the most incredible libertarian assumption is that all companies operate in such a way that the smallest hike in pay absolutely must result in cutbacks elsewhere. apparently, no company is making any profit! :D
But hey, just for the sake of argument let's pretend you COULD take it out of profits. Here's where you run into a related assumption which is one of the basic rules of economics: change happens on the margin. Suppose that the entirety of the McDonalds chain as a whole is profitable. For simplicity we'll ignore the fact that the individual stores are mostly franchises and pretend they're all company-owned. The chain is not uniformly profitable! Some outlets are very profitable and others are just barely scraping by. When you increase the cost of labor the outlets that were very profitable are still worth running even with the new cost of labor, but the outlets that were only slightly profitable before are now losing money.
Those are the outlets that close.
Restaurants that will lose money every year with the higher wage aren't worth keeping open. shifts that lose money at the higher wage also aren't worth keeping open, so hours of work tend to get cut back too. You don't lose jobs at every store or uniformly, but you do lose marginal jobs that did exist or that would exist were it not for the new wage.
Overall, the chain will survive, but it has to shrink back in order to do so. In order to argue that it doesn't, you'd need to believe not just that the company overall is making (a lot of) profit, but that EVERY individual outlet is making the same share of that profit, so they're all worth keeping around post-change.
For instance, suppose you are a McD franchise owner whose restaurant has 50 "crew members" (source on that number: https://answers.yahoo.com/question/index?qid=20070917131148A... ) and your restaurant recently became profitable to the point that it currently makes an annual profit of $250k. A quarter million dollars in annual profit isn't a lot but it's respectable - that is a sustainable business! That's something you can afford to keep operating indefinitely (and try to grow over time). You have some room to invest, some room to make mistakes.
Now suppose the state passes a law requiring you to give all 50 of your crew members an extra $5/hour. How much does that cost? 50 people * 2000 hours/year * $5 = $500,000. So your restaurant just went from gaining a quarter million to losing a quarter million a year.
Now it is not a sustainable business. Your pockets are not deep enough to keep losing that year after year; you should probably close the business or scale it way back.
Are you going to claim that every restaurant in the chain has enough buffer to take a half-million-per-year hit to the bottom line and stay standing? Of course not. There are always some marginal businesses; those are the ones that are likely to shrink, cut benefits, or close.
surely you don't suggest we should allow majority of workers to be exploited because some weakly profitable restaurants might fail? (and 50 employees with 250k annual profits sounds pretty weak.) all these workers are paid the same miniscule wage, regardless of whether their restaurant makes more or less profit, so most of them are exploited, simply because they can easily be replaced.
Who is exploiting whom here? Most restaurants fail. Nearly all restaurants lose money in the first three years of operation. During that time, when the firm is losing money but still paying salaries, isn't the firm owner the one being exploited? And aren't you exploiting the owner even more by forcing him or her to lose even more money on the way to a slim chance of profitability?
People who consider that "the gains outweigh the losses" probably don't realize that even those who get a raise due to a minimum wage law might be on net worse off than before that law was passed. Certainly those who lose their job or fail to get a new one are worse off, but even some who keep their job are also worse off, because they lose other benefits in lieu of salary that they presumably valued more.
There is no plausible theory that says low-skill workers are made better off by making it illegal to hire them for less than a specified price. Legally fixing one term in a contract in general makes both parties to that sort of contract worse off. There are many reasons why it should be hard to measure the damage the minimum wage does so it's not surprising that a few empirical studies return the "man-bites-dog" result, but we shouldn't fool ourselves into thinking it doesn't do any harm at all just because that harm is occasionally hard to measure.
The minimum wage is callous and cruel; it harms those least able to afford being harmed. It is at heart indefensible.
Fortunately, we live in a rich enough society that being legislatively forced into a suboptimal job situation or involuntary unemployment is usually recoverable. It's not a death sentence. Yes, Seattle is effectively kicking poor people in the face with this law, but in the grand scheme of things it's probably not the worst legislative indignity we inflict on them.
"they lose other benefits in lieu of salary that they presumably valued more." - key word being "presumably", which is, given the election results in Seattle, apparently not true. and, there is of course no reason for all of them, or even a majority, to loose more in benefits than they gain in higher pay. makes no sense.
"we shouldn't fool ourselves into thinking it doesn't do any harm at all just because that harm is occasionally hard to measure." - ah, but we should :) measurement is king. if any losses will occur, they should be measurable. otherwise, i guess we should throw the entire history of science out the window.
"There is no plausible theory that says low-skill workers are made better off by making it illegal to hire them for less than a specified price." -- see my very simple explanation here: https://news.ycombinator.com/item?id=7840655 - generally, libertarians, a behavior typical of followers of any ideology, simply ignore all unfavorable aspects and just assume that the market automagically solves everything, without considering parameters under which a certain market operates.
"The minimum wage is callous and cruel; it harms those least able to afford being harmed." -- your concern for the poor is very moving. i personally, OTOH, would use the same words to describe the libertarian approach to economy and to the poor. but, in the end, those are just emotional soundbites.
I'm not sure you understand the argument here: A job is a bundle of benefits. There's a money component but there's also all sorts of tangible and intangible other factors that are of value to the worker and cost money to the employer. Other factors might include things like: Free food. Free training. Company-provided uniforms. A well-lit work environment. Flexible hours. Sick leave. Vacation time (paid or unpaid). A well-lit and clean and safe work environment. Job security. A 401k plan. Health coverage. Convenient employee parking. Educational assistance. Prescription drug discounts.
Suppose the value of your work to the company is $16/hour, of which you get paid $10 in salary, $5 in benefits, and the company keeps $1 as profit. If the minimum wage is increased to $15/hour, the only way the company can afford to keep you on is to get rid of ALL the benefits; they would then pay you $15 in salary and $0 in benefits.
The problem is that if you had WANTED that deal you could have BARGAINED for it. You CHOSE a 10/5 salary/benefit split because that's what you preferred, so when the government forces you to take a 15/0 split instead you are being forced to accept a deal you like LESS than your prior option. You're worse off.
Yes, you're making $15/hour, but now you have to work HARDER and the work conditions are worse and the timing is less flexible and the schedule is less relaxed and the job security is nonexistent and you have to pay for your own food and uniform and training and so on where before those were all provided. It is now a miserable job even at the higher wage, where before it was an okay job with a merely not-great wage.
But wait, I hear you cry: "minimum wage workers have no negotiating power so they can't just demand exactly what they want!"
Ah, but they kind of can. They do so not by arguing with employers directly but merely by CHOOSING employers. When considering whether to work at McDonald's or Burger King, workers look at the whole package and pick the one they like MORE. (The company cares about the SUM, not how much is salary versus benefits - it just wants to get the best workers they can at a low OVERALL cost) Over time, the company that offers a better overall blend of benefits+salary will find it easier to hire the people they need so the packages offered will tend to evolve to best meet the needs of the average workers.
Then the government steps in and says screw that, you can't HAVE those benefits anymore, because the company can't afford to give them to you along with your new higher salary.
If the minimum wage went from $10 to $15, people whose value to the company was between those two simply lose their jobs; people whose value to the company was $16 or more keep their job but the job is now a really crappy one they (according to revealed preference) probably like less than what they had before. So they aren't actually made better off by the change, even though they got a raise.
Which means there's no net benefit to the higher wage, only costs.
> key word being "presumably", which is, given the election results in Seattle, apparently not true
Election results are mostly about signaling and group affiliation. They don't tell us anything about what minimum wage workers want, because minimum wage workers are such a small portion of the electorate.
> measurement is king. if any losses will occur, they should be measurable.
Bad study design could easily render them unmeasurable in any particular study. And most minimum wage increases are essentially designed to be nearly unmeasurable by the sort of study you're thinking of. Yes, the theory says that, all else being equal, businesses will tend to respond to higher labor costs by such measures as: cutting benefits, cutting shifts (so there are fewer hours but not necessarily fewer jobs), investing in automation, shrinking or failing to expand, not opening (as many) new businesses. But theory doesn't say exactly WHEN this will happen or even in which business sectors. An exceptionally stupid study design might compare just the number of jobs right before the law takes effect to one year later, and find no effect. But wait: the law was argued about in the legislature for two years and then passed but didn't take effect until the next calendar year, and took effect in multiple small stages. A smart, pro-active businessman who knew he needed to make changes might see the writing on the wall and start making those business changes before the law even passes much less takes effect, confounding that study design. On the other hand, a lazy, re-active businessman might just suck it up and change nothing, losing some money for a year or two after the change, either hoping to make it work or hoping the law gets repealed. Eventually he is driven to make those changes but does so after the study window, again confounding the results. In short, what sort of delayed or premature response we should expect for a particular sector and a particular sort of legal change is an empirical question - you might have to run one study to find the shape of the expected response and then run another to estimate its magnitude. Doing the sort of thing Card/Krueger did is almost guaranteed to miss most of the signal, even if it's really there.
as for the whole reasoning, it goes under the assumption that all the gain will be taken out of benefits, which is unfounded. also, why would the worker not cover benefits him/herself? with cash in hand, s/he has a much wider choice then picking McD's or BurgerKing's bundle package or nothing... ultimately your argumentation also goes to show how important workplace safety regulations are, since many business owners think like you, and history has already taught us how that can end.
as for the reasoning about studies, this is so full of fallacies and arbitrary pseudo-reasoning it's hard to even start answering. these things are hard to measure, yes. maybe you will be surprised, but people did already realize that long before you wrote that comment. but, when a couple of unemployment figures suit your point, then, OTOH, i am supposed to immediately blindly agree with you? :)
this is getting boring.
P.S. I cannot resist - do you even realize that after so much market-efficiency-based reasoning, you completely took a shit on it in order to discredit the study? the effects you expect are products of a theory based on ideal markets and market agents, yet when we fail to measure the expected effects, that's because they are anything but ideal. genius :D
I'm not sure if you realize that across multiple industries the rate at which worker fatality stats improved either stayed the same or even declined when OSHA was introduced. In short, it's not clear at all that federal worker safety regs actually improve worker safety. You can perhaps see that best in the graph (Figure 34.1) on the third page of this PDF:
http://object.cato.org/sites/cato.org/files/serials/files/ca...
Regarding the study, I'm not saying you can't learn anything from studies. I am saying that when we have hundreds of studies showing that the minimum wage generally causes unemployment - and we do - one or two that say "but it's hard to see the effect of this one small change in this one small area with this one specific way of looking at the data" aren't enough to rebut that general presumption. If you want to "even start answering", you should read at least ONE study on the other side, not just look at data sources that agree with you. For instance, you could read this:
http://www.econ.ucsb.edu/~pjkuhn/Ec250A/Readings/Neumark_eta...
The unemployment stats I pointed to were comparing having a minimum wage AT ALL to not having one - bigger changes are more likely to be highly visible in the output data. BTW, to answer your question (somewhere else in this thread) about Germany, the last time it had very high unemployment was around 2005 when it had a high minimum wage and lots of "worker protection" laws. After the German labor market was freed up a bit (including getting rid of that minimum) the unemployment rate there dropped quite dramatically. Here's a chart of what that looked like:
http://mediaserver.fxstreet.com/Reports/95e05c46-b989-46ee-a...
(UPDATE: Wait, that's showing values in millions of workers, not as percentages, which is a little misleading. So here's a chart that shows the rate while comparing Germany to France over the same period:
http://thinkingoftheworld.files.wordpress.com/2013/06/chart-... )
as for the study, for the third time now i will repeat - i agree that minimum wage may raise unemployment. as far as i have noticed here, so does this study that Seattle commissioned before introducing the minimum wage. the question is, what is the relationship between the gains and losses?
as for the argumentation - it is again the same thing! instead of "whole company", you moved to topic into "individual branches", but it is still the same - apparently, a huge number of workers is employed in places with zero profit, be it whole companies or just branches. this is an incredible claim. why would we accept that workers in highly successful branches should get underpaid, just so that a couple of barely profitable branches could remain open?
everyone needs work. and low-skilled workers come in large numbers. any manager not aware of this, and how it enables him or her to pay the workers as little as possible, is a fool! management will pay the least amount possible, since replacement workers are readily available. this is why an increase in minimum wage will not produce nowhere near a proportionate response in lost jobs.
Fine. Suppose we want to increase the minimum wage by at least $5/hour. Let's see if that's possible without "cutting back":
McDonald's has 1,800,000 employees and makes 5.46 billion in profit. Divide the latter by the former and you'll see that their profit is $3,033/employee. If they gave ALL the profit to the workers in the form of higher wages and divided it equally among the workers, that's how much of a raise they could afford to give without doing any "cutting back": ~$3k/year.
A 40 hour workweek is about 2000 hours per year, so that means if they didn't save ANY profit to give back to investors or invest in the growth of the business or set aside against losses in bad years, out of profits they could afford to give their full-time workers a raise of: $1.50/hour.
Any more than that, and they have to cut back.
But wait, you say! What about bloated CEO salaries?
Huffington post says the incoming CEO of McDonalds recently got paid ~$14 million and the outgoing one got ~$28 million. (source: http://www.huffingtonpost.com/2013/04/12/mcdonalds-ceo-pay_n... ). Let's add those together and round the total WAY up to $50 million dollars. Let's assume they can save $50 million dollars by not paying CEOs or ex-CEOs (and a couple other high administrators) anything, and distribute the savings to the workers as higher salary.
$50 million / 1.8 million = $27.8. So by eliminating those top salaries we could give every worker an extra 27.8 dollars per YEAR. Divide that by 2000 and you'll see we can afford to give each full-time worker an additional raise of roughly: 1.4 CENTS per hour.
Conclusion: doubling the minimum wage (or bumping it by $5, or anything in that ballpark) can't be done out of profits or out of cutting top salaries. Raising the minimum by more than a dollar or two would render the overall firm unprofitable.
also, i am not that crazy to think that this would not cause ANY cutbacks. the money does indeed have to come from somewhere. it's just that there would be nowhere near a proportionate response in firings compared to the increase in the life quality of the people affected, and also in the consumption driven by their new incomes.
ultimately, this is like a collective bargain on a wider scale, supported by the democratic process in Seattle. it is correcting for the unfavorable effect of market forces on the pay of uneducated workers. due to their abundance, the downward pressure on the pay of this category of workers can only be stopped by minimum wage or social security.
EDIT - i've been googling around, and found a much lower number of employees, 440k employees (source: http://www.macroaxis.com/invest/market/MCD--McDonalds-Corp - don't know how reliable..) which, following your calculation through, gives ~ $6 net income per employee hour. also, another point is flat out ignored - prices can be increased, shifting part of this burden to the end consumer, which in the end only seems just. any business that is already giving a fair wage to it's workers is being driven out of business by competition exploiting lack of minimum wage rules and abundance of low skilled labor.
EDIT 2 - Also, the crucial problem with executive pay is not so much that people think that from their pay some huge increases in workers' pay could be given, it's in the purely subjective feeling of injustice, when on one side managers are showered with millions (and I presume McDonalds has more than just 1), while workers are given advice on how to get food stamps. this quite understandably pisses people off.
EDIT 3 - Sorry for all the edits :D Another thing worth noting is that it seems very unlikely that ALL McDonalds employees are working on a minimum wage. This would also reduce the effect of minimum wage hike on their profits.
The larger number I used includes as "employees" people who work for non-company-owned franchises and licensees; I believe your smaller number is only counting workers at the company-owned outlets (not franchises or licensees), so your number should be about 19% of mine, give or take (source for that 19% number is the last line on this page: http://www.aboutmcdonalds.com/mcd/investors/company_profile.... )
(Incidentally McDonald's suggests it has 761,000 "employees" here - I suspect that's a US-only number: http://www.mcdonalds.com/us/en/careers.html )
> another point is flat out ignored - prices can be increased
Actually they can't. I assume prices currently are set at levels that roughly maximize the firm's profits. If McDonalds could earn significantly more money by charging more they would have already raised the price to do that. They serve a price-sensitive customer base; raising prices would indeed earn more per meal served but would sell fewer meals for overall less profit.
(If you think McDonald's could make billions more by raising prices, you have to explain why they've been voluntarily charging less than they could all these years. Are they just being magnanimous, charging less out of the goodness of their hearts? :-) )
If you really want to nitpick, though: if McDonalds spent their entire worldwide profit margin raising salaries just in the US they could do a bit better than my calculation, but that would involve "exploiting" their foreign licensees and helping the relatively-rich US employees entirely at the expense of relatively-poor foreign ones. Whereas if anything, it would be more ethically just to only raise wages abroad and not do so here.)
"I assume prices currently are set at levels that roughly maximize the firm's profits." -- again, you simply assume. and you forget to consider an important factor in determining where the point of maximum profits is - the costs of production. which have now, with the hiking of minimum wage, changed. so, even if they were in this theoretically perfect point of maximum profit (which is an ideal, and thus incredible to be achieved to say the least), they would automatically be out of it after the min wage is introduced, and would be forced to change prices to return to it. but this is all idealized talk, for such a point to exist we must assume a perfectly linearly elastic market. i would like to see proof of that.
Let's do some maths then :
McDonalds 2012 profit : $5.5 billion Revenue : $27.56 billion Employees : 1.8 million
Revenue per employee : $15311 Profit per employee : $3055
So costs per employee : $12256
Let's say McDonalds locations vary in revenue by 25% (95%) and that the main cause is employee_cost/customer. That seems to me a very reasonable claim.
That means employees make McDonalds between $11483 and $19138 in revenue, -772 to 6682 in profit. Let's assume uniform distribution. The amount of net-negative employees would be about 10%.
Since most companies are much less profitable than McDonalds, the idea that a lot of people are effectively employed with zero or negative gain seems quite plausible to me. In the US and Europe both you could defend the idea that most people have a net-negative utility to the US and European nations (taken as a whole), a gap that gets filled by the sale of treasury notes to foreignors.
But there are whole classes of employees that will have net-negative utility :
1) government employees (government does not produce goods or services. And where it does it's financed by taxes, negating the benefit)
2) management (they don't contribute directly to work getting done)
Ideally, neither function would exist (and police and roads would simply be organised directly by the people who want to use them). I'm not saying that's realistic, but it would be better from an economic perspective.
In my opinion people often overestimate how inefficient capitalism is. There was a huge fuss about oil profits a few years back, when oil first went to $100/barrel. When you calculate how much per gallon oil company profits were (and thus how much they could be theoretically maximally lowered by nationalizing the oil companies) you'd get something like 2-3% depending on the company. This was the populist solution to bring oil back from $105 or so to $60 ...
Of course if you're living in San Francisco and see Goldman Sachs organise a bankers' convention in the most expensive hotel in the city it seems excessive, but all their costs only amount to at most the low double digits of their revenues. For the vast majority of firms, it is the low single digits.
That doesn't mean improving the "common man"'s life is not worth it, of course.
put most simply, if your hypothetical McDonalds (at the numbers before you introduced the arbitrary variation, for which BTW an application of the Zipf law would probably be more appropriate) fired one employee, they would not suddenly have $12256 more in revenue. they would be wise to determine the exact costs of keeping an employee when making these decisions.
---
another important argument which is often overlooked - the extra money that people at lower incomes will receive through this will almost entirely and certainly be spent back in the economy where they live! i have a strong hunch that under certain circumstances, although they might, when thoroughly estimated, turn out to be extreme, hiking up minimum wage might produce increased employment in the mid-term.
the determining factor for the amount someone is payed is not how much their company earns, and/or how much they contribute to that. for most workers it is simply - how easily can s/he be replaced? i.e. market price, mostly independent of how well an individual company is doing! no manager is going to pay workers more than s/he needs to, at least not without risking reduction in competitiveness, and for workers with low education, you can find replacements easy, particularly during economic downturns.
and yes, it still can be a company, unless you wish to narrow the definition of the word company. the way a company will distribute it's profits is mostly it's own business. are you perhaps automatically assuming that all companies are traded on the stock market?
in any case, you're the one who started with redefining "charity" in such a wild manner you seem to now hypocritically be accusing me of.