Minimum Wage Pits Employees vs. Customers, Not Employees vs. Management

This post earlier on the customer service downsides of the new salaried overtime rules got me thinking more broadly about the impact of minimum wage type laws.  Progressives justify such laws by saying that there is a power imbalance between management and employees, and that the government needs to have minimum wage laws to make up for the fact that employees lack power.

But from my experience in the service world, it is wrong to look at the situation as a power struggle between managers and employees.  It is much more correct to look at this as a power struggle between employees and customers.  Let me explain.

Service and retail firms tend to live on razor-thin margins.  Retailers typically live on single-digit profit margins, and those of companies like Wal-Mart are as low as 2% of revenues.  Our company in the service business has a similar experience, averaging profit margins of 3-5% of revenues over the last 10 years.

This is not an accident.  Most service and retail businesses depend on simple service-delivery models using relatively low-skilled workers.  There are many low-skilled workers in the world.  If a company were to start making huge profits with a service model using such workers, it would be easy for others to copy it and hire the same types of workers and undercut them on price.  Margins tend to get competed down to the bare minimum.

No matter how much progressives would like it to be so, when California raises its minimum wage, it probably is not going to come out of company margins, at least in the near term.  Over the 10 years from about 2013 to 2022, California will have raised its minimum wage over 87% from $8 an hour to $15.  Wages and costs like workers comp premiums that are tied to wages are about half my costs.  This means an 87% labor cost increase will increase my total costs 44%.  How is that going to come out of a 4% margin?  It is not.

There are really only two things we can do, individually or in combination.  First, we can raise prices 44%, just to try to stay even.  Of course, some customers will balk and stop buying, and then we will lose business and perhaps have to close (we have already closed over half our businesses in California for just this reason).  Or second, we could cut staff in half to keep wages under control.  Of course, this means customers get served much more poorly, which also may drive customers away.  Other companies like fast food restaurants have a third option of automation, replacing people with machines -- I wish we could do this but right now we have run out of ideas for automating bathroom cleaning and landscape work.

Hopefully, you can see what is going on here.  The real tension here is between employees and customers.  When the state mandates a minimum wage in low margin service businesses (such laws are largely irrelevant to high-margin technology companies and such), compliance is paid for by the customer, either in the form of higher prices or worse service or both.


  1. Swami:

    I don't disagree with anything you wrote, but do offer another way to look at it. Consider this a "yes, and..." comment.

    The other effect is to increase competition between workers. Specifically between workers with skills, intelligence, gumption, socialization and tenure vs those without. If an employee is lacking in these various virtues, they can negotiate a job at a lower price compared to those with these virtues. The minimum wage pits the more capable at a point in time against the less capable and privileges the more capable/handicaps the least capable.

    Perverse for anyone espousing fairness and equality.

  2. Earl Wertheimer:

    Self-cleaning toilets. Not cheap, but they will always show up for work.

    Maybe a new caretaker model. Our local Alpine Club section has a house that is maintained by volunteers. They get free accommodations in exchange for various duties.

  3. Joe_Da:

    Consider - colleges and universities charge money to help develop the skills necessary to work - which enhances government organizations.

    On the other hand - the government wants to make employers pay a premium for teaching basic jobs skills to the marginally employable people.

  4. LoneSnark:

    Much of the dead weight loss comes from employees. The rest comes from customers. A relatively tiny amount comes from employers. Think of a high minimum price on iron ore, which has many relatively cheap substitutes (recycling). Customers aren't hurt all that much, they stem their losses by using the substitutes. But the mine owners have no where to run.

  5. herdgadfly:

    There are of course robot lawn mowers to keep staff count down.

  6. McThag:

    On the "bright" side there's always inflation!

    I've not done a serious look, but it sure seems like the costs of things relative to minimum wage are the same today at the Federal $7.25 an hour as it was when I got my first job back when it was a mere $3.35 an hour.

    Everything is at least twice as expensive as it was then.

    Double that minimum wage again and I expect that prices will just go up and the workers will be back to the same buying power they have now.

  7. Craig Loehle:

    This is based on the myth of the money-bags capitalist, sitting on a huge bag of gold. None of them stop to ask why, if it is so easy to exploit workers and have a huge profit, doesn't everyone do it? Why don't they themselves do it?
    In the balance of power between company and employee, employees also have a lot of power. They steal stuff. They pretend to be working from home. They slack. And of course they can change jobs. Most employees are not captives, as the narrative insists.

  8. Matthew Slyfield:

    "Service and retail firms tend to live on razor-thin margins. Retailers
    typically live on single-digit profit margins, and those of companies
    like Wal-Mart are as low as 2% of revenues."

    It varies by sector as well. From what I have read, the average margin for retail grocery stores nationally is 0.5%, yes, one half of one percent.

  9. thammond:

    Exactly right - and add corporation taxes to that as well.

    What is also pretty stupid about making a minimum wage high, is that lots of people don't stay on a low minimum wage for very long. The entry level jobs lead to other, better jobs and people move on. Higher minimum wages disincetivise people to acquire skills, become more productive and find better jobs.

  10. ano333:

    On the other hand, customers also "pay" for a lower minimum wage, since lower wages make workers more eligible for government assistance. Customers are the ones paying those taxes (since even corporate taxes get passed through in the form of higher prices).

  11. Tom Murin:

    Businesses should post a sign on the automated ordering kiosk noting that was done due to the increase in minimum wages or Obamacare, etc. Perhaps then people will make the connection (they won't, but I will feel better).

  12. Not Sure:

    Otherwise known as the (well, one of them, anyway) WalMart Complaint. Okay- so workers are getting government assistance? Do you suppose they'd be getting any less assistance if they didn't have a job at all? Of course not- they'd be getting more. Conclusion- businesses which employ low wage workers are saving taxpayers money by employing these workers.

  13. ano333:

    Would Walmart shut down, or would they just hike prices to compensate?

  14. Not Sure:

    If WalMart thought they could raise prices without hurting their business, they'd have already done it.

  15. John the River:

    During the Obamacare roll-out and fallout, activists attacked companies (like Papa John's pizza) that cut, threatened to cut or blamed Obamacare for cuts. They made much of the "25% increase in profit" that the company had reported. Of course that's a 25% increase in the profits made with a 4% operating margin. From that slim margin of profit comes new expansion, stockholders dividends, fresh whips to beat the employees with...
    The Government made more. As did the employees. Medical was already costly, Obamacare was going to make it insanely so.

  16. Zachriel:

    Margins will stay about the same, as everyone will be competing on the same, new playing field. Prices will rise depending on industry. That will drive automation in some cases, a reduction in business in others resulting in some job losses, but the overall effect will be to equalize the distribution of income somewhat.

  17. mlhouse:

    What the liberals simply will never be able to understand is this fact:

    If you do not pay your employees enough you will not be able to hire enough employees or get the productivity you need (quality or quantity).

    If Wal-Mart or retail stores or fast food did not pay enough wages they would be short staffed. The fact is when Wal-Mart opens a new store they have hundreds of applicants for each job opening.

    In Minneapolis we are going to have some serious problems with the new statutes the whacko communist city council is cooking up. First, they of course want to raise teh minimum wage. The newest one, which just passed the city council, is to mandate paid sick time for employees. The one sitting down the pike ready to be reconsidered is the requirement that you give all employees 28 day notice of their shifts, and if there is not 28 days notice you need to pay time and a half. So, think about it. Your overpaid low productivity worker calls in sick. You need to replace them. But you did not give 28 days notice to the replacement. Therefore, you need to pay that overpaid worker time and a half. So, you need to spend 2.5 time the labor cost to cover.

    When all businesses leave Minneapolis these people will be clueless.

  18. Rob McMillin:

    Progressives do not care. I'm not sure why, but it seems like 100% of their policy positions are all about virtue signaling.

  19. Ann_In_Illinois:

    Why do you think it will move towards equalizing incomes? Some people will get a 100% cut in pay. Are you saying that they'll just get welfare?

  20. Ann_In_Illinois:

    Exactly! The high minimum wage will cause most harm to those most vulnerable - those who were just barely able to get or keep a job before.

    What especially worries me is that young people from bad backgrounds (i.e. a black 16 year old male from a bad neighborhood) may essentially be shut out of the job market for life. They won't be able to get a starter job at 16 or 17 or 18, one where they learn good habits, etc., so how does they get jobs at 19 or 20? And if they give into temptation and start doing something illegal that leads to a record, then their already-low chances get even lower. Saying that such kids should go to college anyway, to get better jobs, is a let-them-eat-cake way to ignore the problem.

    I feel like we're throwing away some people's entire lives, just so some union members can make a bit more and some short-sighted people can feel virtuous about 'doing something'.

  21. Zachriel:

    A modest increase in the minimum wage will help far more people than will be hurt. Yes, people who lose their jobs will receive assistance, hopefully including some job training. But keep in mind that many people on minimum wage are already receiving assistance.

  22. Joe_Da:

    As Thomas Sowell pointed out - Its harder to climb the ladder to better wages if you cant get on the ladder

  23. Joe_Da:

    Marginal tax rates can be devastating.

    A jump from 7.25 to 15.00 per hour net of payroll taxes appears to be a huge increase when you only take into account the social security, medicare and income tax.

    However, marginal tax rate is closer to 80-90% when taking into account the reduced earned income tax credit, child tax credit, food stamps, snap, etc.
    A person making minimum wage full time at 7.25 will take home essentially the same pay at 15.00 per hour.
    Because of the way those government benefits are scaled, the person making minimum wage will have effectively the same take home pay whether they work 10 hours a week, 20 hours . 30 hours or 40 hour per week.