by Brian Boone

Different businesses entail a different level of risk.  A restaurant, for example, may require the owner to fund and make tenant improvements, enter into a long-term lease agreement to secure the physical premises and commit the time and expense to hire and train a core staff; and these commitments are required before the first entrée is served.  A restaurant owner can vary staffing and food ordering somewhat according to the volume of patrons and related sales, but the rent, the payments on the tenant improvement loan, the insurance, the payroll cost (and required benefits) for the chef, dishwasher, hostess, bartender, and an estimated level of supply and food inventory to insure quality and service are all fixed and have to be exceeded by sales, at a minimum for the venture to survive.  If the owner works in the restaurant as a manager, she must collect a base wage for her services as well if she is to pay her mortgage.  If a break even level of sales is not reached (a level that can cover all of these costs of essential resources) the owner will have to invest more capital (short-term) or will possibly have to shut the doors to patrons (long-term) and will suffer great loss of down payment capital and with liability to the landlord and bank for the tenant improvements.  Of course we see restaurants fail and close often.  This risk may differ from the risk of launching a new publication for local distribution.

In the example of the restaurant, it may be that the expected income to the owner assuming success, given the costs of resources, is sufficient to pay the owner a fair wage to compensate for the contribution of time and effort as well as additional income to provide a return on the investment of savings and to serviced the debt requirements compensate for the risk of borrowing.  Let’s assume that the government is proposing to impose a minimum wage (or wage increase) and that prior to the increase, the restaurant owner was able to attract an available supply of labor for dishwashing and table bussing at $6 per hour.  Let’s assume the government is proposing an increase to $12 per hour.  The restaurant owner may realize that the net profit he expects will no longer provide for a return on investment and will substantially increase the risk that she will even be able to draw a wage for herself that will allow her to pay her personal bills.  The owner will feel trapped in that the bank and the landlord, who rely on and “banked” on her success will still require payment.  The owner could try and raise the prices on the menu to offset the cost but, ultimately, the owner would likely cut her losses and would close the doors and might file for bankruptcy protection.  The restaurant shut-down would cost the Chef, the bartender, the hostess, the bussers, the servers, the dishwashers and the owner their jobs.

Many proponents of increasing minimum wage complain that an employee at the current level ($6 in the hypothetical example) cannot be self-supporting.  Is it important that any solicitation for labor in our economy provide sufficient compensation to allow an individual to be self-supporting?  What about the family where the wage of the dishwasher supplements the income from another household member?  Many proponents suggest that the higher minimum wage will put money in the pockets of consumers and that this will improve the economy.  If this is true, I am wondering why we would be so foolish as to stop at $12 per hour as a minimum; why not $50 per hour or $100 per hour or $1,000 per hour?  If your answer is that $50 is too high or is ridiculous then I ask you:  why is $12 the proper and reasonable amount?  Because risk profiles are different for different businesses, maybe the minimum wage should be different for different businesses?

There is one mechanism available that can effectively set minimum wages for businesses at unique and different levels:  the invisible hand of the free market that provides for the pricing of resources according to the free market bidding and competition for those resources.  If people are sitting with no-employment at all, the restaurant owner, may be able to attract qualified labor for dishwashing at a lower rate, but if there are higher rates paid by homebuilders for laborers to the point that there is a shortage of qualified dishwashers, the restaurant owner would have to raise the pay rate accordingly.  Opponents to the free-market method believe that there is some guy with a suit on in Washington (who, of course spoke to a guy with a very slick econometric simulation model in a spreadsheet) who can determine that some single rate works best.  Of course this “Washington suit” does not want the restaurant owner to shut the doors of the restaurant or for the car wash owner to close after he attempted to raise his rates to pay his laborers only to find that the restaurant owner (along with other employed and newly unemployed) has decided she has plenty of free-time to wash her own car, given the higher prices.

The neighbor may be willing to hire the boy down the street to mow his lawn at $6 but would mow it himself at the $12 rate thus removing critical supplemental income for a struggling family.  How can one minimum wage rate be optimum and effective for all businesses providing goods and services when each business is subject to different supply and demand dynamics?  If I am hungry and in a government funded shelter and I can earn $2 per hour to pass out marketing fliers to augment my need for public assistance, isn’t it better for me than not to work at all to provide something for myself?  If you set the minimum wage too high, the business owner may pass out the fliers herself or may choose a different media method for advertising her city bike tour business.  Then the resource of effort provided by the unemployed worker is lost as well as the chance at some level of self-sufficiency and self-respect.  If there is no unintended consequence of failed businesses and loss of available jobs, then why not raise the minimum wage to $25, $50, $100 or even $1,000 per hour.  The invisible hand of the free market is considered ineffective by many because there are some jobs that would be priced at such low rates, that the job would not completely lift the employee from poverty (without other family income , public assistance, or communal efforts.)  But the hand of the suit in Washington is also imperfect and inefficient because it eliminates the opportunity for citizens to even partially contribute to their families or to limit the need for public assistance by artificially raising the price of a resource thus eliminating jobs that would otherwise exist.

While a minimum wage is an idea that was born from noble aspirations, it serves to have the opposite effect than the one desired.  With a minimum wage, we will have more people without an opportunity to provide for themselves.  This unintended consequence is inevitable and cannot be ignored lest you agree then that $1,000 per hour or more would be an even better policy than $12 per hour.  Unfortunately with incredible appeal and political skill, the politician calling for a higher minimum wage (quite appealing to the voters) will find a way to deflect responsibility for the unintended consequences of the government meddling with the free market and will blame them on his opponent.

One might ask what minimum wage has to do with personal sovereignty and the cause of freedom?  Minimum wage interferes with the freedom of one to offer employment to another at a free market price and with the freedom of one to accept an offer of employment from another at a free market price.  This limitation on the free will of both sides of the transaction is argued to be justifiable given the intent of it’s policy without full regard for the practical impact of it’s policy.  The goal of causing hard working people to receive a higher wage is noble while the unintended result of causing people to be wholly unemployable and then, by necessity, dependent entirely upon those still employed, at or above the minimum, is counterproductive and contrary to the goal itself.