December 1, 2012

A $12 Minimum Wage in Retail?

Filed under: Business Moves,Economy,Taxes & Government — Tom @ 6:59 am

A lefty organization tries to repeal supply and demand.

______________________________

This column went up at PJ Media and was teased here at BizzyBlog on Thursday.

______________________________

Last week, just in time for the start of what yours truly and the vast majority of Americans call the “Christmas shopping season,” but which the press in virtual lockstep tags as the “holiday shopping season,” a policy analyst at a leftist think tank seriously proposed that all retailers voluntarily raise their employees’ minimum wage to $12.01 per hour, or $25,000 per year for those who work a forty-hour week year-round.

The study (“Retail’s Hidden Potential: How Raising Wages Would Benefit Workers, the Industry and the Overall Economy”; full PDF here) came from Demos, whose nice-sounding goal is to “make equality and democracy more than just ideals.” Though it is often characterized as “non-partisan,” it boasts of “a partnership” with the openly liberal but really far-left American Prospect. Catherine Ruetschlin, the study’s author, appears to have had some possibly scrubbed involvement with Occupy Wall Street, and to have been a leader of an unsuccessful 2008-2009 effort aimed at “ridding the New School from the tyranny of Bob Kerrey.” Kerrey, the former Democratic U.S. senator, headed that New York City university for a decade before leaving when his second five-year term ended in January 2011.

According to her Demos bio, Ruetschlin “is currently completing a PhD in Economics at The New School.” Before she receives that doctorate, she should be required to retake Econ 101, especially those pesky sections dealing with the profit motive and the law of supply and demand.

I won’t even attempt to list all of the weaknesses in the Demos study, as it would require at least a term paper to thoroughly expose them all. What I will address will more than suffice to discredit it.

In Ruetschlin’s alternative universe, if retailers raised all employees’ wages to at least $12 per hour, “the new floor would mean a 27 percent pay raise” on average for those earning below that threshold. Then, as if by magic, because of that increase and others granted to higher earners who would also demand to be paid more, “More than 700,000 Americans would be lifted out of poverty, and more than 1.5 million retail workers and their families would move up from in or near poverty.” Employing her trusty Keynesian stimulus calculator, she further projects that “As a result of the economic growth from a wage increase, employers would create 100,000 to 132,000 additional jobs.” And of course, the impact on retailers’ operations would be minimal, because “The cost of the wage increase amounts to $20.8 billion, or just 1 percent of the $2.17 trillion in total annual sales by large retailers.”

It is here that Ruetschlin’s most obvious slip shows. Instead of framing the increased costs of pervasive pay raises (some of which I believe she failed to consider, including payroll taxes, workers’ comp, and other wage-based costs) as a percentage of what retailers actually have available to absorb additional costs (i.e., before-tax profits or net cash flow, and certainly not sales), she goes into a completely irrelevant rant about how some of them are engaging in stock buybacks. It’s easy to see why she dissembles. A Deloitte LLP study (very large PDF) of retailers’ 2010 financial results revealed that eight of the world’s top ten retailers (the other two are privately held) achieved net profit margins of only 3.0 percent. That is their after-tax percentage; pre-tax, it’s at most 5 percent.

Thus, what Ruetschlin really wants is for retailers to do one of three things: voluntarily reduce their pre-tax profits by about 20 percent ($20.8 billion divided by roughly $108 billion in pretax profit), force these costs on to their customers, or extract an equivalent amount from their suppliers in the form of price breaks. And this is going to stimulate job growth?

No it won’t. Here are just a few of the more obvious effects, depending on whose ox gets gored.

If companies voluntarily take the hit and take no alternative actions, their share prices will plummet, as will their ability to pay dividends. They will be less able to raise capital for future expansion. This will affect not only the so-called “one percent” who own and preside over these firms. It will also strike at the rest of us who directly own shares in these companies or indirectly hold them through retirement-plan and other mutual fund investments.

But of course, companies, at least those wishing to survive, will take alternative actions. Some will place more emphasis on their highly automated online efforts. Other will freeze or contract their brick-and-mortar store count. Still others will reduce the floor space at their existing stores. Oh, and one other thing: An entirely government-driven trend which is already underway will accelerate at warp speed. Employers will become even more determined to keep employees from meeting ObamaCare’s new definition of “full-time employment,” holding as many of their current and new workers to 30 or fewer hours per week to avoid being fined for not covering them on their health insurance plans.

Companies which simply choose to pass on the increased costs to the public will become less competitive. They will lose customers, sales and market share, and will be forced to shrink their store count and workforce. Some will go out of business.

If suppliers are the ones who get beaten down, their profits and their shareholders will suffer, along with employees who will surely be hurt by some combination of layoffs due to increased automation and compensation cuts.

At the same time, a $12.01 minimum wage in retail would put enormous pressure on those in other lower-paying industries to pay more, forcing them to raise their prices and suffer the consequences of reduced consumer demand for their goods and services.

There is virtually no doubt that if Demos and Ruetschlin were ever to get what they want, the overall economy and total employment would shrink, not grow.

What Demos, Ruetschlin and their grim band of fellow radicals refuse to recognize is that employment is not some kind of entitlement. It is instead a mutual business agreement between a worker and his or her employer that the use of their services at a given price is a win-win for both parties. If you make the cost of the agreement too dear for either party, you won’t have an agreement. If you are able to force such agreements on the unwilling anyway, you will end up with fewer of them. In the current case, the result will be fewer jobs.

What I really fear is that leftist efforts such as these are the opening shots in what will become an all-out war on employment practices at companies throughout the land. Using dreck such as that produced by Demos as support, “greedy capitalists” will be blamed for the continued and virtually inevitable failure of the economic policies of the Obama administration. And if these companies won’t do what they “should”? Why, the government will just have to take them over and run them “correctly.”

We’ve seen it happen time and again in other countries. I wish I could be confident that it can’t and won’t happen here.

Share

No Comments

No comments yet.

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.