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Wednesday, May 04, 2005

The Problem with a Living Wage

Someone on a message board that I comment on wrote this:

"Sen. Ken Toole is proposing to tax corporations who do not pay a living wage to help offset the cost to the local, county and state governments for services rendered to those employees with inadequate disposable income to purchase insurance. It definitely is a step in the right direction. It is a simple solution which would be easy to enforce if it gets passed."

"Other than the hurdle of getting it passed, I see a problem unless I am missing something. That problem is that if it only looks at full-time employees, won't corporations try to avoid the tax by significantly reducing the ratio of full-time workers to total workers. The money they save on benefits could be used to raise the wages of the remaining full-time employees."

"If so, Montana would have many more part-time workers as a result (with no benefits) so that the full time workers could be paid just enough to avoid the tax. Full-time workers would benefit but if the number of part-time workers doubled, the majority of the workers in Montana would be worse off? Hopefully, the final bill will address this problem."

It is nice to see a moment of honesty in this post. This problem he sees is the big rub with minimum/living wage laws. I am very much in agreement with the goal of minimum wage laws. However, the unintended consequences always have to be considered.

I believe the thought process is that corporations have such insane profits that they can afford to give back some of that profit to their employees. If this were only the case. The average profit margin for US companies is around 7%. That is a slim margin for error. What about some particular companies?

Wal-Mart: 3.65%
Ford: 1.81%
FedEx: 4.93%
Home Depot: 6.84%
Target: 4.82%

So what actions would companies take if their wages were forced up? One result is lowered benefits. Another is lower rates of employment. And yet another is to raise prices. And so then what are we left with as a result of increased wages?

  • Lower benefits for lower-income workers.
  • A higher unemployment rate that will disproportionately effect the rank and file.
  • Higher prices that will disproportionately effect low income families.
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