Economic Thought Question
What if we doubled the minimum wage?
by Marshall Brain
Today's thought question is a simple one: What would happen if we doubled the minimum wage?
Trillions of dollars flow through large American corporations, and executives are making remarkable amounts of money. Executive pay has risen by a factor of 10 in the last 20 years and shows no signs of slowing down [ref, ref, ref]. Meanwhile, the wages of rank and file employees are stagnant. Given all the money available, why is it that companies like Wal-Mart, Home Depot and McDonald's pay their employees so little and give them so few benefits?
Imagine a hypothetical company with 20,100 employees. At the top are 100 executives who pay themselves an average of $4 million per year. The other 20,000 employees make minimum wage -- $5.15 per hour -- for 2,000 hours per year of work.
Those executive numbers sound top-heavy, but today they are not. Executive pay truly has been rising at a spectacular rate. For example, when Enron collapsed it had about 20,000 employees. According to the book Pipe Dreams by Robert Bryce:
"Enron filed documents in bankruptcy court that showed total cash payments of $309.8 million to a group of 144 top Enron executives during 2001. In addition, those same executives cashed in stock options worth $311.7 million."
That's more than $4 million per executive across 144 executives.
So in our hypothetical company, we have 100 executives making $400 million per year. We have 20,000 employees making about $200 million per year. If we simply cut the average executive pay from $4 million per year to $2 million per year, we can double the pay of rank and file employees in this company.
Could the executives manage to survive on $2 million rather than $4 million? Yes, they could. They could also survive on $1 million a year, or $500,000. Their pay is completely arbitrary. It has risen by a factor on 10 in the last 20 years -- In 1980, these same executives would have been making $400,000 instead of $4 million.
A common complaint about doubling the minimum wage is that it is "inflationary." The point of this example is to show that employee wages can be doubled without raising prices at all. Executives are now redistributing wealth from employees to themselves at such a remarkable rate that employee wages have fallen considerably. Simply by reversing this concentration of wealth, employee wages can rise to reasonable levels without changing consumer prices.
A Real Company
Wal-Mart is the largest employer in the United States and provides a real-world example of the situation. Wal-Mart has 1.3 million "associates". A large portion of these associates are paid hourly, at close to minimum wage. [ref]
The next time you go to a Wal-Mart store, talk to the associates. When I go to the Wal-Mart store closest to me in Cary, NC, I am greeted at the door by a friendly person who is at least 50 years old. The associates who work at Wal-Mart are not kids -- they are adults. They have families. They are good, hard-working people from all backgrounds.
For the sake of this discussion, assume that Wal-Mart pays one million of its rank and file associates $7.50 an hour right now. These are the employees who work in the stores, stock the shelves, man the cash registers, sweep the floors and so on.
Let's say that we changed the following:
Wal-Mart pays the associates $12 per hour instead of $7.50 per hour.
Wal-Mart provides associates with health benefits. Wal-Mart will allocate $400 per month per employee for that.
Wal-Mart provides associates with two weeks of paid vacation per year.
Four hundred dollars per month, spread out over 160 hours per month, represents about $2.50 per hour. Two weeks (10 days) of paid vacation represents about 50 cents an hour. So, in monetary terms, Wal-Mart would be paying its associates $15.00 per hour rather than $7.50 per hour.
In other words, by doubling the amount of money paid per hour to employees, Wal-Mart can give its associates jobs that pay $12/hour, provide health benefits and offer 2 weeks of vacation time every year.
Would this cripple the company?
To answer that question, you can look at Wal-Mart's financial statements on a site like http://finance.yahoo.com. Here are the quarterly numbers reported by Wal-Mart for 2002:
Total Revenue is all of the money Wal-Mart makes in a quarter. You can see that Wal-Mart is currently averaging about $60 billion per quarter, or $240 billion per year (that equals roughly $2,400 per American household).
Cost of Revenue is the money that Wal-Mart has to spend to make that $240 billion per year. It represents the wholesale cost of everything Wal-Mart sells plus other expenses that vary with sales. It is averaging $47 billion a quarter, or $187 billion a year.
Gross Profit is Total Revenue minus Cost of Revenue -- about $53 billion a year (equaling about $530 per American household).
Selling, General and Administrative includes the CEO's salary and benefits, the "senior management team" salaries and benefits, executive salaries and benefits, the corporate headquarters, the ad budget and so on -- about $40 billion a year.
Operating Income is the profit before taxes -- about $3 billion per quarter or $13 billion per year (equaling about $130 per American household).
We are assuming that Wal-Mart has one million hourly associates making $7.50 an hour for 40 hours a week, 50 weeks a year. We want to move the associates to $15.00 per hour. That extra $7.50 cents per hour, over the course of a year, represents $15 billion. Quarterly it represents $3.75 billion. Let's round it up to $4 billion per quarter to take FICA and other odds and ends into account.
There are two ways to look at that $4 billion quarterly increase in associate pay:
The first way is to compare it with the $10 billion that Wal-Mart is currently spending on Selling, General and Administrative plus the $3 billion per quarter in Operating Income. Spending $4 billion per quarter to double the wages of one million associates is a small amount of money compared to the $13 billion the company is already spending on things like ads, executive salaries, corporate jets (Wal-Mart has 20 jets) and dividends.
The second way is to compare it to the $60 billion in Total Revenue that Wal-Mart makes every quarter. Four billion dollars is about 7% of the total revenue. If Wal-Mart raised its prices by 7%, it could give one million hourly employees $15/hour.
Wal-Mart could cut $4 billion out of Selling, General and Administrative and Operating Income. Wal-Mart could eliminate its 20 jets, cut the CEO salary by a factor of 20, cut thousands of executive salaries in the same way, cut back on the $1.3 billion/year in dividends and so on. Prices would not have to go up at all, and Wal-Mart could double the pay of one million associates. Or Wal-Mart could increase its prices by 7% and double their pay in that way.
Let's split the difference. Wal-Mart raises its prices by 3.5 percent, and executive pay and perks are reduced by $2 billion. That means that the price of a can of Chunky Soup at Wal-Mart goes from $1.49 per can to $1.54 per can. Would anyone really care? Several major grocery store chains routinely charge $1.99 or more for a can of Chunky Soup and no one appears to care at all. [a survey of the four major grocery chains in Raleigh, North Carolina found the price of a can of Chunky soup ranging from $1.99 to $2.50 per can. At Target the price was $1.69 per can. At Wal-Mart the price was $1.49 per can.]
Now imagine that we did the same thing across the board, doubling the wages at McDonald's, Target, Home Depot, Toys "R" s, etc., etc.
If a $500 tax rebate stimulates the economy, imagine what an extra $700 per month plus health benefits plus paid vacation for millions of employees would do for the economy, and for the spirit of our nation.