When the minimum wage goes up, how does the money cycle change?

Inflation increases the cost of goods, the value of the money goes down. I remember hearing, back in the 70’s, that a dollar was worth 26 cents. Your money buys less and less, and the prices continue to increase. At the end of WWII, inflation was so bad in Austria, that they had to print 1 million mark notes and print them so fast that they could only print them on one side. It took a whole grocery bag full of these marks to buy a single loaf of bread.

When the minimum wage goes up, the executives raise the base cost of living. A pound of dried pasta noodles goes from $1 to $1.25. You can’t raise the price a a yacht 25% and not expect used prices to escalate. But the lower class won’t miss a quarter.

When the minimum wage goes up, small businesses are hurt the worst.
http://borderlands-books.blogspot.com/2015/02/borderlands-books-to-close-in-march.html

Wages go up, profits go down, prices go up, the cost of living goes up, and it results in a redistribution of money often from poor to middle class people to other poor and middle class people.

Postscript: that bookstore was able to stay in business because of private donations.

Generally speaking, the rise in inflation is minuscule. The increase in the buying power of the minimum-wage workers increases substantially and they become less dependent on government subsidies and have the ability to spend more. This drives the economy. A vibrant economy drives the need for more employees, and so companies will hire more workers. It’s a win all around, unless of course you depend on paying your employees a wage that requires subsidies from Uncle Sam to sustain their existence, in which case your business is a leech on the government.

Here’s a good article on Forbes
http://www.forbes.com/sites/timworstall/2015/03/16/we-are-seeing-the-effects-of-seattles-15-an-hour-minimum-wage/

It increases the velocity o money, because people on the bottom wolf the wage scale spend rather than invest. But it does not cause inflation until unemployment is almost eliminated, because a company can make more money by expanding supply.

So with wages stagnant, and unemployment anywhere above 3.5% , a rise in the minimum wage increases employment through increased demand.

Minimum wage here is $16.40 and it doesnt seem to hurt anything.

When minimum wage goes up in America the increase is usually so small it barely affects anything in a very noticeable way. If it actually went up a few to several dollars it usually helps grow the middle class. When wages went up during the hay day of unions our middle class grew, and our economy became very robust.

When wages increase cost of good increase on some things. The cost of goods can only go up as much as the market will bear.

The senior executives still get paid a whole bunch of money in America. That’s also a competitive analysis of what it costs to attract people of that caliber. It’s out of control in America. The CEO of a company can make $10 million?? That just seems out of hand to me.

@osoraro I was going to stop reading at “Forbes”, but decided to read on anyway.

Since small businesses only have to phase in the $15 minimum wage over the next seven years—how exactly do you imagine that that is causing a supposed increase in restaurant closures?

There’s no logical connection here. Restaurants open and close all the time for all sorts of reasons. The Forbes article doesn’t give any evidence nor provides any data.

So, no. It wasn’t a “good article”. It was an inept evidence-free piece of ideologically driven propaganda.

I’m all for higher minimum wage, but $15 even sounds high to me.

@JLeslie $15 too high? Could you live on $600 a week before taxes?

@zenvelo What about teenagers? A 16 year old needs to make $15 an hour?

Yes, I could live on it with roommates or if I was married with no kids. Not in NYC or San Fran, but in average America as a starting wage I could do it.

@JLeslie Wages shouldn’t be decided based on what the worker’s social standing is, but on the nature of the work.

Teenagers might be living on their own, or contributing to the family income, or trying to save up for school so they don’t have to take out burdensome student loans.

Wouldn’t you rather a person started their adult life ahead of the game, instead of so far behind that they can never realistically expect to catch up?

@dappled_leaves Of course wages should be decided based on the work, but how many teenagers are working writing program for NASA? If they are they should get the same pay as the 35 year old doing the same thing.

Teenagers typically have less experience, fewer skills, and those jobs pay less.

As far as ahead of the game, just starting even sounds good to me. Let’s work in this crazy tuition rate shit happening in our country. People graduation with $40k+ in loans?? That’s just crazy talk.

I don’t see anything wrong with young people living with a roommate when they start out to be able to afford their expenses and save a little.

@JLeslie We’re not talking about jobs at NASA. We’re talking specifically about minimum-wage jobs. And yes, in this economy, teenagers and 35-year olds are in competition for those jobs.

That has nothing to do with determining what wages should be assigned for any job.

My number is $12 for minimum wage. You can agree with it or not.

I fully support paying better wages, I’m tired of paying for people to eat through tax money (food stamps) when they are doing their very best, working hard, full time, with integrity, and all good intentions. We basically subsidize the corporations. It’s ridiculous.

If a teen, or anyone else, gets a part-time job bagging groceries I see nothing wrong with $12 an hour. Here, we have many people bagging groceries who are mentally impaired. I’m happy to use government money to subsidize helping them, that’s a whole different story.

@JLeslie “We basically subsidize the corporations. It’s ridiculous.”

Exactly.

I know. We agree. Go to Australia and parts of Europe and see how much everything costs and make sure you want that. Their prices are higher. Their minimum wages are higher. I like the idea of somewhere in the middle with some room for flexibility. I don’t want any workers abused with low wages. I literally think it can be abusive. I also am tired of CXO level making multimillions a year.

@JLeslie Sure, we agree on all of that. What I was disagreeing with is that minimum wage should be limited solely because it is going to teenagers. I disagree because (1) we shouldn’t decide wages based on the social standing of the worker and (2) minimum wage jobs are not held by only teenagers. That is an old, old model.

I just brought up teenagers as in example. I’m not basing it on their age, although I see why you thought I was, I’m basing it on the type of work.

@Kropotkin Well, if that article offended your sensitivities, these articles will certainly burn your butt. It doesn’t make them any less true, though.

http://www.cato.org/joining-the-minimum-wage-debate

As usual we are trying to fix the wrong problem. Over the past 6 years we have been creating jobs but they are primarily minimum wage jobs. That is the problem and raising the minimum wage won’t solve it. I know there is a strong push to penalize the rich uncaring CEOs of the world but again, raising the minimum wage won’t do that.

First the wages you see in the news are primarily stock options. For instance, Charif Souki – Cheniere Energy is reported to be making $141,949,280 per year. The truth is his salary is less than $1 million per year. The rest is based on his stock options and bonus. So everybody wants to tear him down. Unfortunately raising the minimum wage won’t do that because he has no minimum wage jobs. The minimum wage jobs are at the local ‘Mom and Pop’ shops, the local restaurant, convenience store, or retail shop. Those owners are eeking out a living just like everyone else.

The truth is minimum wage jobs are not designed to be a career. They are low or no skill jobs that anyone can do with little or no training. A stepping stone to enter the job market or supplement your income. If you want higher wages, you need to grow the economy and you can’t do that by attacking the industries that fuel that growth. Stop making it harder to do business in the US and start making it easier. That’s how we can improve the job market and raise wages.

^^Exactly.

@Jaxk Let’s say for argument sake that I run a convenience store and I believe in paying my employees a living wage. I do this because 1. I have a moral obligation to support the employees that keep my business profitable and 2. I don’t want to be a leach on the government.

Now let’s say a competitor opens up a convenience store across the street and they don’t care about their moral obligations to employees and has no problems leeching off of the government. My competitor can undercut my prices because he has less expenses and that will drive me out of business. Essentially he is using taxpayer dollars to indirectly subsidize his profits and gain a competitive advantage over me.

Having a minimum wage that is in-line with a living wage is all about having a level playing field so businesses can compete on their merits instead of using employees as a vehicle to indirectly receive subsidies from the government. This is about honest capitalism and letting a well-regulated free market work its magic.

Just to expand on the above argument. A big reason the bookstore in @osoraro‘s article was in trouble was because they were competing with Amazon.com. Amazon relies on exploitative wages and practices (indirectly) to keep prices low. If Amazon was forced to pay living wages then it is very probable that the bookstore would be in much better shape. This is why it’s important for the minimum wage to apply to the whole country.

@gorillapaws – Actually I do own a convenience store and it doesn’t work that way. I don’t pay minimum wage right now but I don’t pay $15/hr either. I pay a competitive wage based on where my store is located. If the store was in Manhattan, I would pay more, if it was in rural Idaho, I would likely pay less. If a store opened across the street and tried to intercut me, I may have to let some one go. I could survive with one less employee even though I don’t want to.

Amazon relies on volume just like all the other big retailers. There is a Safeway just a few blocks from my store but I can’t compete with them on price. I compete on convenience. Safeway competes on volume. A different business model.

@Jaxk You’re kind of proving my point. The fact that a competitor can move in and force you to lay off your employees if they’re willing to pay exploitative wages means the system is broken. Also you and Safeway are different markets, but they’re not completely different. If you charged $30 for a bag of chips, people would go to Safeway, so there is a price/convenience relationship. This applies to the bookstore example. People may be willing to pay a bit more for shipping/handling to save themselves a trip (gas, time, effort finding parking in San Francisco, etc.), but if that cost captured the full human expenses then the local bookstore can compete better.

You mentioned a competitive wage in your area. If those wages were higher, do you think more people would be willing to pay a small “convenience-premium” at your store as opposed to bargain-shopping at Safeway? If demand increased substantially at your store, wouldn’t you be more inclined to hire employees so your customers aren’t waiting in long lines (i.e. maintaining your convenience and customer service standards)? Don’t you see how this creates a virtuous cycle?

@JLeslie people there seem to think that making minimum wage in Australia is like making minimum wage in America because of ” how much more everything costs”. It isn’t like American minimum wage, the idea is to have a somewhat liveable wage. And it isn’t that much more expensive, either. It used to be, but not now. This thinking is outdated.

@gorillapaws – If a competitor moves in I will have to do something to change my expenses regardless of what they pay in salaries. The same business divided by two instead of one. How does that prove your point or show that the system is flawed?

As for the bookstore, Brick and Mortar stores are dying left and right. They simply can’t compete with internet stores because their expenses are much higher. The minimum wage is just one more nail in that coffin.

@trailsillustrated I was just going by what my parents experienced when they travelled to Australia last year. I’m sure some of what they experienced was tourist prices, but their overall impression was some things cost a lot more. Don’t get me wrong, even if that is the case, I’m willing to pay a little more cost of living if everyone is doing well.

My parents easily could have been wrong, they were only there a few weeks.

As I said in my first answer I’m
Not terribly concerned about higher prices. I don’t think they will rise much much higher.

The issue that comes up now, then, is if business regulation impedes freedom. Can you just tell a business bigwig they’re earning too much and have to split their income with other workers? In my most objective mindset, my gut tells me no, even though I really hate how our current system functions. Perhaps there’s an indirect way of doing this.
@gorillapaws @zenvelo So by your idea, the bookstores such as the one @osoraro linked won’t shut down because people will have money to support it? The time to build up to the wage increase will be good enough?
Hooray for the bookstore!
@JLeslie @Jaxk It seems $15 is too high for some areas as well, but I couldn’t speak for sure. Either way, there is a political haggle I’m sure you’re aware of (that I find a sad reflection of our politics) where you set the bar higher than what you’re okay with and settle for a “medium.”
@gorillapaws Who works those terrible factory positions described in your link? Why would one choose to work there?

I’m wondering if I’d be able to support myself with a $15/hr paycheck. That’s about $2700/mo. $600 for rent, $150 overestimate for utilities, $200 overestimate for groceries, $75 for transportation, it sounds doable for me, honestly. I still question the morals what the execs take in, though. The amount they make is ridiculous.

@JLeslie “We basically subsidize the corporations. It’s ridiculous.” An amazing way of putting it!
@Jaxk You can say that minimum wage jobs aren’t meant to be a career, but our economy certainly isn’t making it easy to find something better. I myself have had trouble just finding a job like this. I was supposedly hired by one last week but they haven’t contacted me since. It seems a miracle would have to happen for me to find something better.
@osoraro Re: “Wages go up, profits go down, prices go up, the cost of living goes up, and it results in a redistribution of money often from poor to middle class people to other poor and middle class people.”
I don’t understand this analysis. Could you clarify?

@dxs Sure. If you’re a business owner and you have to pay more for labor, that money has to come from somewhere. Either you pass the cost into the consumer with higher prices, or you cut into your profit margin. Or both.

For example, let’s say you are a small business owner of a coffee shop, and you charge 3 dollars for a cup of coffee. Now the government comes in and says that you have to pay your workers 2 dollars more an hour. You can deal with this one of four ways.

1) Fire workers so you can pay the remaining workers more
2) Charge 4 dollars for a cup of coffee
3) Eat the cost yourself.
4) Decide that the cost of labor is too high and you close your business.

Either way several things happen.
In option 1, if a worker is out of a job, then they get paid nothing, making them poorer, with decreased purchasing power

In option 2, you’re passing the cost to the consumer, making them poorer than they already are, and their overall purchasing power decreases. Also you’re charging more, which will decrease people wanting to come in and buy your product.

In option 3, you are becoming poorer and your own purchasing power decrease

In option 4, everybody loses.

The people who seem to win are the workers, but you have to look at the bigger picture. Sure, they have more cash in their pocket, but when they go to buy something, because of option #2, they have decreased purchasing power anyway. But @gorillapaws argues that the increase in inflation is miniscule, and he may be correct, and I may be writing out of my ass.

The pro minimum wage people will argue that it puts money in worker’s pockets. That is absolutely true. But the money has to come from somewhere. You can talk about executives being paid millions of dollars, and a minimum wage is fine for a corporation like McDonalds or Starbucks who has the capital to afford the financial hit. But if you’re a small coffee shop owner just getting by, then it may be a problem.

All I’m saying is that it’s not a cut and dried issue. You mentioned that you are going to a demonstration in a couple of days. Demonstrators see things in black and white, and shout catchy slogans. My opinion is a very nuanced issue that requires a lot of thought and public policy planning, not someone shouting and waving a placard.

(I agree with @gorillapaws, though, about Amazon’s predatory practices. The tried and true libertarians argue that it’s just progress and market forces. I think that bookstores are competing against an unfair marketplace. My problem is that I have no local bookstores anymore.)

@JLeslie visiting for two weeks is not living here, with house payments, groceries, power etc. Some things of course are more. I came back in 2013, I know what these expenses cost on the west coast of the U.S., and all in all, it’s not more.

To comment on the bookstores, my dad sells books (mostly on Amazon, but they aren’t warehoused by Amazon, it’s his own personal inventory) and his business has declined in the last 5 years mostly due to Kindle and similar.

@trailsillustrated I just ran the cost of living calculator from a website for various cities in Australia and America and it seems similar to around America. Some cities more expensive than others, depending which cities you are comparing. I guess it seems fairly similar in that you can find cities in Australia that cost similarly to America.

@JLeslie I’m not in Sydney, one of the most expensive in the world. I find it impossible to imagine that anyone could live on minimum wage even here. But here they would be eligible for council housing. The only people I’ve seen on minimum wage here are school kids, young adults and retired people. Then, they also get penalty rates for nights, weekends and holidays. When I was in America, I was astounded by the low wages for even jobs that required a bachelors degree. I just don’t know how people make it there. I don’t.

@osoraro Just to illustrate the idea behind inflation. Let’s say in my convenience store example (and I’m going to pull totally fictional numbers) that I buy a 24-pack “suitcase” of Budweiser from the distributor at a price of $10 and sell it for $14. That means I have a 40% markup. Further suppose I pay my employees $8/hour and the minimum wage is raised to $10/hour. That’s an increase of 25% to my employee cost.

Now if we Iook at my business expenses, let’s figure that my overhead is split up like so: 35% is for rent, maintenance, replacing equipment, utility costs etc. 5% is for administrative costs like any legal expenses, accounting, other miscellaneous expenses. 50% is my staff expenses (excluding myself) and the last 10% is what I pay myself to live on.

I make my living on the $4 margin I charge, half of that is my employee cost ($2). If that cost increases by 25% and I make up the difference by increasing the price of beer (everything else too of course) in the store, the price would only increase by $0.50 to $14.50. That’s an increase of about 3.6% in price, meanwhile my employees (and the other minimum wage workers in my area) are gaining a whopping 25% increase in buying power.

The overall inflation rate won’t come anywhere near this 3.6% increase because a huge portion of the economy isn’t determined by minimum wage. For example, housing, utilities, energy, insurance, healthcare, car payments and many other giant chunks of the average American’s budget won’t be affected at all by this. Meanwhile the stimulus injected into the economy as people on the bottom begin to push closer to the middle class and have significant more purchasing power would drive the economy forward in a very big way. The other major benefit is that this should significantly reduce government spending on social safety-nets, and increased tax revenue from the higher incomes of the minimum-wage workers. This should shrink the deficit significantly.

Another benefit is that people will be more able to afford to invest in their education or other forms of training that allows them to be more productive overall in the economy over the course of their lives and earn more. I suspect most people making minimum wage are capable and want to do more with their lives, but many get trapped in a cycle of poverty that is very difficult to escape. It leads to the kind of exploitation mentioned in that article I linked.

@osoraro

“Well, if that article offended your sensitivities”

It didn’t.

“these articles will certainly burn your butt.”

Since the first condition was false, this doesn’t logically follow.

” It doesn’t make them any less true, though.”

You do understand that those articles on the Cato site don’t constitute peer-reviewed research, right? I actually can’t think of many more zealously partisan sources. What are you going to link to next? The Von Mises web site? The Heritage Foundation? A Libertarian blog?

@Kropotkin I take it you didn’t read them?

@gorillapaws I understand the arguments for a minimum wage. And I’m not even saying I disagree with them. The OP was asking about minimum wage and I thought I would post links to articles that give an alternate point of view, so he could educate himself about the complexities of the issue.

It all depends on whether you believe that giving more money to the bottom wage earners improves the economy better than the resulting price inflation will. My bookstore example is a real one (with a happy ending), and restaurant owners in SF are complaining about the high cost of doing business (more because of the health care tax than the minimum wage law, but it’s a similar issue). Time will tell if unemployment increase in SF and if businesses leave for the more business friendly Oakland which is right across the bay.

@osoraro The main point was to show how the price increases would be much smaller (admittedly with fictional—but not completely unrealistic numbers) than the 50% price increase in coffee you suggested. In your defense, you did clearly state that you were making the numbers up.

For a business to markup prices by that much, their employee costs would have to skyrocket to unrealistic numbers: they would need to be in a very high margin business, with exceptionally low overhead (excluding staff) with a huge percent of their costs coming from minimum-wage employees, and the increase in the minimum wage would have to be massive to arrive at a 50% increase in prices. For it to have a significant impact on the economy as a whole, most industries would have to have a similar business model.

There is literally no way for a minimum wage increase to cause hyperinflation of the sort that @kritiper referenced unless it was raised to something crazy like $50.00/hour.

@gorillapaws I was simply demonstrating the potential economic effects of increasing a minimum wage using a fictional example. Money doesn’t appear out of thin air unless you’re a Federal Reserve and you can authorize its printing. It has to come from somewhere. It either comes from price inflation, reduced profits, or eliminating jobs. That may be insignificant as you maintain but one cannot just wave away the risks and pretend they are not there.

@osoraro To a certain extent you’re right that money has to come from somewhere (in this case very modest inflation), but you’re wrong that it’s a zero-sum-game (at least I believe that’s what you’re implying—please correct me if I’m putting words in your mouth). Weath can actually be created. So while the economy may experience a small amount of inflation (more so in some sectors of the economy than others), it should result in significant growth overall. Those who would be hit the hardest would be the large companies that depend on rock-bottom wage labor to undercut competitors (e.g. Wal-Mart, Amazon warehouses, etc.). I’m not sorry for them in the least as their profits are dependent on externalizing their labor costs to the taxpayer.

Sure, wealth can be created in a large economic area, but that’s no consolation if you’re a bookstore trying to make a payroll and stay in business.

@osoraro It might be if your bookstore’s largest online competitor is forced to pay significantly higher labor costs. If you’re stuck paying higher wages, and your competitors aren’t then you have a serious problem.

That’s true.

@trailsillustrated I completely agree that our current federal minimum wage is ridiculously low and can’t be lived on. Especially considering our situation with health care. I don’t think “America” looks at the minimum as being a number someone can live on, it’s more a number that seems reasonable for working unskilled jobs. I do think paying the current minimum most often takes advantage of people.

I think the occurrence of higher wages was left to unions, competition, or the integrity of the business owner.

I wonder if a large rise in wages would have the same effect in America as in Australia? I don’t think Australia had these super high executive salaries while they were raising the minimum. It’s always harder to roll things backwards. America also has a lot of people and business making a lot of money and that keeps prices extraordinarily high for some things. Australia might have had lower profit expectations? I don’t know.

@gorillapaws – I don’t really have a problem with your scenario even though I think the price increase would be smaller than your example. I don’t however, agree with the conclusion. The increase in minimum wage comes directly from the customers of the store. You are merely taking money from those customers and giving it to other customers (the employees). It is money already being spent so I don’t see any increase to the economy and at minimum wage I don’t see any increase in tax revenue either. The rich people (George Soros, Koch Bros. etc.) don’t really shop at convenience stores or other minimum wage outlets, so I don’t see anything coming from them either. What you may see is labor intensive businesses like full service car washes, go the way of the Drive-in Movies. A prime example of people being replaced by automation with the Brushless wash you see in many gas stations. Or the self checkout like they recently installed at the Safeway. Minimum wage jobs are prime candidates for automation. When you make labor prohibitively expensive, business will find another way.

@JLeslie I don’t think it would work there. We have a smaller population, much higher wages, and different rules. ( banks cannot charge usury fees, my bank account has no fees at all.) I think CEOs make huge amounts here too but I think I might be different. It’s unheard of for a job requiring a degree to pay a ridiculous wage, there I saw jobs wanted a bachelors degree offering 10$ an hour. I don’t know.

The usury in this country bothers me a lot! We used to have better laws regarding that.

Thanks for posting everyone. Sorry it’s taken me so long to respond!

@osoraro Option 3 is the one I’d like to see happen, but can we really guarantee it will? I’m angered by a lot that goes on in this society, and I feel that the best way of solving this problem is to speak out about it. There are so many people who are passive and who don’t need to worry about anything. I could be one of these people. But things get to me, and I don’t like the quality of being passive. No, things aren’t always “cut and dried”, I totally agree, and I find many of the protests I’ve considered joining to be just how you described them. But what else can I do? If I give a big push to one direction, will it give society a small push to that direction?

@all If the minimum wage does get raised, who’s to say all of the big businesses won’t just exploit us and raise their prices? Since when have they given a fiscal f$#% about ethics? It’s basically the same question as the first one I asked in my last post, but I haven’t thought up an answer to it.

Fair enough, but what if the coffee shop owner is also just getting by making a living? Most small business owners aren’t millionaires.

@osoraro Aha! That’s another thing I must consider! I don’t know what the average small business owner makes.

@dxs In my Borderland’s Books example that I mentioned above, the owner makes about $30,000 a year.

@osoraro Ouch. How on earth do we solve this predicament we’re in?