Hypotheticals - The Impact of Raising the Minimum Wage

Here are a couple of hypotheticals to illustrate how the current fashion for across the board increases in the minimum wage will often do more harm than good.

X company has revenues of $1,000,000 a year, a line of credit with the bank and a well established business.  After all other business costs have been paid the company has $400,000 left to divide up between owners and workers.   The owner pays himself $200,000 and pays his top manager $80,000 a year (pay, payroll taxes and workers compensation) leaving $120,000 a year for other employees.  He has four other employees, he pays them at minimum wage, $10 an hour, with mandatory other payments such as payroll taxes, sick leave and workers compensation that takes up the last $120,000.

Y company has revenues of $250,000 a year.  After other business costs have been paid Y company has $170,000 to divide up between the owner and workers.  Y company also has 4 employees paid the minimum wage, $10 an hour.  As with X company that takes up $120,000 leaving $60,000 for the owner.

The city enacts a minimum wage ordinance bumping the minimum wage up to $15 an hour.   For each company their new cost for their 4 employees will now be $160,000 a year.

X company will grumble, but will be able to adapt.  It has the cash flow and the bank connections to deal with the disruption.  Perhaps the owner reduces his annual take to $160,000 to cover the new costs.  The increase in the minimum wage as to this company will probably be good for the city wide economy, more money will be in circulation from people who spend most of what they earn, and less money will be driving up asset prices.

Y company, on the other hand, will be in severe financial straights.  If the owner absorbs the cost of the additional wages he will now be making $20,000 a year, less than the old minimum wage, much less the new one and less than any of his employee's make.  His only other options are to fire someone, or make substantial cuts in employees hours, or close the business.  It is a lose / lose situation for everyone, including the economy of the city.

In any given city it is hard to know how many companies are more like X company, and how many are more like Y company.   If 95% of the companies are like X company, the minimum wage hike will certainly be a net plus (although hard on the Y companies and their employees).  If 95% of the companies are like Y company the minimum wage hike is going to cripple the cities economy.

A relatively simple solution is to create an exception to the minimum wage hike.  Any company that can demonstrate that owners and management are not making more than, say 300% of the average earnings for full time workers in the company is exempt from the new minimum wage (although still subject to the old minimum wage).