The $15 Seattle minimum wage went into effect this April, but it will gradually increase from $9.43 over the next 7 years until it reaches $15.00. The Seattle media is blaming the threat of this increase for the recent closure of several Seattle restaurants. Wage increases stepped over 7 years would not seem to be a contributor to restaurant closings, unless restaurant owners are acting way presumptively. Raising the minimum wage is becoming an accepted solution to stubborn wage increases that politicians demand should be higher. Governor Jerry Brown has bought the same $15 increase for California. It’s a simple and politically expedient lever to pull to address the widespread concern over the poor wage and recovery performance we have experienced since the Great Recession began.

Why stop at $15.00? Why shouldn’t restaurant employees be paid $25.00 an hour? Several restaurant owners queried said they would simply raise the price of food $4-$5—this would take care of it, they thought, when the time comes.

Let’s think about what we are talking about here. Do we really think we can just set wages to any arbitrary level and life will go on as before, but with more money in our pockets? Do we think the rest of the economic world will sit still? Regardless of what politicians demand, people do what they feel they have to do or what they enjoy doing. That is the problem, increasing the wage minimum just because you think it should be 50% higher, is too simple. Naïve might be a better word.

In this case, the supplier of the produce and services that Seattle restaurants buy from has the same problem. His wage costs will increase slowly, causing him to raise the price of his goods $4 or $5 per. The wine merchant, possibly located in California will raise the price of his product slightly to cover the increased cost of his labor—remember California has also made the same artless minimum wage decision. The accountant who frequents the Seattle restaurant, but who also does the restaurant’s books will likely raise his rates to pay for the higher cost of eating out. The apartment manager who houses several of the employees and struggles to maintain his Seattle property will think this is an opportunity to raise rents slightly to meet his shortfalls.

Are you starting to get the picture? The arbitrary wage increase designed to help those at the bottom of the wage scale will create its own counter responses. Those on fixed incomes, and even those who will receive the scheduled wage boost very likely will not be able to afford the higher costs generated by this artificial wage increase.
Ironically, they may see no real increase in their purchasing power.

It is pretty easy to understand how this same economic scenario would spread to any manufacturing or service business in or near this city. Smaller companies and restaurants who are not as well financed may close or be forced to cut back. The fun, newer restaurants with experimental entries may be the first to disappear. The natural reaction to the wage increase will be to offset its impact with higher prices of your own. In the end, the effect on those whom the increase was designed to help, will be higher prices in the service and manufacturing marketplace. The government will have created its own mini inflationary move at a time when our weak recovery (also a product of confused government policies) may have run its course. A business owner can adjust his pricing and staff level to the market very quickly, daily if necessary. Arbitrary, government-mandated wage increases are here to stay. Even if they can be lifted or changed down the road, adjustments will be clumsy. They are the wrong medicine prescribed by “unlicensed practitioners” who have little or no understanding of market economics.

A sounder way to raise wages is to create markets that are friendlier to small businesses. You do this by turning your back on the easy, big government practices we have tried over the past ten years. Instead of making the large banks and their investors stronger, make their customers stronger—particularly medium and small businesses who will pay higher or additional wages for additional workers once they feel comfortable in their own markets. Instead of legislating-away bank risk with ponderous bills like Dodd-Frank, make the banks and their owners take on risk once again. Remove Wall Street functions from the banks. Make banks operate like banks. Provide incentives and capital for those banks who lend to small businesses. Large government as well as large banks encourage uncreative industry and should be avoided. Smaller government requires less taxation, and allows smaller companies with new ideas and faster responses to succeed.

These measures are more difficult to put in place, but they will foster basic economic growth which can finance higher wages—in fact, widespread economic growth forces employers to pay higher wages to keep good employees. You don’t believe this? Look at the wage increases paid in the construction industry over the last two or three years to keep good employees. There are cycles and setbacks, of course, which cannot be legislated out of a free economy no matter how hard we try. But artificially boosting wages is a cruel trick on those at the bottom of the pay ladder. It is not the way to help those struggling to make ends meet.


This entry was posted in Business-Politics and tagged , , . Bookmark the permalink.