The Los Angeles City Council demonstrated its ignorance of Economics 101 when the panel voted last week 12-1 to raise the minimum wage to $15 an hour by 2020 for millions of workers in the country’s second-largest city.
United Farm Workers co-founder Dolores Huerta celebrated and said, “I think the economy will benefit and everyone will be better off.”
Apparently, Miss Huerta has never taken a class in economics, which is all about trade-offs. Yes, those who kept their jobs or are new hires will benefit, assuming they work full-time. But then there are those who lose their jobs, or who aren’t hired full time. They are the losers.
If there’s one thing you learn in Econ 101, it’s the concept of trade-offs, of costs and benefits. There’s no free lunch.
Councilman Mitchell Englander, the council’s only Republican, cast the lone opposing vote. In a statement, he said the council action could “make it impossible for entire industries to do business” in Los Angeles.
“The very last thing that we should be doing as a city is creating a competitive disadvantage for our businesses with those in neighboring cities,” said Englander, who represents the northwest San Fernando Valley.
What’s important is that there is a real alternative to a minimum wage law. The fact is that companies that are more profitable usually pay their workers higher wages. If the private sector can be more productive, everyone benefits.
Recently, Walmart and McDonald’s have raised wages to $9 an hour or more, substantially higher than the federal minimum wage of $7.25 an hour. They did so following a highly publicized campaign by protestors to force McDonald’s to increase wages and benefits. Walmart, the notorious cost-cutter, was under pressure to raise wages as well.
Both companies did so without Congress passing President Obama’s bill to raise the federal minimum wage to $10.10.
This story demonstrates that wages can rise without the government intervening in the private contracts between employees and firms.
Walmart and McDonald’s both raised wages because they had the means to do so. Walmart made $16 billion in the past year from which to pay higher wages. The company’s profit margin of 3.4% was almost double Costco’s profit margin of 2%. Recent earnings reports indicate that Walmart’s profit margin has fallen since raising wages, but large corporations are able to absorb these costs.
McDonald’s does even better financially than Walmart. It earned $1.8 billion in profits after taxes in 2014, and it has a profit margin of 17%. That’s more than twice what Yum Brands (KFC, Taco Bell and Pizza Hut) earned. So you can see why McDonald’s could be the leader in raising wages.
Of course, the marketplace more than the legislature persuaded the respective management teams to raise wages. Competitors were stealing away good employees with higher wages. A tighter labor market and higher productivity will do more to raise wages “naturally” than the “artificial” means of government edict.
Natural vs. Artificial Means of Raising Wages
At Chapman University, where I teach, I divide the blackboard into two parts — one is a list of “natural” ways to raise wages, and the other is a list of “artificial” ways to raise wages, as follows:
Once students see there are natural, genuine ways to raise wages, they are less likely to vote for artificial means to force companies to raise wages.
Interestingly, after the Los Angeles City Council decided to raise the minimum wage to $15, one of my students came up after class and told me his family now planned to move their business out of LA. Enough said.