Friday, May 22, 2015

An Innovative Minimum Wage Law In Los Angeles?

By Keenan Mann

Imagine for a moment that you are in need of a new pair of running shoes.  You know of a strip mall that has two shoe stores so you get in your car and make the short drive.  The first store, Uncle Sams's Sports, is closer to where you parked, so start there.  When you walk in you're greeted by the manager who asks if he can help you.  You politely tell him that you're looking for a pair of running shoes but you also indicate that you'd like to browse on your own.  After ten minutes or so of looking at display models, you zero in on a shoe that isn't quite what you were looking for from a functional standpoint but is aesthetically pleasing.  Then you flip the display model over and discover the pair is priced at $60 more than you expected.  So you replace the shoe and proceed towards the exit, intending to visit Freedom Footwear, which is two storefronts down. As you pass by the register, the manager asks if you've found everything okay. You tell him you found a pair you liked but since the price was more than you wanted to pay, you were going to Freedom to see what they had to offer.

At that point the store manager tells you that you are not allowed to do that and insists that you retrieve the shoes you liked, bring them to the register, and complete your purchase.  When you try explaining again that price is more than you want to pay, the clerk informs you that, by law, you must make the purchase.  He goes on to explain that he has overhead to cover (it turns out he's the owner too).  He says to you, "There are employees to be paid, the rent is due, and I have to pay myself a salary too.  That's why we worked so hard with our city council to get a law passed that forces people who come into our stores to buy our products at council-approved prices."  He goes on to tell you about the three kids he has to feed and the fourth on the way and explains to you that it's your duty to help him with these things.

You tell him that while you certainly appreciate his situation, having one of your own, you don't believe you have any obligation to support him.  You say to him, "I'm just here to buy a pair of shoes and I'm perfectly fine with your store deriving a benefit from our exchange but please understand that is not my primary objective.  In fact, it is not among the very short list of objectives I have in this regard.  I know you have a store to run, but I have my own budget to manage and purchasing these shoes from you at this price is inconsistent with my budgetary objectives."

You bid him good day and leave the store, not realizing or caring that there are surveillance cameras everywhere.  A few days later you receive a letter from the city government regarding your shoe shopping incident. It seems you have broken the law and the city has levied a fine in the exact amount of the purchase price which will start accruing interest in 30 days.  You've barely had time to recover from the shock when you notice protesters on the sidewalk in front of your house.  It's the store manager and some of the workers, all holding signs that read, "Uncle Sam Wants You to Buy His Shoes".

Sounds silly right?  You can't be forced to buy something at a price you don't agree to right?  But that's exactly what minimum wage laws do.  They force businesses to buy labor at prices they might not otherwise pay.  There is no difference, in other words, between the shoe shopper and the labor shopper.

Of course, those who favor legal minimum wage mandates argue that the wage thresholds are necessary to lift people out of poverty and pay them living wages.  And while that sentiment is noble, it is misguided  (more on that point in a separate post) and it places a responsibility on the businesses in question that is well beyond reason.

The business owner doesn't open a store to help people raise families and escape poverty.  He does it so he can make a living.  If others are able to make a living and raise families, that is secondary benefit.  If those same others need to make a living and raise families off their wages and they can't convince the business owner to make the necessary adjustments, they should sell their services to a business willing to pay them what they desire, if they can.  In the end, if the business owner is unable to attract labor at the wages he is offering, he will have to raise his wage levels or go out of business.

That's how it works.  But someone forgot to tell that to the city council members in Los Angeles. According to an LA Times article, they recently voted to raise the minimum wage to $15.  The plan is to have the $15 phased in by 2020.  But on top of that, by 2022 the minimum wage will be indexed to inflation, which means as prices rise the minimum wage will rise automatically.

The problems inherent in that approach seem obvious.  The story's author even pointed out that, "Autopilot inflation adjustments will exacerbate price increases across the board at....The higher prices would in turn push up inflation measures, resulting in a never-ending spiral of wage increases".

But University of Washington Professor Martha Klawitter saw the inflation indexing arrangement as an obvious solution rather than a problem as she said, "This is a way to allow the minimum wage to respond directly to the economy, to adapt to the current conditions automatically without requiring the political process to intervene."  Mrs. Klawitter seems a bit confused about what market forces are and how they differ from governments mandated wage hikes.

She might want to get barbecue shop owner Todd Schwartz to help her bone up on real world economics as he explained it very succinctly with the following, "Wages don't come from me; they come from the customer.  What is the most you are willing to pay for a barbecue sandwich?"

Todd Schwartz for City Council President!


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