Last summer, I wrote an article summarizing my thoughts on the hot topic of raising the federal minimum wage to $15/hour. In that article, I argued that one of the key principles of Capitalism is that companies naturally price their products to perfection. While special interest groups may decry that current wages for workers at companies like McDonald's (NYSE:MCD), Burger King (NYSE:QSR), Wendy's (NASDAQ:WEN), KFC (NYSE:YUM) and their competitors are not "living wages," the fact that so many millions are willing to work for the wages implies that the market has indeed set the appropriate price for the positions. Forcing legislation that disrupts this natural mechanism can have dire consequences. I argued that the likely result of these types of legislation in many instances would be automation - if a company does not find it economically viable to pay the mandated wage, simply eliminate the position altogether.
Some cities and states have already voted to increase the minimum wage in their respective jurisdictions.
- Los Angeles, CA - full phase-in by 2020
- San Francisco, CA - full phase-in by 2018
- Emeryville, CA - full phase-in by 2018
- California State - full phase-in statewide by 2022
- Mountainview, CA - full phase-in 2018
- Seattle, WA - full phase-in by 2021
- New York, NY - full phase-in by 2019
- New York State - full phase-in statewide by 2021
While I believe much of the detriment caused by mandated minimum wage increases are being blunted by both the gradual phase-in policies and the limited population affected versus a federal mandate, we are beginning to see some of the effects. Wendy's, for example, is rolling out kiosks at its 6,000+ locations during the second half of this year, as I predicted would happen. While it will ultimately be up to the franchisees whether or not to adopt the technology, if the $15/hour initiative progresses nationwide and is adopted federally, we can all expect automation to become the new norm.
A Huge Portion Of The Workforce Makes <$15/HR
The crux of the $15/hour minimum wage story seems to be focused around fast food workers. This hyperfocus is unwarranted - many occupations in the United States pay less than $15/hour. The Bureau of Labor Statistics published data in May 2015 detailing over 800 different occupations, along with their mean and median salaries. Because we are dealing with such diverse datasets, median salaries are much more accurate as they eliminate extreme outliers. When sorting the data by median average hourly wage, the following occupations make <$15/hr.
|Fast Food and Counter Workers||3,703,110||$ 9.11|
|Hosts and Hostesses, Restaurant, Lounge, and Coffee Shop||391,150||$ 9.22|
|Ushers, Lobby Attendants, and Ticket Takers||114,000||$ 9.22|
|Gaming Services Workers||119,540||$ 9.24|
|Waiters and Waitresses||2,505,630||$ 9.25|
|Dining Room and Cafeteria Attendants and Bartender Helpers||412,830||$ 9.27|
|Miscellaneous Entertainment Attendants and Related Workers||312,430||$ 9.33|
|Miscellaneous Agricultural Workers||337,920||$ 9.65|
|Food Preparation Workers||862,740||$ 9.70|
|Childcare Workers||573,440||$ 9.77|
|Miscellaneous Food Preparation and Serving Related Workers||52,470||$ 9.80|
|Food Servers, Nonrestaurant||257,070||$ 9.82|
|Pressers, Textile, Garment, and Related Materials||48,340||$ 9.84|
|Parking Lot Attendants||144,150||$ 9.92|
|Laundry and Dry-Cleaning Workers||201,620||$ 10.01|
|Personal Care Aides||1,369,230||$ 10.09|
|Nonfarm Animal Caretakers||174,060||$ 10.10|
|Hotel, Motel, and Resort Desk Clerks||243,210||$ 10.11|
|Graders and Sorters, Agricultural Products||35,290||$ 10.14|
|Motion Picture Projectionists||5,620||$ 10.33|
|Automotive and Watercraft Service Attendants||109,710||$ 10.36|
|Retail Salespersons||4,612,510||$ 10.47|
|Miscellaneous Personal Appearance Workers||142,280||$ 10.65|
|Miscellaneous Personal Care and Service Workers||57,140||$ 10.73|
|Sewing Machine Operators||141,520||$ 10.84|
|Building Cleaning Workers||3,089,590||$ 10.86|
|Stock Clerks and Order Fillers||1,934,060||$ 11.17|
|Taxi Drivers and Chauffeurs||180,960||$ 11.30|
|Barbers, Hairdressers, Hairstylists and Cosmetologists||362,360||$ 11.40|
|Ambulance Drivers and Attendants, Except Emergency Medical Technicians||19,950||$ 11.41|
|Funeral Attendants||35,290||$ 11.43|
|Laborers and Material Movers, Hand||3,637,790||$ 11.50|
|Nursing, Psychiatric, and Home Health Aides||2,363,400||$ 11.56|
|Shoe and Leather Workers||11,410||$ 11.58|
|Baggage Porters, Bellhops, and Concierges||77,980||$ 11.60|
|Miscellaneous Protective Service Workers||372,390||$ 11.67|
|Library Assistants, Clerical||100,090||$ 11.77|
|Tour and Travel Guides||38,740||$ 11.85|
|Security Guards and Gaming Surveillance Officers||1,108,310||$ 11.87|
|Models, Demonstrators, and Product Promoters||88,080||$ 12.01|
|Residential Advisors||102,540||$ 12.01|
|Tailors, Dressmakers, and Sewers||26,900||$ 12.08|
|Miscellaneous Vehicle and Mobile Equipment Mechanics, Installers, and Repairers||132,030||$ 12.09|
|Grounds Maintenance Workers||976,840||$ 12.31|
|Butchers and Other Meat, Poultry, and Fish Processing Workers||372,980||$ 12.34|
|Gaming Cage Workers||17,650||$ 12.43|
|Transportation Attendants, Except Flight Attendants||15,680||$ 12.47|
|Counter and Rental Clerks and Parts Salespersons||685,520||$ 12.58|
|Forest and Conservation Workers||6,870||$ 12.59|
|Miscellaneous Food Processing Workers||234,060||$ 12.67|
|Recreation and Fitness Workers||573,920||$ 12.76|
|Miscellaneous Production Workers||881,020||$ 12.78|
|Photographic Process Workers and Processing Machine Operators||23,940||$ 12.78|
|Animal Trainers||11,720||$ 12.80|
|Textile Machine Setters, Operators, and Tenders||76,630||$ 12.83|
|Packaging and Filling Machine Operators and Tenders||378,560||$ 13.02|
|Couriers and Messengers||73,180||$ 13.12|
|Receptionists and Information Clerks||975,890||$ 13.12|
|Fishers and Related Fishing Workers||540||$ 13.14|
|Switchboard Operators, Including Answering Service||100,500||$ 13.19|
|Woodworking Machine Setters, Operators, and Tenders||124,150||$ 13.37|
|File Clerks||140,560||$ 13.39|
|Helpers, Construction Trades||228,710||$ 13.64|
|Mail Clerks and Mail Machine Operators, Except Postal Service||95,640||$ 13.74|
|Weighers, Measurers, Checkers, and Samplers, Recordkeeping||69,360||$ 13.80|
|Miscellaneous Religious Workers||7,840||$ 13.82|
|Miscellaneous Assemblers and Fabricators||1,366,250||$ 13.87|
|Miscellaneous Teachers and Instructors||899,670||$ 13.92|
|Miscellaneous Woodworkers||6,900||$ 13.94|
|Office Machine Operators, Except Computer||63,290||$ 13.95|
|Furniture Finishers||16,480||$ 14.04|
|Miscellaneous Motor Vehicle Operators||54,160||$ 14.05|
|Office Clerks, General||2,944,420||$ 14.22|
|Molders and Molding Machine Setters, Operators, and Tenders, Metal and Plastic||148,410||$ 14.24|
|Miscellaneous Material Moving Workers||21,740||$ 14.60|
|Shipping, Receiving, and Traffic Clerks||674,820||$ 14.64|
|Bus Drivers||674,180||$ 14.88|
|Cutting Workers||79,070||$ 14.89|
|Miscellaneous Textile, Apparel, and Furnishings Workers||71,690||$ 14.96|
|Data Entry and Information Processing Workers||267,900||$ 14.99|
When breaking the table down by broad occupations, 51,789,630 out of the total 137,896,660 employment positions in the United States pay <$15/hour. That is 37.6% of the entire labor force. What would happen to the US economy if all of these workers were suddenly mandated a raise by the government independent of market conditions?
Previous Minimum Wage Hikes
|Date Of Increase||Minimum Wage|
|April 1, 1990||$ 3.80|
|April 1, 1991||$ 4.25|
|October 1, 1996||$ 4.75|
|September 1, 1997||$ 5.15|
|July 24, 2007||$ 5.85|
|July 24, 2008||$ 6.55|
|July 24, 2009||$ 7.25|
The federal minimum wage currently sits at $7.25/hour and has not been increased since 2009. Prior to the 2007-2009 phase-in, minimum wage sat at $5.15/hour since September 1, 1997. The last two times the minimum wage was increased, the labor participation rate dropped after each subsequent final phase-in.
|Date Of Final Phase-In||Minimum Wage||% Increase|
|January 1, 1981||$ 3.35||-|
|April 1, 1991||$ 4.25||27%|
|September 1, 1997||$ 5.15||21%|
|July 24, 2009||$ 7.25||41%|
- In April 1991, the federal minimum wage was fully phased in as a 27% increase versus the previous final rate. From April 1991 to August 1991, the labor participation rate fell from 66.4% to 66%.
- In September 1997, the federal minimum wage was fully phased in as a 21% increase versus the previous final rate. From September 1997 to December 2000, the labor participation rate stayed mostly unchanged, fluctuating from 67.0-67.2%.
- In July 2009, the federal minimum wage was fully phased in as a 41% increase versus the previous final rate. In July 2009, the labor participation rate was 65.5%. It has never been that high since, and it currently sits at 62.6%.
The effect on unemployment rates is obfuscated due to the overwhelming majority of the labor force making more than minimum wage. In order to most accurately measure data, we must find out who in America are most likely to earn minimum wage income. According to a 2014 study by Pew Research, people who are at or below the federal minimum are:
- 50.4% are ages 16 to 24
- 24% are teenagers (ages 16 to 19).
- 77% white; nearly half are white women
- 64% part-time workers
A more accurate gauge may be the BLS's youth employment and unemployment data, which isolates those ages 16-24.
What is most interesting is the period of 1996-1998 being an exception. When comparing the S&P 500 (NYSEARCA:SPY) to the labor participation rate, we can see in the 1996-1998 period, the economy was exploding (particularly in the tech sector). This need for growth may have helped carry the increase in labor costs. This is evident as the labor participation rate during that period reached a peak that has not come anywhere close to being eclipsed since.
What is disturbing to me is the recovery in the S&P 500 from 2009 to present day has not been met with participation in the labor force. Labor force participation is the lowest it has been since 1977, and it begs the question - why hasn't the bull market of 2009-2016 translated into a healthier job market?
An Uncertain Future
In my career, I am tasked with estimating project costs on a nearly daily basis. There are five different variables that must be accounted for:
- Material Cost
- Labor Cost
- Equipment Cost
- Overhead Costs
When you add these five things together, you reach the final cost proposed to the customer. What we know for absolute certainty is that a federal mandate raising the cost of minimum wage from $7.25/hr to $15/hr - a 107% increase - will significantly impact the cost of goods and services that depend on labor from any person making <$15/hr today. Given that 37.6% of the workforce are employed in occupations that earn below a $15/hr median wage, prices of virtually all goods and services should rise across the board for 100% of Americans.
Currently, the median hourly wage for American labor is $17.40/hr, representing a 140% premium over minimum wage. As it currently stands, today's workers earning that median wage are earning a living wage, particularly in lower cost regions of the country, because current goods and services are priced at a floor set by the $7.25/hr minimum wage. Raising the minimum wage to $15/hr will increase the minimum price floor, and current US median income earners will find their purchasing power diminished substantially - families that are comfortable may find themselves impoverished virtually overnight.
I believe legislation mandating such a high minimum wage will accelerate the decline of the American middle class. Because price floors are set by the cost of labor, raising that cost of labor across the board raises all prices across the board. Much, if not all, of the additional money in minimum wage earners' paychecks will be spent paying for the higher priced goods and services, while current middle class workers above the median wage line who aren't mandated a wage increase could be severely hurt by these price increases. The end result:
- Minimum wage earners will be just as poor at $15/hr as they are at $7.25/hr due to resulting increased prices.
- Those currently barely making a living wage will enter the poverty class. The middle class shrinks while the poverty class grows.
- 100% of all Americans have their cost of living reduced as prices increase across the board.
- Job losses accelerate as entry-level positions are replaced by automation.
- Further job outsourcing abroad to escape an artificially inflated cost of labor.
Instead of artificially inflating the cost of minimum wage, we should be incentivizing minimum wage earners to invest in themselves by learning needed skills. The gravitation to higher wages should be natural as workers migrate to greener pastures as their skillsets improve, not through legislation.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SPY over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: All information found herein, including any ideas, opinions, views, predictions, commentaries, forecasts, suggestions or stock picks, expressed or implied, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. I am not a licensed investment adviser.