Kelly Bullis: Here’s the problem with minimum-wage hikes

Talking about hiking the minimum wage has become the rage in Washington, D.C. One has to wonder if this is a calculated political move to take the focus off the failures of Obamacare for the elections this fall. I asked one of our staff members who used to own several businesses to help me write today’s column. Without further ado, here is what Toby Tatum says …

“For 22 years I was the owner of six restaurants employing 275 people and serving one million customers a year. Many times over those years I had to contend with increases in the minimum wage.

Current discussion of increasing the minimum wage brings two pictures to my mind’s eye: the ripples in a pond from a thrown stone and a hamster on a treadmill.

First of all, the only employees I paid minimum wage were new hires as dining room servers. Typically they were moved up a little if they could last through the first month or so. The servers never earned much above the minimum because they earned tips and their total gross income was always about equal with the highest-paid cooks and sometimes higher than that. But when the minimum wage went up, there was an expectation and a need for me to maintain relative wage parity, which is to say that if the minimum wage went up, say, 24 percent (as currently contemplated), then all my employees got a raise. Those closest to the minimum got somewhat larger percentage increases than the highest-paid cooks, but everyone got a raise. The increase had a “ripple-in-the-pond” effect because all employees, including the managers, moved up some.

But, simultaneously, my menu prices went up by the same average percentage increase in my labor cost. Moreover, this same reaction occurred in businesses across the country because the ripple-in-the-pond effect pushed up the wages of workers earning amounts even north of $50 per hour.

The federal minimum wage in 1990 was $3.80 per hour and the consumer price index was 130.7. Today the minimum wage is $7.25 per hour and the consumer price index is 232.95. So the minimum wage has increased 90.8 percent and the CPI has increased 78.2 percent. Although these increases don’t track in lock-step, they are close. This predictable phenomenon reminds me of the hamster on a treadmill. When the government increases the minimum wage, retail prices usually rise in approximately the same percentage to leave consumers’ purchasing power at approximately the same level. (They make more in wages, but everything costs more.)

Besides an increase in retail prices, many workers may either lose their jobs or have to work harder for fewer hours. For example, in my case my employees served 4.25 customers per labor hour on average. My average revenue per customer was $8 and my labor cost was 18 percent of revenue. Assume the minimum wage was increased by 24 percent. Further assume that for whatever reason I could not or would not increase my prices. Then, in order to maintain a labor cost of 18 percent, my labor productivity would have to increase to 5.27 customers served per labor hour — a 24 percent decrease in labor hours. In other words, the net effect of an increase in the minimum wage will be a combination of price increases for everyone and expected increased productivity in the form of reduced labor hours for some! This is the way it always works out.”

Thanks, Toby. I’m thinking that if Congress votes to increase minimum wage, we better batten down the hatches and prepare for some serious inflation.

Kelly Bullis is a certified public accountant in Carson City. Contact him at 882-4459, or on the Web at BullisAndCo.com