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Why a $15 Minimum Wage Can Bankrupt Some Businesses

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Glenn Stok discusses his personal views and opinions of significant social and economic influence to inspire further consideration.

If a company is forced to pay more than they get, they will close.

If a company is forced to pay more than they get, they will close.

Raising the minimum wage to $15 isn't the solution for low-wage workers. Unless they are worth it, they will lose their jobs. They need to generate revenue greater than their salary to stay employed, or the company couldn't afford to pay them.1

Why the $15 Minimum Wage Is Bad

  1. If an employee's work doesn't result in more revenue than their company pays, that would be a loss to the company, and the business would go bankrupt.
  2. Companies hire people as an investment, and it needs to be profitable.
  3. If a company is forced by law to pay employees more than the work generates, they will eventually go out of business, and the workers will lose their jobs.

Understand the Facts About Minimum Wage

A company hires people for only one reason. It's an investment, and they require a profitable return. When they see a profit, they will eventually give a raise.

If they can't get more in return, then there is no reason to hire or keep that person.

People who demand a $15 minimum wage for low-paying jobs are clueless. They don’t understand the only way to be paid $15 is to do a job that earns more than $15 an hour for the company. If the investment in an employee does not produce more than the cost, then the position is not necessary.

Asking for more pay without giving the employer more results is a losing battle for everyone. What are they thinking? They don't understand how it works.

That's why we have this issue in political discussions. The minimum wage advocates don't understand how finances work. I'm afraid we will see a lot of layoffs whenever lawmakers increase the minimum wage.

The only real solution, other than automating the low-wage tasks, is to educate the employees, so they learn how to earn more money. Then their salary will naturally increase without the need for an artificial minimum wage.

How People Misunderstand Why They are Hired

When I ask people what the purpose of their job is, they usually answer, "To support my family."

They either misunderstand the question, or they don't know why companies hire people.

It should be no surprise that it's to benefit the employer. Their emphasis is always on increasing their revenues.

I have spoken to a few people who are out of work and who have received job offers. They turn the offers down, and I ask why.

They tell me the pay is too low and they deserve more. They won't work for less than what they feel they deserve.

When I hear that, I ask what the value of their work is on a per-hour or per-day basis. I never get a straight answer. They simply don't know.

Then I ask them if they feel they can make more money for their company than they ask for in salary. Most people don't understand that question. They think I'm crazy for suggesting that they should give more to their employer than they would get in salary.

Think about that for a moment. These people feel it's owed to them. I wonder where they get that idea?

Another experiment I try is asking people to evaluate their performance on the job. I ask if they feel they are compensated well for their performance.

I'm shocked to hear some people tell me that they don't want to work harder until they get paid more.

It doesn't work that way!

I hired people in the past for my business, and I consider it an investment in the company. When an employee's job performance brings in more than their compensation, I give them a raise.

Raising the minimum wage without considering one's performance capability isn't a solution. If the minimum wage is higher than the value the employee can achieve for the company, then they would not be hired in the first place.

Companies Need to See a Return on Their Investment

I guess I am biased because so many people have told me they won't work hard until their boss gives them a raise. It just doesn't work that way!

An employee is an intangible asset to the company. We cannot necessarily place a monetary value on their knowledge and experience, but being an investment, they need to produce more income for the company than they are paid.2

The management needs to see a return on their investment. Then they will want to give a raise to keep the profitable employee with them.

Employees need to show their worth to get promotions and raises. If they genuinely believe that they are worth it, they should prove it.

But there are indeed legitimate problems with corporations too. It's not just capable workers who want more than they deliver. Big corporations need to straighten out their act also.

People need to show their value to the boss.

People need to show their value to the boss.

Will Raising the Minimum Wage Cause Prices to Go Up?

The reduction of regulations that President Trump promised and fulfilled has made it easier for companies to do business and hire more people in the United States, rather than outsourcing labor.

Unfortunately, some politicians still favor increasing the minimum wage without concern for the consequences. Small businesses that survive on thin profits will have to raise prices to cover the higher labor costs.3

How Does Minimum Wage Affect Unemployment

Raising prices is not a feasible solution in the long run. Either of two things can go wrong.

  1. Companies that can't survive under these condition might consider outsourcing to hire personnel in other countries. That could drag down the quality of the products and support.
  2. Raising prices to cover higher wage costs might lose customers. That would in effect require less personnel and a need to lay off some workers.4

Either way, employees are the ones who lose out.

How Does Outsourcing Affect American Workers?

The other day I called a particular company for support of a product I had purchased. My call was routed to a support rep. I asked the lady where she was located since I detected an accent. She said she was in India.

The technology we have today allows hiring business support personnel overseas to handle customer's phone inquiries. The problem with this is that companies do not hire American citizens for these jobs.

Outsourcing to China is another example. According to an article in US News & World Report, that has cost 3.2 million jobs in the U.S. from 2001 thru 2014 alone.5

What About Over-Qualified Personnel?

I personally have known people who refuse to take jobs that pay less than their previous employment. That is indeed another problem when one is considered over-qualified.

They feel they deserve more. I do not doubt they do, but I think it's better to take a job at less pay if it helps pay the bills.

If things work as expected, it will lead to a raise when their talents are recognized, and management notices that they generate more income for the company.

It doesn't matter if we are talking about $15 an hour or $100 an hour. The fact remains that the employee needs to earn more than his or her wages for the company. If they can't achieve that, then there is no point in hiring that person. As I said, it's an investment.

The Problem With Overpaid CEOs

Since hiring people is an investment, that should go for the CEO too, in my opinion.

CEOs should deliver more than they earn! The salary the company pays these top managers should also be considered an investment. If top management personnel fail to make a profit, they should not get more than they earned for the business.

The Problem With Government Agencies

Government agencies often hire people at a specific wage without considering if it's profitable.

They don't think like a business. They don't care to control spending and don't focus on profit because they can always raise taxes to cover the loss.

Final Thoughts and Opinion

It's clear that corporations need to show a profit, and no one should complain about that because that's what creates jobs. But corporations should consider the need to provide training for newly hired personnel. Many large corporations already do that.

Here's a solution. The government should motivate companies to provide training to employees by rewarding them for offering such an employment benefit. That could be done with a reduction in taxes, or a tax credit for offering on-the-job training that moves people into higher income brackets.

That will motivate companies to hire personnel even if they don't start off having complete knowledge of the work. With proper training provided by the employer, workers can be taught to offer more value.

I see no reason why any company in their right mind would hesitate to increase wages once they see a return on their investment.

References

  1. Norm Brodsky. (March 2016 Issue). “Beware the Consequences of a $15 Minimum Wage” - Inc Magazine
  2. Peter Georgescu. (June 13, 2018). “Your People Are Your Future” - Forbes
  3. James Sherk. (January 19, 2017). “$15 Minimum Wages Will Substantially Raise Prices” - The Heritage Foundation
  4. Jack Kelly. (July 10, 2019). “The Unintended Consequences Of Raising Minimum Wage To $15” - Forbes
  5. Katherine Peralta, Staff Writer. (December 11, 2014). “Outsourcing to China Cost U.S. 3.2 Million Jobs Since 2001” - US News & World Report

This content reflects the personal opinions of the author. It is accurate and true to the best of the author’s knowledge and should not be substituted for impartial fact or advice in legal, political, or personal matters.

© 2011 Glenn Stok

Reader Comments

Glenn Stok (author) from Long Island, NY on November 05, 2011:

Fuller-Life, I agree with you that politicians are focused on being reelected. That's the main reason why they don't do things right. But I am also thinking that if we had a businessman or businesswoman in the white house, they would know how to fix the economy. But who knows, even a business understanding may be put aside if they just want to be reelected. You do have a point. It's sad, Isn't it?

Thanks for reading and adding your insightful comment.

Fuller-Life from Washington, DC on November 05, 2011:

Glenn, I don't think politicians are uneducated and lack the knowledge to do things right- They are. They know what to do, but they wont do it. They care more about being elected. Look at how they are fighting funding towards education and health? It's because they can afford private surgeons and send their children to better schools and international exchange programs, that they don't care about the rest of us. I have never seen any developed country that doesn't invest in infrastructure that is able to stand for long. We are in trouble with this ill founded ideological fight!

Glenn Stok (author) from Long Island, NY on October 25, 2011:

ktrapp, Education and Healthcare are both broken and need to be fixed. It's sad that these things are left to deteriorate in a country as great as America. It won't be great for long if these problems aren't fixed soon. You're so right that these two things also affect unemployment.

Kristin Trapp from Illinois on October 25, 2011:

Like most problems in this country, when you start to peel away the layers to get at the root cause of the problem, in this case outsourcing, you realize there are multiple failures that have resulted in the problem. And some of these causes may have started years before the problem, making it difficult to unravel.

I for one, just wish it would all get fixed. I think our education system is lagging, but the cost of a college education is absurd; our healthcare costs have skyrocketed, yet we seem sicker than ever; as a nation and world we embraced the internet and technology, yet as unemployed Americans we lament that people a world away can take our jobs. I think outsourcing is a big conglomeration of unanticipated problems from years past, and fixing it is going to be difficult.

Glenn Stok (author) from Long Island, NY on October 25, 2011:

Ktrapp - Thank you for expressing these additional issues. I have to totally agree with you. The entire picture is more complicated than any single item. The issues you mentioned are definitely part of the problem too.

Kristin Trapp from Illinois on October 24, 2011:

I think an additional issue is the cost of benefits which is a huge cost to businesses, making it more affordable to outsource. And because the cost of living for Americans is so much higher than in places where outsourced workers live, it makes it difficult for Americans to accept jobs that just aren't enough to pay the bills.

I also know several people in the IT field and they have told me that they try to hire locally for their American firms, but they hardly even get any applicants. So, in many instances they have no choice but to outsource. I think the blame for this may be with the education system in the U.S.

Glenn Stok (author) from Long Island, NY on October 24, 2011:

@Fuller-Life - Very good points you made. That may very well be part of the problem... Americans don't take those jobs so they get outsourced to other countries. As for lower pay to the disabled, I think the reasoning is that their disability slows them down. So the payment still needs to be in line with the quantity produced. At least they appreciate the dilemma and accept it.

Fuller-Life from Washington, DC on October 24, 2011:

Excellent layout of the argument Glenn. I agree with you on the need to try to employ Americans. But if Americans can't accept lower but reasonable pay, I don't see any justification why a company can't outsource. Also, I think it's wrong to underpay disabled people when they can do administrative work just as well as the able bodied. I'm convinced that profit is as much a moral issue as it is political.