As I said, I think it is too early to see what the effect will be in Seattle or elsewhere. The early reports are unreliable, very ideological, on both sides. All the restaurants named as closing in Seattle, when actually asked, said their closing had nothing to do w/ minimum wage law (see my post above). I don't have much faith in the economic projections either. On either side.

I'm firmly on the "wait and see data" fence here.

It is a pretty straightforward thing to predict. The elusive "reasonable man" would expect it. If you look at it logically, there are no surprises. When this shuts down a bunch of businesses, do you think it will be easy or hard to take the minimum wage from $15 to $10 an hour? After those businesses close, what would it take to bring them back?

My daughter's friend has worked at Wendy's for a year now. He works hard, is a good team member and was employee of the month. He just got his first raise of 15 cents....

I worked at Wendy's in 1988 and made more than double the min. wage because that's what the market commanded. My town had negative unemployment. I'm surprised the gov't. didn't cap the wages, since people seem to think it's fine for the gov't. to set the price of labor.

[QUOTE]I worked at Wendy's in 1988 and made more than double the min. wage because that's what the market commanded. My town had negative unemployment. I'm surprised the gov't. didn't cap the wages, since people seem to think it's fine for the gov't. to set the price of labor.

In 1988 my income was about about 80% of what I paid for my house that year.
I wish I still had that problem. Times have changed.

When I flipped burgers, a nickel raise was a big deal. It was incredibly well spent time as it made me realize that I needed to acquire some more valuable skills.

You expect people to stuggle when they do a minimum wage job. In 1968, the "minimum wage" really was not the true minimum like now. An awful lot of folks did not make that much.

The fact remains that the minimum wage hasn't kept pace with inflation.

Minimum wage workers are being paid less (in real terms) than they were historically.

BTW - I'm a small business owner and have been for the last 15+ years.

If you look at that graph, the peaks in minimum wage "worth" coincide with recessions. And the drop in minimum wage likewise correlate with economic recovery. As it should.

But that is not apples to apples...because in 1965, an awful lot of people made much less. "Minimum wage" did not mean the same thing.

Economics is not medicine or physics. It is a lot more complicated and less understood. A reasonable man doesn't have a high chance of predicting the effect of this, and neither does a reasonable economist. Exhibit A, reasonable economists already disagree on this exact issue. Exhibit B, if $1-2 difference in minimum wage is enough to reduce the net number of restaurants, then we should see many fewer restaurants per capita in high minimum wage states than in low minimum wage states, but I know of no data showing that result.

I can certainly see how things might play out as you say: minimum wage goes up, crappy unproductive workers get paid more for being crappy and unproductive, more businesses close down than open up.

I can also see how it could play differently: minimum wage goes up, those higher wages get spent, some businesses benefit, the businesses paying minimum wage raise prices by a small percentage, it turns out that demand is inelastic, profit margins stay the same, worker turnover declines.

We really don't know.

Georgia has a very low minimum wage. Oregon had a high minimum wage. Are there more restaurants per capita in Georgia?. Do restauranteurs in Georgia make much more profit?.

We need data to form an opinion.

Old guys reniniscing about how $3.25 was a good wage 40 years ago is not data.

Seattle will give us data, in the coming years. I'm on the fence until I see that data.

Here are a couple other options. Maybe there could be a lower minimum wage for workers in their first six months in a job. If the worker is good, pay them more after that; if they are bad, fire them pronto.

This makes sense

This ignores the fact that labor is generally the single biggest expense of a small business, along with a lot of other things.

You can say you want to have a rational discussion, but you have to look at it rationally to do so.

Economics is a fairly complicated discipline, but there are a lot of things about it that are not. Say labor is half your expenses, or 50% of the total. If that half goes up by 60%, your total expenses go up 30%. How could your overhead rise by 30%, and you only raise your prices a few percent and stay in business? A lot of businesses run at 50% overhead, or half the money they get goes to keeping the business going. If you are going to give most of the money you otherwise would keep to your employees because of a change in the law, you don't think it would be more likely for you to shut it down?

An awful lot of people don't make it now.
That chart is from the BLS and as such, presumably charts the change in the official FLSA minimum wage. The FLSA sets the minimum wage, and it is what the FLSA says it is. It was $1.15 in 1968, in 2012 it was $7.25. The comparison is valid.

No. Because a much larger percentage of the population actually received much less than minimum wage. It was only the minimum for the lucky few. Much of the population was exempt when it was enacted...but few are now. Every few years, less and less were exempt.

When I was young, few made as much as minimum wage...now few make as little.

If the minimum wage increases were as huge and as sudden as your example suggests, then I suppose you could confidently predict something dramatic would happen. But your example is very much exaggerated, and so is your conclusion.

Take Seattle's law. It is both more complicated and more subtle than your example. Since we are talking about restaurant workers here, this article is good reading:

Seattle's $15 Minimum Wage Law, Explained - Eater

In 2014, the biggest change will be from $9.50 to $11.00 (non tipped workers), the smallest will be from $9.50 to $10.00 (tipped workers and those with employer health care). Those are either 15% or 5% increases.

Typical restaurant labor cost is 30%, at least that is what successful restaurants target. That varies by type of restaurant, but let's keep it simple. So, say sales is $100. Labor $30, food $30, that is $60 in "prime costs". Leaves $40 for occupancy, g&a, marketing, etc, and pretax profit.
https://www.whitehutchinson.com/leisure/articles/primetime.shtml

So if sales is $100 and labor cost goes from $30 to $31.50 (+5%) or $34.50 (+15%), to keep "sales - prime cost" at $40, sales needs to rise to $101.50 or to $104.50, that is 1.5% or 4.5%. Again, this depends on whether the employees are tipped, non tipped, with healthcare, without.

So a logical thing a restaurant might do is increase menu prices by 1.5% or 4.5%. Some will convert employees from tipped to non tipped, and raise prices more but eliminate customer tips. There will be a variety of strategies.

Which will work and which won't?. Will certain types of restaurants do better than others?. Will a restaurant operator have to be smarter, hire better workers, change the way they do business?

Don't know.

In the coming years, we'll be able to track net new openings of restaurants in Seattle, and probably number of food service workers. Some people are already tracking new restaurant openings and permits, but to be complete you'd want to track closings too.

Seattle Restaurant Data Demolishes Conservative Argument Against $15 Minimum Wage | ThinkProgress

My point is, your example of a sudden 60% increase in labor cost is not close to the reality of what will happen to Seattle restaurants, so your logic starts from a false premise.

Yes, I realize minimum wage will gradually step higher over the coming decade under the Seattle law. So will all prices, thanks to inflation. I figure that the people who invest in starting restaurants are taking that into account, in deciding whether to start new ones in that city. So far, they seem to think the numbers still pencil out.

San Francico and Seattle will be the test case.

You could no sooner compare two different states for the number of restaurants and get any sort of good data than you could compare the Moon to Venus.

San Francisco already squeezes the customer for too much as it is, and their minimum wage is going to go up to around $12, then keep going. Los Angeles is contemplating a $15 minimum wage as well, but I think they'd be well advised to see how SF and Seattle play out.

When your operating margin is less than 15%, and your overall costs go up 10%, your busines is not long for this world. That is the case. It's going to be up to customers to decide whether they want to take the hit, because business can not.

What if the government set minimum prices for used cars. Let's say $15,000.


We'd have some sellers unable to sell their POS car because it isn't worth $15k to anyone. (aka unemployed worker)

And we'd have some buyers that can no longer afford to buy a used car. (aka business that eliminates a job)

I got curious about why people are still opening restaurants in Seattle, since they know the minimum wage is going up. When they do the projections, how can it still pencil out?

So I built a very simple model. Assume a restaurant has 15% operating margin in 2014, with costs as shown. Suppose labor cost goes up with the minimum wage, and I'm using the $11/hr for 2015. Suppose food cost goes up 2%/yr (inflation), other costs go up 2%/yr. How much do sales have to go up, to maintain the same profit margin?

It looks like sales have to go up 5%/yr. If that increase is entirely from price increases, then a menu item that was $10.00 in 2014 would be $12.70 in 2019, when the minimum wage tops out.

http://forums.pelicanparts.com/uploa...1429851189.jpg

Of course, this is a grossly simplified model. And different types of restaurants have different cost structures. For example, McDonalds' franchises usually have labor costs that are 20% of revenue, lower than the 30% in this model. http://www.restfinance.com/Restaurant-Finance-Across-America/July-2013/That-McDonalds-Salary-Study-Gets-It-Wrong/ A fancy French restaurant usually has labor costs that are a higher percent of revenue. And, in the McDonalds, most of the employees might be making minimum wage, while at the fancy place, few of them will be.

^ you need to go over those stats again, my friend.

It was still the minimum wage. The minimum wage is DEFINED.

But it was "defined" differently. When I was growing up, we called people happy people "gay" and folks who acted a bit different "queer".

When I was young, where I grew up, a person who had a job that received "minimum wage" was considered very well off indeed as they made much more than most people. It was not the minimum for a majority of Americans. It was only the "minimum" that their company could pay for that specific job in that particular location (based on business size and type). Most small businesses and labor related jobs were excluded (and most jobs were small business or labor related).

Min wage initially did not fully cover many employees. There were exemptions for most small business (and many others simply did not pay it).


Employees of retail trade enterprises with sales of less than $1 million annually were not covered. Individual establishments within those covered enterprises were still exempt if their annual sales fell below $250,000.

Even if they met the sales of over $1M, retail and service establishments were allowed to employ fulltime students at wages of 15 percent below the minimum.

Employees of the "air transport industry" were not covered.

Public schools, nursing homes, laundries, domestic workers and the construction industry and farm workers were not covered.

Supervisory employees of Federal, State, and local governments were not covered.

I used to work for Gottschalks Department Stores. I was there for 21 years and my last 10 were spent planning & forecasting. Part of my job was to set the budgets for store payroll.

When minimum wage went up one year, I calculated the annual cost to the company would be about $1.5 million dollars. My annual store payroll budget was about $80 million.

That year, we ended up cutting head count to make up for the $1.5 million that would be spent increasing wages. We had no choice as retail competition was fierce. We were up against companies like Macy's, Penny's, Wal-Mart, Target, Costco and those companies were so much larger than us that they were able to buy merchandise at a much lower cost than we could get.

If you look back in time, you might remember when you got service at stores. Now days, you can barely find a clerk. Checkouts are all becoming Wal-Mart style and there is virtually no one in a store to help you. This is a direct result of higher costs (payroll and other).

Minimum wage might not be keeping up with inflation but my question is: why is inflation increasing so much? We have an extreme % of population not working, collecting govt subsidies, etc. At the same time executive wages have skyrocketed. I would not be focusing on raising the minimum wage but instead working on the top wages. I would let a company pay their execs any amount they want but limit the tax deduction for any single employee to $100,000.

FYI: The $1.5 million minimum wage effect was about 1/2 our annual profit. The company never paid out a dividend and used all profits to reinvest in the business and open additional stores. We employed about 6500 employees and each new store opened employed 75-200 people.


Just my $0.02 worth

Low interest rates have a definite effect on housing prices. And, many people today with large mortgage payments do not get any interest deduction due to the fact that the low interest is less than the standard deduction.

Government medaling with housing definitely contributed to the housing bubble which, in my opinion, is still going on.

I made minimum wage in high school and it was enough to cover my expenses (i.e., gas, entertainment). Today I earn far more than I made in high school and that is because I learned a thing or two over the years.

Since the unfortunate demise of that proud institution (which btw my mom still mourns) minimum wage has gone up 17% in addition, and will go up another 17% again this year. That would force almost anyone out of business. And what most people still don't understand is that there are additional costs to employers to just the wage increase. Payroll taxes and workman's comp also go up, as does liability insurance, etc. etc.

I contend that the minimum wage increase that will occur this year will spell disaster for many, many people. Those companies that survive will be choked so lean, that there will be nothing left for raises and bonuses for good employees.

So how are Nordstroms, Macys, Target, Kohls, Walmart, and all the other department and discount stores still in business and quite profitable? Maybe they just out-competed Gottschalks?

With interest rates about as low as they can be, you have to wonder (or at least I wonder) where housing prices will go from here.

On the one hand, there is a distinct shortage of housing in many cities. In Portland, we have <2 months' inventory.

On the other hand, when mortgage rates went up last year, you saw an immediate cooling of the housing market, both prices and sales volume, even though the same shortage existed then.

You are assuming a lot, yet for some reason not really reading and understanding what people write about their firsthand experience. For example, how do you know that these stores are "quite profitable", and second did you not read that profit was cut 50%? From one law alone? And did you further choose to ignore that we have another two (2) as in dos, more minimum wage increases? Two in two years? And you still just refuse to believe that this is going to be a problem?

Once again, I just think that conversation is pointless with you. You start these threads in order to make a point, not to have conversation. You are passive/ aggressive.

The financial statements of those companies are publicly available. I've checked them. Maybe you should.

Oh good for you. BTW 2015 is what we are after, not 2014.

Since you "say" that you can read a financial statement, maybe you can learn how to write one? New math?

That's exactly what they did!

Gottschalks had annual sales volume of about $700 million. Wal-Mart is somewhere around $250+Billion, Target is around $82+Billion, Macy's/Federated is around $28 Billion.

In order to stay afloat, you need to be profitable. That can be done by increasing revenues or decreasing expenses or some of both. At Gottschalks, we were buying around $800 million of inventory per year where as Walmart is purchasing around $750 BILLION. They are able to get purchase discounts that simply don't exist for the little guys. Walmart is able to dictate prices buy purchasing entire supplies (in China). By the way, Walmart, Costco, and others are getting great discounts on inventory by paying very low prices from merchandise produced in low-wage countries.

So, where can we cut expenses - Payroll is the next most controllable expense and that's what we were forced to do at Gottschalks. It's quite possible that this affected customer service and then ultimately reduced sales. It's also quite possible that with inflation and rising cost of living, people went to the big stores and bought cheaper stuff. As minimum wage has increased over the years, many smaller companies did not survive and even medium size companies (like Gottschalks) didn't make it. We have far less choice than we had in the past and as we continue to squeeze businesses, we are left with big-box stores and that's it.

jyl - you have stated in some of your posts that "I'm firmly on the "wait and see data" fence here." I don't think you need to wait as there is plenty of history to review. We used to have 1 income families and that was sufficient. We used to have all kinds of services (i.e., full service gas stations, milk delivered at your door, etc...). Raising the lowest incomes to keep up is not the answer as it just keeps pushing prices up and service levels down. I believe that we need to reduce wages at the top and I would do that by limited the maximum tax deductions for payroll.

Tidybouy,

I am wondering now about stores like Home Depot, who put a store in San Francisco. Do they look at cost/profit/volume at individual stores? Or are the stores used to push product, and hence allowed to run at lower than average profit for the company as a whole?

In Fresno, as you know, many national chains look at the area as a "remote market" and put less effort into promotions and marketing, training costs, etc. They just throttle back their costs and expectations and let Fresno stores sort of wobble along. When a store in a major market faces exorbitant costs increases due to mandatory minimum wage, crazy voter approved taxes, etc, what do you do? When do you pull the plug?

I can't say for sure how Home Depot operates but I'm pretty sure they look at each store individually but also look at areas as a group. With Gottschalks, we had stores that made a lot of money and stores that did not do so well. However, just because a store is not doing well does not mean you can just close it, especially if you have a rent contract. Also, we had stores where a city wanted us so bad (i.e., palmdale) where the city paid for the building. In the Palmdale case, the city gave us $6mil to build the store and we were obligated to operate for 20 years because of the gift. In another case, Fresno & Madera were fighting over where we would open our distribution center and both cities gave us land to build on. We ended up going with Madera because it was an enterprise zone and was more favorable to us (we got payroll credits & other tax credits).

As with most companies, they probably won't disclose to the public specific store data as that could benefit the competition but I'm fairly certain that Home Depot is looking at each location.

Minimum wage should be tied to the cost of a gallon of gasoline. Back in 1971 I was making $2.00 an hour working part time in a sporting goods store in Hollywood having a great time. A gallon of gasoline was about $.25 a gallon. So for an hour of work I could buy 8 gallons of gasoline. The higher priced gasoline in the Midwest was up to about $.40 a gallon so one could buy only 5 gallons for an hour of labor. I could afford to drive my 4 year old $1000.00 Alfa Romeo. Michigan to California @ 30 mpg needed about 74 gallons which was less than $40.00 at L.A. prices. That was 20 hours of labor. At the $4.00 a gallon with the same car that would be $296.00 Absurd! So gasoline has gone up by 16x. That would be about $32.00 an hour minimum wage at $4.00 a gallon. If gasoline goes down to $2.00 a gallon that would be $16.00 an hour. The cost of university today has made it impossible for students to work their way through school at $7.50 an hour. The rich get richer and the poor have a much worse life than they did 45 years ago.

Your post is thoughtful. Thanks for taking the time to write it.

Personally, I see the benefits of scale allowing huge companies to crush smaller ones. This has been good for shareholders and top executives; bad for small companies, and I think bad for workers too.

I would like to see a couple of things:
- Higher tax rates on the highest income (like >$500K, which is top 1%)
- Higher tax rates on the biggest companies, and prevent them from getting much lower tax rates from tax inversions (switching corporate domicile to low tax jurisdictions offshore)
- use that money to fund lower tax rates on small businesses and the lower income households

I'm not super old. But in my lifetime I've seen a big change in this economy. The median household income ($52K roughly) is no longer sufficient for a comfortable life, retirement savings, and educating two kids. That is a damning situation.

What really upsets me is that I see folks in the bottom 50% fighting each other, tooth and claw, for scraps. While the top 1% - actually, the top 0.1% - fund media campaigns that successfully convince the bottom 50% that their well being depends on the rich getting richer.

See the charts above on income inequality. We are at levels not seen since the roaring '20s, right before the Great Depression. That's not right. In my view.

In 'the mid '70s, gas was about $.50 per gallon and I made $1.60 an hour. So, an hour bought about $3 gallons of gas. At $2.00 a gallon, that is only $6.00 an hour now...so it looks to me like things are getting better.

I watch the price of gasoline fairly closely.

The problem with the concept of "cost of gasoline" is that it varies by as much as $.50 per gallon, depending on which side of the street you are on. Sometimes each street corner has that much variation at each store. The other day, Arco was at $2.95, Shell was at $3.45, and Chevron was at $3.40. Meanwhile Costco was at $2.70 or thereabouts. Each station operator drives the competition daily, and the cost of trucking and the wholesale cost can fluctuate several times per day.

Once the gas is in the ground, the operator of each station has the ability to price gas, at least in California, according to his market. That still allows a lot of leeway, as you can see.

Interesting idea. Limit expensible labor to salaries of less than $100 or $150k. But instead of putting more money in the consumer's hands, it puts more in the government's hands. How is that better? A major benefit of a higher minimum wage is that it increases consumer demand and the circulation of money.

I am all for higher consumer savings. I think a hiring tax credit for businesses might do it, but probably an investment credit would be better, for tangible assets. Put money into the hands of small businesses and they will spend it. Put money into the hands of the wealthy, and they will save it away. Force business to spend, and prices will go up in a nanosecond, draining the pockets of the working class.

Shift tax burden to big companies and the wealthiest; reduce tax burden on small businesses and the low income.

The biggest companies can use multinational tax strategies. Most big tech companies have tax rates 10-20%. Small businesses can't domicile overseas or hold intellectual property in low tax jurisdictions or hire teams of $600/hour tax lawyers. They get stuck with the full statutory 35%.