Economic Thought Question #1
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 unbelievable 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?
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. Assume that they all work 40 hours per week. 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 provide its associates with 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, 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 $15.2 billion. Quarterly it represents $3.8 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. In other words, if Wal-Mart raised its prices by 7%, it could give one million hourly employees real jobs.
Wal-Mart could cut $4 billion in fat 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. Wal-Mart could move one million American employees to real jobs offering reasonable pay, medical benefits and a paid vacation with either of those options.
Let's split the difference. Wal-Mart raises its prices by 3.5%. That means that a can of Chunky Soup 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 in the same way 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 our nation.
A Hypothetical Company
Let's look at this same question another way. 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 roughly $4 million per person.
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.
Why has pay gotten so skewed. Why are executives making millions of dollars in America while rank and file employee wages push toward minimum wage and no benefits? Why have executive salaries risen by a factor of 10 in the last 20 years while employee wages are stagnant? Why has the real value of the minimum wage been falling?
The average CEO of a large corporation now makes between $10 million and $20 million per year. Since 1980, CEO salaries have risen by a factor of 10, and that same trend is increasing all executive compensation. [ref] [ref]
Every day, you participate in this pathological concentration of wealth. You wake up in the morning to the sound of your GE clock radio. If you go to the Executive Paywatch system and look it up, you will find that the CEO of GE is concentrating wealth as best he can:
In 2001, Jeffrey Immelt raked in $37,529,356 in total compensation including stock option grants from GENERAL ELECTRIC CO.
The radio station that's playing when the alarm goes off is owned by Clear Channel Communications. Its CEO is not doing too badly either:
In 2001, L. Mays raked in $21,218,241 in total compensation including stock option grants from CLEAR CHANNEL COMMUNICATIONS INC. And L. Mays has another $13,137,890 in unexercised stock options from previous years.
You step into the bathroom and use your American Standard toilet. The CEO of American Standard made $11 million in 2001 and has $32 million in unexercised stock options. You wash your face with a bar of Ivory soap made by Proctor and Gamble. The CEO of P&G made $13 million in 2001. You shave with your Gillette razor. James Kilts, the CEO of Gillette, made $31 million in 2001. You step out of the bathroom into the kitchen and open the refrigerator, made by Whirlpool. The CEO made $7 million in 2001. You take out the Tropicana orange juice and pour a glass. Tropicana is owned by Coca Cola, the CEO of which made $105 million in 2001. You grab a Kellogg's Pop Tart. The CEO of Kellogg got $9 million. On the kitchen table is your Dell Laptop. Michael Dell made $15 million in 2001 and cashed out $80 million in options. You look at the news on Yahoo, the CEO of which received $61 million. You get into your Ford truck to head for work. Ford's CEO made $16 million. For your morning coffee you drive to Starbucks, where the CEO made $12 million. You stop for gas at Exxon, the CEO of which made $39 million. [ref]
You have only been up an hour, and you have already touched products that send billions of dollars to these CEOs and their executive teams annually. But what choice do you have? You need a clock radio, and you are going to buy it from a corporation. You need a toilet, you need a refrigerator, you need a computer and you need gas in the car. All of the corporations have CEOs, and these CEOs have decided amongst themselves that they will each make tens of millions of dollars every year. Twenty years ago they made a tenth of that -- their salaries are rising that fast.
If a CEO is making $20 million a year, that $20 million does not fall from the sky. It comes directly from consumers by charging them higher prices, or from employees by paying them lower wages, or both. It is a redistribution of wealth. Money leaves your pocket to pay the CEO and the entire "senior management team."
This is happening for a simple reason.
CEOs, executives and board members are all interconnected with one another. The CEO and executives of one company serve on the boards of directors of others. This executive network has an unexpected consequence because it means that the members of the network all have a vested interest in helping each other. The network of wealthy individuals forms a tightly interwoven "rich club," where all of the members have relationships with everyone else in one way or another. This rich club is where exploding executive salaries come from. Here is how the system works.
Let's say you are a wealthy individual. You are the CEO of a company, and you sit on three other boards of directors in other corporations. When your salary comes up for a vote at the next board meeting, the board is going to be generous. Why? Because all board members know that when their salaries come up for review, they want you (and the other people in the room) to be generous as well. The rich club creates a gigantic, "I'll scratch your back if you'll scratch mine" web that is working across thousands of people who are all interrelated by their interlocking relationships.
It doesn't really matter what the CEO is asking for:
If the CEO is asking for a pay raise, he/she usually gets it.
If the CEO is asking for a new jet, he/she usually gets it.
If the CEO is asking for a better retirement package, he/she usually gets it.
For example, Jack Welch (former CEO of GE), whose recent divorce made public his "perks-for-life retirement deal" from GE, was found to be receiving a $9 million annual pension, a $15 million Manhattan penthouse plus use of corporate jets, helicopters and limos. "After [Welch] cut his deal with GE six years ago, compensation pros were quick to dig his new contract out of SEC documents shareholders rarely scrutinize. Soon CEOs were waving Welch's deal in front of their own boards, demanding similar treatment, pay consultants and corporate directors tell NEWSWEEK. While no CEO admits to mimicking Welch's contract, the executive elite began getting similar deals. IBM's then CEO Lou Gerstner renegotiated his contract to extend his perks for 20 years after retirement. Larry Bossidy, the former Honeywell CEO, cut a perks-for-life deal, which he says is much less generous than Welch's. Emerson Electric's former CEO Charles Knight-who approved Gerstner's deal as an IBM director-got his perks extended 15 years beyond retirement. 'Jack's contract became the gold standard,' says one pay consultant." [ref]
Another example comes from Enron. One particularly obscene expenditure by Enron was the purchase of its seventh private jet. Enron's Gulfstream V cost $41.6 million and was purchased in early 2001. At the time, Enron was reporting losses approaching $500 million per quarter. The plane was not necessary -- the company already had six jets. The Gulfstream V, however, has the ability to fly without refueling to Europe, making it an executive status symbol. So the board of directors approved the purchase and Enron bought the plane as the company sped down the tracks toward bankruptcy. The fact that the company was already losing $500 million that quarter did not stop it from wasting another $41 million more on the jet. [ref]
Why would Enron's board of directors do that? The board of directors is supposed to be looking after the best interests of the corporation as a whole. But each board member, like most people, is most of all looking after his/her own best interests. His/her own best interests are to say yes to almost anything another executive wants, because then those executives will say yes to the board member when he/she asks for something. In addition, someone who says "no" a lot is not going to last very long in the rich club.
This is a system that guarantees that the rich will get richer and richer. Everyone in charge of approving salary increases has a big incentive to say yes to every request. This system explains why executive pay has risen by a factor of 10 in the last 20 years. All the members of the rich club are stroking each other checks and favors all the time to keep the network running. Even better, the members of the rich club don't have to pay for any of it -- consumers pick up the tab through higher prices, or employees through lower wages.
The kind of networking seen in the rich club starts in college. Places like Harvard and Yale bond alumni together into cohesive groups that do each other favors. For example, a graduate from Harvard can call any other Harvard graduate, and the fact that they both went to Harvard virtually guarantees that the called party will pick up the phone and listen to the pitch. Yale graduates are issued a leather-bound alumni directory at graduation to help the process along. "These alumni can provide access to hard-won interviews, 'lobby' for worthy students, and provide as well hands-on information about career opportunities, job openings within the industry, and advice about interviewing (such as commenting on a firm's corporate culture)…. According to London Business School, the typical MBA graduate changes jobs within 24 months. Thus, the alumni network becomes vital in isolating those firms looking to replace senior managers or otherwise hiring mid-career MBA grads." [ref]
This kind of networking is also hereditary. Any private college will accept almost all "legacies". If your mother or father went to Harvard, you are likely to get into Harvard automatically through the legacy system. That plugs you right into the rich club. It is affirmative action for rich people.
The three problems with this system are obvious:
It is a positive feedback loop. No one in the rich club who has anything to gain by cutting executive salaries. Therefore, executive salaries and benefits rise while millions of others make minimum wage or close to it and get no benefits.
As executive pay increases, it gives the executives more and more power. They have more money for campaign contributions, lobbyists and lawyers.
It is not the members of the rich club who pay the bills. All of these salaries, severance packages and jets cost money, and the money has to come from somewhere. You and I are paying the bills, and the level of largesse within the rich club grows constantly.
Is this what the founding fathers had in mind when they created this nation? No -- the aristocracy is what the founding fathers were fighting against.
Points of Wealth
When the CEO is making 1,000 or 2,000 times more than most of the employees in the company, there is no way for rational people to justify the imbalance. For example, at a fast food restaurant like McDonald's you have thousands and thousands of people working for minimum wage. Standing on their backs is a small group of people making hundreds or thousands of times more than minimum wage. The CEO is making $15 million a year. There are thousands of executives making millions more. There are key shareholders who make immense amounts of money from the stock dividends. Let's call these people Points of Wealth.
The problem with Points of Wealth is that their wealth gives them far more power and influence than a normal person has. Our political and legal systems have aligned themselves with the interests of these well-off individuals in a way that the founding fathers of the United States would find impossible to imagine. Through campaign contributions, $1,000-a-plate fundraising dinners, expensive lawyers and lobbyists, a person of wealth in the United States can gain direct access to the political and legal systems. These systems then respond to their requests, changing laws and policies to benefit the wealthy. The interests and needs of the non-wealthy are abandoned in the process.
The question to ask ourselves is this: What is the advantage to society in creating these Points of Wealth? Does anyone benefit from the process? If you have hundreds of thousands of people working for minimum wage at McDonald's and a small group of executives siphoning immense salaries off of their diligence, is anyone better off? Yes, the handful of executives -- the top 10% of the U.S. population -- are better off. They live in god-like opulence. But the other 90% -- do the citizens of the United States gain any benefit from having these super-rich individuals corrupting the political and legal systems with the power that their wealth brings?
I would like to suggest that the answer to this question is, "no". I would like to suggest that it is time for We, The People, to recognize what is happening and demand an equitable distribution of the wealth of this nation.
One way to do this is to heavily tax executives and shareholders making more than $500,000 per year. Those taxes would not go to the government, but instead flow to every American citizen through a central account. In this way, each citizen shares in the wealth of the nation.