Congress' New Minimum Wage Bill: A Jobs Killer?

Do you love your job? Would you love it just a little bit more if the boss gave you a 35% raise? If some members of the U.S. Congress have their way, you just might get your wish.

Last month, Rep. George Miller (D-Calif.) introduced a new bill to the House of Representatives, aiming to raise the federal minimum wage from the current $7.25 per hour to $9.80 per hour by 2014. The upshot: Three years from now, the kid you hire to mow your lawn could be raking in the hourly equivalent of a $20,000 salary. And if that seems generous, then get a load of this...

Papa John doesn't know the half of it
Last week, the Twittersphere was all a-quiver over a comment by Papa John's (Nasdaq: PZZA  ) CEO John Schnatter warning that Obamacare could add $0.14 to the cost of a large pizza at his delivery chain.

And yet, $0.14 is small beans compared to what the Fair Minimum Wage Act of 2012 could do to prices at sit-down eateries. Even as it hikes headline "minimum wages," the FMWA would also increase the amount that restaurant operators must pay their waitstaff.

Currently, "tipped workers" can be paid as little as $2.13 per hour in base wages, plus tips (typically anywhere from 15% to 20% of the cost of a meal). Not all patrons tip, however, and not all of those who do tip well. In a worst-case scenario, waitstaff on a slow night at a restaurant could earn just the $2.13 base salary -- a mere 29% of the regular minimum wage.

That scenario doesn't sit well with some members of Congress, who think waiters should get a base salary at least 70% of the overall minimum wage -- so at least $5.075 per hour, and eventually, $6.86 per hour. The law aims to move rapidly toward this target by bumping up the base wage for tipped workers by $0.85 per year, every year, until it hits 70% parity.

Pause for reflection
After the legislation was introduced, Congress promptly pulled up stakes and went on a five-week vacation. As a result, we have a little time to think this over and ask ourselves (and our representatives): Does this make sense?

If you're a minimum-wage worker, trying to provide for a family of four on an income of less than $15,000 a year -- or a Democratic member of Congress, running for re-election in a stagnant economy -- the answer's probably going to be a resounding: "Yes! More money for me, without any extra effort or more hours worked to earn it? Gimme!"

But turn this picture around, and the answer's not so clear.

Higher wages, pricier pies
For one thing, the Employment Policies Institute estimates that fewer than 10% of minimum-wage workers are single parents supporting children. (Most are teenagers, or married to better-paid spouses.)

For another, consider the case of the Pizza Hut patron. As the teenager slinging his pie begins pulling down $100 a night (assuming $55 in base wages, eight tables worked in an eight-hour shift, $40 a table, and 15% tips), the price of a night out with the family is likely to rise substantially.

Or consider the employer. Up in Michigan, Ford (NYSE: F  ) is hiring new workers at hourly wages that average $14. If you own a 7-Eleven, you may wonder why Congress thinks you should pay $10 for an unskilled worker to man your cash register and load up the Twinkie stand, when just up the road, Ford pays skilled machinists just $4 an hour more.

Meanwhile, Ford itself will soon face questions from a workforce demanding: "Hey! I'm a skilled machinist! Why am I making just $4 more than the Twinkie-jockey down the road?"

So much for the industrial revival
Faced with demands for higher wages, it's entirely possible that Ford, General Motors (NYSE: GM  ) , and other manufacturers will rethink their decision to "re-shore" jobs they had previously offshored. As wage inflation hit China in recent years, more and more American manufacturers have found the cost advantages of offshoring evaporate, and decided to shift production back home. Introduce wage inflation here, though, and this trend could short-circuit.

Alternatively -- but just as bad for employment -- more companies could go the route of Amazon.com (Nasdaq: AMZN  ) . Trying to juice its 0.7% net profit margins, the company recently bought a company that makes robots -- and is putting them to work in its warehouses. Result: More jobs for robots; fewer jobs for Americans.

And when you get right down to it, if you don't have a job, it doesn't matter much what the minimum wage is -- $7.25 an hour, $9.80, $100. Multiply any of them by "0 hours worked," and the result is still zero.

Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Ford Motor and Amazon.com. Motley Fool newsletter services have recommended buying shares of General Motors, Ford Motor, and Amazon.com, as well as creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
 


Read/Post Comments (16) | Recommend This Article (14)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 16, 2012, at 3:42 PM, belseware wrote:

    I found an error! "That scenario doesn't sit well with Congress, which thinks waiters should get a base salary at least 70% of the overall minimum wage -- so at least $5.075 per hour, and eventually, $6.86 per hour."

    I submit you're being premature, claiming that "Congress...thinks" thus and so. This has not happened yet.

    Minimum wage laws don't work...they have consequences that obviate any plusses. ...and in most cases DO NOT advance "social justice".

  • Report this Comment On August 16, 2012, at 3:58 PM, TMFKlesta wrote:

    Members of Congress introduce bills all the time, and most of them aren't passed into law. In a GOP-led House, this will likely suffer the same fate. I don't expect this to go anywhere.

  • Report this Comment On August 16, 2012, at 4:50 PM, callumturcan wrote:

    All you need to know about minimum wage is to look at Milton Friedman's work on it, which won him his 1991 Nobel Prize. Minimum wage, while a nice idea, is a terrible idea economically speaking; as it either kills jobs in a down time or hampers wage growth in good times as there is no free-market wage fluctuations which would push wages higher in these types of jobs if the economy was growing at a nice clip.

  • Report this Comment On August 16, 2012, at 4:50 PM, Clint35 wrote:

    I hope this bill doesn't go anywhere. All it would do is basically raise inflation. And maybe win a few more votes for the congressional members that passed the law. Which is probably what they care about most, getting votes.

  • Report this Comment On August 16, 2012, at 4:59 PM, pacella wrote:

    I have heard this argument all of my life. The same people always complain when the minimum goes up. I think it started when the minimum went to a dollar an hour. The world didn't end then and it won't now. Everything else has gone up, wages are merely gaining at the same rate.

  • Report this Comment On August 16, 2012, at 6:14 PM, steveben wrote:

    callumturcan said it well, the more government imposes wage controls, the less the free market is able to or motivated to pay wages higher than what is proposed. Let the free market work!! I've seen it all my life as well,and when the government gets involved in other peoples business, the economy suffers.

  • Report this Comment On August 17, 2012, at 3:46 AM, Risky88 wrote:

    If the FREE market worked

    wall street wouldn't have America in shackles saying if you dont do x we'll bring down the entire economy.

    Sorry but the actual economy runs on actual people who go to work everyday.

    If the free market worked wages would rise at the same rate as inflation and would be no where near even 14$.

    Who said 14$ a hour is right for a machinist?

    Business needs to stop worrying about the bottom line and more about the top line.

    If no one makes any money, who is able to buy anything?

    Oh wait the Chinese are the number one consumer in the world now, since the free market sent all the jobs there.

    Most retailers depend on what age group for majority of sales?

    Oh yes ages 25 and under, wonder what would happen if that age group made more cash?

    Would apple sell more ipads, would abercrombie sell more shirts?

    The answer is obvious.

    Farmers often say they can't find anyone to work in the fields thats why they hire illegals: umm no the fact is no one that is sane would for 5$ an hour doing that kind of work.

    No one forces you to do a job, unless pretty much your entire family depends on you just to eat.

    Gee wonder why so many people work 2-3 jobs, Cant be at all because they dont make enough at there first job even though they give it 110%.

    If the free market worked, everyone in america would be kissing the shoes of business men on wall street saying how great they are and thank full.

    Yes wall street is free market, because they know exactly why how to get around any regulation, hence once again why almost none have been prosecuted even though its been almost 4 years.

  • Report this Comment On August 17, 2012, at 5:08 AM, NOTvuffett wrote:

    farking genius. look at the unemployment rate amoung youth in this country right now- especially black youth. this will just be an additional hurdle for their first work experience.

    no mature person with a good work ethic makes minimum wage.

  • Report this Comment On August 17, 2012, at 7:07 AM, mountain8 wrote:

    Geldej,

    This country has never tried free market economics. Any time the government sticks it's nose in, the free market goes away and the government has stuck it's nose in about everything. So you can't say if it would work or not.

  • Report this Comment On August 17, 2012, at 9:20 AM, StopPrintinMoney wrote:

    Lets make the minimum wage $500 so that everyone becomes a millionaire.

  • Report this Comment On August 17, 2012, at 10:01 AM, nyalavarthi wrote:

    Mr. Rick smith

    you sound like a mean guy

  • Report this Comment On August 17, 2012, at 10:04 AM, dfigures wrote:

    If wages go up (which I suppport) people can afford to consume more which is good right? Astronomical growth in the form of profits and cost of living coupled with depressed wages is counterintuitive in my mind.

  • Report this Comment On August 17, 2012, at 10:06 AM, pondee619 wrote:

    " (assuming $55 in base wages, eight tables worked in an eight-hour shift, $40 a table, and 15% tips), " Your assumption that all patrons at pizza hut tip 15% is fatally flawed. Too many patrons feel that "tipping is voluntary" and leave a buck or two and leave. Same happens at most lower cost eateries. Talk to the waitstaff at these places and get a feel for the real world. The "good" tippers do not make up for the stiffs.

  • Report this Comment On August 17, 2012, at 10:37 AM, TMFDitty wrote:

    @pondee619: "Currently, 'tipped workers' can be paid as little as $2.13 per hour in base wages, plus tips (typically anywhere from 15% to 20% of the cost of a meal). Not all patrons tip, however, and not all of those who do tip well. In a worst-case scenario, waitstaff on a slow night at a restaurant could earn just the $2.13 base salary -- a mere 29% of the regular minimum wage."

  • Report this Comment On August 17, 2012, at 11:12 AM, BMFPitt wrote:

    No, since it has absolutely zero chance of passing. But if it did, it would be a terrible law that would drag down employment even more.

  • Report this Comment On August 23, 2012, at 12:22 AM, MHedgeFundTrader wrote:

    While in Zermatt, Switzerland recently, I took the opportunity to undergo my annual physical. Over the years, I have discovered that American doctors are so paranoid about getting sued that I can never get a straight answer about anything, so I do all of my physicals abroad.

    I like visiting Dr. Christian because he is cut from the same cloth as I. He is a small wiry guy without an ounce of fat, and keeps his hair tied behind in a ponytail. Nothing like treating your patients through example. He has served as the team doctor on several Himalayan expeditions, reaching the incredible altitude of 25,000 feet without oxygen. He includes Mount McKinley and Aconcagua on his resume.

    He gave me the good news: I had blood pressure of 110/70 and a resting pulse rate of 50. This was at an altitude of 5,500 feet, which always elevates one’s blood pressure. The bottom line was that I had the heart of a teenaged Olympic athlete. He told me that whatever I was doing, to keep on doing it. I said that would be strapping on a 60 pound backpack and climbing the 1,500 foot mountain in my backyard every night after work. He answered that would explain everything.

    Dr. Christian usually allocates extra time for patients my age to deliver them bad news. That was unnecessary in my case. So we killed time trading notes on our favorite climbs.

    I also grilled him on the state of the Swiss medical system. He complained that it was going downhill, but was nowhere near as bad as in the US, where his brother practices medicine. Everyone here gets medical care after paying a small premium. His liability insurance was only $3,000 a year, compared to $100,000 in the US. The only malpractice suits in Switzerland are brought by Americans, and they always lose.

    The main reason medical costs were so low is that the people of Switzerland were so much healthier. Walking around the streets here, most people look like they are triathletes. And they do this despite smoking like chimneys. Maybe they are related?

    Life expectancy in Switzerland is 82.2 compared to only 78.2 in the US. And the quality of life at old age is much better. Obesity is rampant at home, but rare in the Alps. Diabetes is unusual in Switzerland, but epidemic in the US. Over 400,000 Americans undergo kidney dialysis in the US, while the treatment is almost unheard of in Europe. This is why the US is spending 12% of GDP on health care, on its way to 17%, while Switzerland is flat lining at 8%, with an older population.

    I thanked Dr. Christian for his advice. The total bill? $200. I headed to the local pharmacy to get a one year supply of my anti-cholesterol drug, which I can buy 90% cheaper than at home. That allows me to keep my total health care costs under $500 a year.

    I then celebrated my good fortune by stepping across the street for a bratwurst and a beer, which my American doctor once banned me from. There, I planned my coming assault on the Matterhorn.

    The Mad Hedge Fund Trader -

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