Chicken and egg economics

How many times have you heard this argument with regard to the minimum wage?

If employers pay employees more, then they’ll have more money to spend, and that’ll make the economy better.

What came first: the revenue or the wage?

It sounds good to say paying employees more will stimulate the economy. But it isn’t that simple. For one businesses need to have the money, the revenue, to cover the increased labor expense. In other words, the revenue comes first. This is why chain stores will close or cut back at under-performing locations.

Forcing a higher minimum wage on businesses that don’t have the revenue to cover it will result in lost jobs as a result. Minimum wages are price floors, and the economic effects of price floors are well studied and easily demonstrable. Price floors price out market participants and result in an increased surplus of whatever is effected. Minimum wage hikes, then, result in a greater surplus of labor.

And there’s also wage push inflation, also called cost push inflation, in which companies raise prices to cover higher minimum wages, as opposed to paying more or hiring more people due to increased revenue and demand for their products or services.

A lot of the arguments in favor of hiking the minimum wage presume the business owner can just absorb that new cost. As if all businesses are sitting on bottomless buckets of cash, or have a supply of revenue sufficient to cover a wage hike, and it’s just greed keeping those companies from paying more to their employees. Except as I’ve pointed out, with Wal-Mart of all companies, that’s just not true.

Along with this is another common argument that I also recently rebutted on Twitter in which someone said that, paraphrasing, companies could pay their employees a living wage if every C-level executive took a pay cut. Yet, as I’ve also pointed out with regard to Wal-Mart, the math just doesn’t work out.

The person in question spoke specifically of Amazon CEO Jeff Bezos and the fact he’s worth billions, but Bezos’s cash salary was only $1.6 million in 2017. The rest of his compensation, and the vast majority of his net worth, is stock which has no cash value unless sold. If he took home no cash salary and that was instead divided up against all other employees, how much would they all get? Not even enough to buy a cup of coffee at Starbucks.

So in the riddle above, revenue obviously must come first. Typically a company won’t hire on employees or raise wages unless they can afford it. And they’ll only do so within what they can afford. And the math determines if they can afford it. So if you force it on them by mandate of law, especially by a significant margin over the current minimum wage, you’re going to see diminished hours, layoffs, and businesses shutting down.