely: my five employees and myself. Additionally, it would reduce the choice options for all of my customer base in selecting a place to have a meal.

Businesses like the one I described are in every city, town and village in America. It is not just restaurants; it is hog farms, clothing stores, service stations, theaters, grocery stores, thrift shops, general stores and every other kind of business you can think of. These are the types of businesses that have traditionally been work havens for teenagers, summer workers, second-income spouses, retired part-timers and others who just wanted to keep busy. They have never been intended for people who are seeking careers; for the young they are simply steppingstones to gain experience as one prepares for a career. For the second-income earner, they have been a stop-gap measure to move the family over a financial rough period. For the retired person, these jobs have been a supplemental to retirement or Social Security payments, and sometimes even a social outlet.

As the government continues to mandate fixed minimums of wages paid for these temporary-type jobs in the marketplace, they are eroding the free-market system that places various values on jobs consistent with the amount of skills necessary and the complexity of the job itself. To assume a minimum wage of $15 for standing at a window handing out sacks of meals to drive-thru customers is the same as for a job requiring heavy amounts of responsibility related to health and safety issues in the general public is nothing more than bureaucratic consensus conference room sitters making up various value systems as they go along. Sooner or later, the unintended consequences from that kind of thinking are going to have dire effects, not only on the national economy but on the lives of people who are trying to better themselves through hard work and personal skill-building.


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