One of the biggest disagreements in economic policy revolves around the “living wage.” Most presidential candidates in the Democratic Party want to raise the federal minimum wage to $15 per hour, as it is considered a “living wage.” On the other hand, Andrew Yang wants to allow states to determine their own minimum wage and implement a basic income on top of that. Bryan Frew, CPA explains how each policy changes business decisions for large corporations and small businesses.
It is impossible to be content with the vast wealth in this country when extreme poverty is often only a few blocks away—the success of a society should be judged on how well its least fortunate members are doing. Workers want higher wages, and many believe corrupt corporate practices keep wages down out of greed and lack of morality. While it is true that many businesses exist to turn a profit for their shareholders, it is a more complex issue than what the current Democratic presidential candidates lay it out to be.
The candidates agree that the best way to help people out of poverty is by redistributing the wealth accumulated by the top earners. Both the minimum wage increase and the Freedom Dividend seek to address that issue.
The federal minimum wage is currently $7.25 per hour. Nearly half of the United States (including Republican-controlled states) enforce a minimum wage higher than what is mandated. With a full-time schedule, $7.25 per hour translates to around $15,000 per year. This is not enough to live on for a single person, much less support a family.
Senator Bernie Sanders is the loudest advocate of raising the federal minimum wage to $15 per hour, or what he calls a “living wage.” But mandating companies to raise the minimum wage to $15 per hour will not have the desired effects promised—minimum wage is not designed to be a living wage. Employers hire teenagers that have busy school schedules and work strange hours. There is often a different level of productivity between a 16-year-old that wants gas money and a father working a part-time job on weekends to pay make ends meet: Teenagers working for supplemental income tend to be less productive than someone working to survive.
Because minimum wage jobs tend to be jobs people take for extra cash, the minimum wage does not need to be a living wage. There are millions of workers taking jobs without the goal of earning a living wage: Some want to supplement their income, some are working through school, some are just bored.
Employees are hired to help make their company profitable; low wage workers often say that their boss is using them just to make money. That should not come as a surprise. If your boss wasn’t making money off of you, why would she keep you around? With larger corporations, the owner of the company generally answers to a corporate board, and the board expects the company to generate a profit.
While corporate boards are not necessarily evil, they do not exist to advance humanity. The boards exist to show their shareholders what a good investment their company is. And corporations hire brilliant people to make sure that happens. Companies want to maximize revenue and control costs. Employees are hired to generate revenue or save costs. If that wasn’t the main purpose of hiring, the business would close after a short time.
The United States has the greatest economy in the history of the world because of the innovative brainchildren of our brightest residents. It is not “evil” to fire an employee that costs more than they generate or save; it is common business sense. Small businesses innovate while big businesses produce goods and services very efficiently. Both are necessary in a high-functioning economy.
Having 50% of our workforce in small business is the envy of the world. The US leads the world because of small businesses; half of the jobs in the United States are working for businesses that employ less than 500 total workers.
Unfortunately, the number of small businesses is shrinking due to heavy government regulation. While government regulation is necessary to create a stable business environment with well-understood expectations and boundaries to operate in, over-regulation kills small businesses. Compliance costs money, and small businesses don’t have the resources to pay to comply with over-reaching regulations. They don’t have money printing machines in their basement, so they fight for every dollar. They cannot afford to keep workers that cost more than they are worth to the bottom line, as bad as that sounds. That means that they must find ways to cut costs to survive.
The same concept applies to minimum wage increases. Big companies and small companies alike create a budget for the upcoming fiscal year. If minimum wage increases, companies would need to modify their budgets to accommodate the new expenses. If wages are higher than the prior year, the company can either generate more revenue, or cut costs to achieve the profit their investors expect. Make no mistake, these companies have brilliant people proposing all kinds of creative ideas. But if a company cannot afford to pay somebody, he or she will most likely be laid off to keep the company within their projected budget.
In contrast, the federal government is quite ineffective when it comes to proposing and producing ideas. For example, Obamacare required companies to offer benefits to full-time employees. Many employers responded by sending workers home when they reached 29.5 hours because the mandated benefits incurred new expenses. Similarly, many employers will respond to minimum wage hikes with budget cuts through layoffs and shorter hours. In other words, the increase in hourly wages may actually result in a lower income for employees.
This is where automation comes into play. Almost every job can be replaced by software, robots, or some other form of technology. The reason tax accountants are still preparing tax returns is because it is more profitable to hire an educated human than it is to develop the software necessary. Some of the technology is already here and others could be developed in the near future. It’s just a cost-benefit analysis away from being put into action. Over time, the cost of technology decreases, and the cost of labor increases. Artificially increasing wages will not do what is promised; it will only accelerate automation. Automating jobs is an expensive investment, and only the biggest corporations have the capital. An increased minimum wage does increase wages for unskilled workers but at what cost? It will reduce the amount of jobs, kill small business, and speed up automation. And forget about the 16-year-old getting a job for gas money. Most companies are not going to work around volleyball practice, school, and youth group to pay a teenager $15 an hour.
What’s the answer? The Freedom Dividend effectively takes minimum wage from $7.25 to $13 per hour without crippling businesses. On top of that, the extra untaxed $1,000 per month gives employees more power. More power to take a pay cut to do work they are passionate about. More power to negotiate higher wages because they no longer need that dead-end job to eat. More power to stay at home and raise kids. More power to enjoy life. A family of four on one income with wages of $15 per hour, the proposed minimum wage would receive about $29,000 after employment taxes. But with the Freedom Dividend, that same family on one income of $7.25 per hour receives $12,000 per adult. Their income is now $38,000 after employment taxes—a 32% increase in cash. Small and local businesses win. Families win. The government lets people make their own decisions. Freedom wins.
We can afford to do this. The Freedom Dividend puts power in the hands of the citizens, not in the government.