The Key Word Is Minimum: How minimum wage really works.

There’s been a lot of talk lately about the minimum wage, and I heard this morning that the President intends to increase minimum wage for some workers, by way of executive order, by almost 40% (later announced during the State of the Union Address). Although this particular action does not affect us or our employees, I’ll admit I’ve been stewing about this for most of the day. This isn’t a left or right issue; this is straight economics. I don’t know enough about law to discuss that aspect of this decision, but I do have experience with work and minimum wage, from both the worker’s and the employer’s side of the coin.

As an employee

My first job other than babysitting was with the local park district at a miniature golf course. At the time minimum wage was $5.25/hr, and that’s what I earned. My manager typically staffed 2 workers during the day and 3 workers for busier nights and weekends. In my second year at the same job, I was anticipating a raise to $5.50/hr. Instead, minimum wage in the state was raised to $6.50/hr, so that’s what I earned.

Now you’re probably thinking that I was thrilled about this – an 18% raise is huge! Here’s the thing, though – that’s not really how it works. The park district labor budget didn’t change just because wages increased. My manager had to make a tough choice – cut costs or raise prices. He chose not to raise prices. As a result, my manager could only afford to staff the course with 2 people the majority of the time, and often only 1 person during slow times. I was making more each hour, but I was also working fewer hours, so my income didn’t really increase much. Additionally, customer service no doubt suffered at times as a result of understaffing.

My manager could also no longer afford to offer raises. Now, instead of earning more than minimum as a reward for my experience and hard work, I was still being paid the minimum. I was making the same amount as a person who was just starting her first job, like I had the year before, when I started my first job. As an employee, I wanted to be rewarded for my success and earn my raise.

As an employer

Ten years later, I now own a business, and I have to consider the same factors that my manager with the park district had to consider when hiring and scheduling employees. Our farm currently has two part time employees, both high school students. We pay slightly more than minimum wage, and would like to be able to offer them raises for improving their skills or efficiency or for taking on more responsibility.

I’ve run the numbers, and I know that to add a third employee with our current herd size, wages and milk prices, we need every cow to produce an additional 1.5 lbs of milk every day to pay for it. Without running the numbers, I can tell you that if the wages we pay are increased by 40% without being offset by an increase in production or the pay price for our milk, we would have to cut hours for our current employees. We don’t have our employees standing around doing nothing, and that work still has to be done, so it puts us in a tough spot. But the fact is, we can’t spend money we don’t have.

Do I need to say that again? We can’t spend money we don’t have.

Based on my experience, raising the minimum wage does not help workers. It turns good jobs into minimum wage jobs, and it prevents job growth. The higher the cost of labor, the less likely we will be able to afford to create a job. The higher the starting wage we pay, the harder it is to offer raises or incentives to our more experienced employees.

As an employer, if our employees become more valuable, so does our business. I want to have a reason to pay our workers more than minimum wage, but I do not want that reason to be a law.

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13 thoughts on “The Key Word Is Minimum: How minimum wage really works.

  1. This is common sense, as you point out. Sadly, this president has the economic intelligence of an iguana, Hence the out of control spending, astronomical tax increases and perpetual unemployment benefits.

  2. It is simple economics, not feeling good or buying votes. Like any farming operation, you can’t raise prices to cover costs when labor is already over 75% of your overhead, so you don’t hire or give the raises employees deserve.

    1. Thanks for the comment, Steven.

      We, as farmers, are definitely in a different position than a business that has control of it’s price. We can control our costs to some extent, but factors like wage minimums and grain (feed) prices are out of our control as well.

      But – if it were easy, everyone would do it. 🙂

  3. This is very interesting, and I like how it explains the plight of struggling businesses, but I don’t understand what you’re advocating. Should we have never raised the minimum wage above the original 25 cents an hour? Should it be raised on par with inflation every year to be fair? Is the minimum wage too high in general or should be completely gotten rid of? What do you think?

    1. Lynn, my intent was not to advocate, but simply to share my experiences and advise caution. Too often I think side effects of such legislation are forgotten, and these effects are felt by both workers and businesses, whether they are struggling or not. I would also note that one could draw many comparisons between our government and a struggling business.

      Also, since you asked, I think that minimum wage is too general. To me, it makes little sense to regulate wages at the federal level. Would you agree that a living wage in Kansas is very different than a living wage in NYC? Why should the minimum in those places be the same?

      What do you think?

  4. National minimum wage laws are absurd. What may be considered a decent wage in one area of the country is laughable in another local. The government would better serve its populace by creating an environment that increases job opportunities; then the wage issue would not be an issue. Here’s an example: if you are trying to sell a house and it is desirable to several buyers, your bargaining power is strong and will allow you to get a good price. Now take an employee, if they are selling their time (aka. seeking employment), and they have valuable skills for many different employers, they have bargaining power to seek a desirable wage. The prospective employers will determine how valuable that employee is to their operation and pay accordingly. If there is not a positive return on the employees work, the (smart) employer will not keep them employed–that’s economics!

    Unfortunately, many of those officials running our National Government don’t understand this concept because they view work from the perspective of government employment where a saleable commodity is not necessarily the end game for a valuable employee. I know, I work part-time for the government. I’m not saying government employees are not valuable or hard-working, but their purpose is different than private enterprise employment. To that end, we need to create an environment that rewards businesses for their investment and then jobs and wages will take care of themselves.

    1. Ed, I tend to agree with most of that. I do think at different points in history there has been a surplus of labor that resulted in the need for some labor and wage regulation. That said, I’m a big believer in state’s rights. Thanks for reading and commenting!

    2. While I agree that the cost of living varies widely from place to place, having varying “minimum” wage levels creates its own set of problems. Not having a federal minimum wage means you have the potential for a “race to the bottom” with states competing to be the most “business friendly”. Some states will set their minimums very low, effectively selling labor to the lowest bidder in order to be attractive to businesses.

      Let’s not forget, also, that many of these minimum wage earners end up having their salaries supplemented by taxpayers in the form of subsidized housing, subsidized health care and food assistance just so they can get by. I don’t have the answer, but it seems wrong when someone who works 40 a week can’t afford the basics.

      1. Mike, I certainly don’t have the answer either. I’m also not very familiar with the concept of a 40 hour work week.

        I do have a few thoughts regarding the race to the bottom scenario. Workers are also mobile, and I like to believe that most people (even business owners) are decent. Besides, companies need quality labor, and politicians need votes. I think it’s a balancing act.

        I worry that it will be more difficult for that person currently in a minimum wage position to earn a promotion, or to even find work, if we put the strain on businesses.

        Its a delicate situation. I wish that I had all the answers. Thanks for your comment!

  5. The government doesn’t understand “We can’t spend money we don’t have.” I truly believe that that is the biggest problem for our economy.

  6. People need to provide for themselves and quit using the government for a crutch ! “Hard work” should not be a dirty word nor has it been known to kill anyone ! Educate yourself, learn a trade, have a goal and a desire to achieve something in life for yourself and your family. To many people are sitting on the couch watching TV and snacking as they await the arrival of the government hand outs. This once proud and prosperous country would be so much better of if every welfare recipient had to take a blood test to qualify for assistance, be a non smoker, and if you get a tattoo while on assistance your benefits will be revoked . Plus you should have to work somewhere ( sweeping streets, picking up garbage or any other job offered, much like the WPA ) to be able to receive that assistance. When this country has more people on assistance than are working, just how long do people think this “free ride” is going to last ! Do the math people, it will not work !! Raising the minimum wage is just another hand out. Any hard working person with any common sense, that has a desire to better themselves will not be paid minimum wage. Wages should be determined by the person not the government. Being in business most of my life, I don’t care if I have to pay someone $200 an hour. If that person is making the company money ! Okay gonna get down off my soapbox now cause I could go on and on.

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