Only about 3% of All Workers at any one time make the Minimum Wage

Posted by PITHOCRATES - April 24th, 2014

Week in Review

If you’ve heard the left talk about the urgent need to raise the minimum wage you would think half the nation is languishing under pauper’s wages.  While rich business owners are lighting their cigars with twenty dollar bills.  As they rest their feet on the back of a minimum wage worker.  But it’s not quite that bad (see The Cost of the Minimum Wage: $20 for a Burger posted 4/24/2014 on E21).

McDonald’s high turnover rate shows that most of its workers are using the job as a stepping stone to other careers or as a transition position between jobs. One in every eight U.S. workers has been a member of McDonald’s 750,000 person workforce. Economics21 director Diana Furchtgott-Roth entered the workforce scooping ice cream at Baskin Robbins at about $3 an hour. She never intended to have a career in ice cream…

Ninety-seven percent of American workers make more than minimum wage, not out of the kindness of employers’ hearts but because this is the only way that employers can retain employees. Low-skill workers need jobs, wages, and work experience too, and if the minimum wage rises, these people will be priced out of a job.

So only about 3% of all workers at any one time make the minimum wage.  And the 3% from 10 years ago are most likely included in the 97% of workers today.  Because minimum wage jobs are entry-level jobs.  And what makes them so valuable is their low pay.  For these workers gain some skills and work experience.  And then get the hell out and join the 97%.  And go on to do great things.  Even become CEOs and directors.  Which they never would have done had they stayed at those minimum wage jobs.  Which they might have had if the minimum wage was a more comfortable living wage.

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Minimum Wage Jobs are allowing Teenagers to afford Smartphones and Tablets

Posted by PITHOCRATES - April 12th, 2014

Week in Review

There’s a lot of talk about raising the minimum wage on the left.  As they are running out of ways to buy votes.  And they feel they can buy a lot by paying unskilled and inexperienced workers closer to what people with a college education make.  But minimum wage jobs are entry level jobs.  They’re the first rung on the career ladder.  The left loves to point to grown adults trying to raise their families on a minimum wage. As sad as that is the minimum wage isn’t supposed to raise families.  It can supplement a family’s income by allowing a parent to work part-time while the kids are at school.  But this is extra money.  To help cover some other expenses.  Like these (see More than 60% of U.S. teens have their own iPhone and iPad, prefer Apple products to the competition: study by AFP RELAXNEWS posted 4/9/2014 on the Daily News).

Over 60 percent of teenagers already own an iPhone and excitement is growing over the much-rumored launch of an ‘iWatch…’

… teens with an average age of 16.4 years and reveals that gadgets and electronics currently account for just 8 percent of their spending, with games systems and games accounting for a further 7 percent.

And of that small percentage, Apple products appear to account for the largest outlay. Not only do 61 percent of teens say that they own an iPhone (up from 55% in Spring 2013), 67 percent say they’re planning to purchase an iPhone within the next six months. And it’s a similar story with tablets. Piper Jaffray says that 60 percent of US teens currently own a tablet and of that group, 66 percent are using an iPad. When asked, 66 percent of non-tablet-owning teens have earmarked an iPad as a future purchase…

Over recent years, branded headphones have exploded in popularity and 56 percent of teens are planning to purchase a set over the next six months.

According to the BLS, approximately 2.5% of all workers earn at or below the minimum wage (people who get tips can be paid less than the minimum wage as their tips plus their wages takes them over the minimum wage).  And about a third of these workers are teenagers.   Yet over half of these teenagers can afford costly smartphones and tablets.  And the very expensive monthly cellular charges that make them work.  Also, over half of all teenagers are going to buy an expensive set of headphones.  Which can only mean one of 3 things.  The minimum wage is sufficient to buy all of these things.  They have a parent working a second (and perhaps, a minimum wage) job to help their kids pay for these.  Or 60% of all teenagers have rich parents.  Is it worth raising the cost of small business owners (who will hire fewer people when people are more costly) so about a third of all minimum wage workers can more easily afford their toys?

As far as single parents struggling to raise their family on a minimum wage, is it right to diminish the value of a higher education by paying unskilled and inexperienced workers more?  Will people still put in the extra work to get an education or training and delay having fun (our young people, not those who find themselves by circumstances beyond their control working a minimum wage job due to a divorce, death in the family, etc.) to earn the skills necessary for a higher paying job when they can get nearly the same amount by taking the easy way?  People say they hate these jobs.  Will paying them more so they have no incentive ever to leave these jobs make them hate them any less?  Or will they be locked into these miserable jobs for the rest of their miserable lives?  A lot of people take pay cuts to leave jobs they hate.  So getting paid more for a job they hate isn’t going to make them hate that job any less.

Raising the minimum wage is not going to change anything.  Other than reduce the amount of jobs available for the unskilled and inexperienced.  No.  The best way to help people earn more is to create more jobs.  For when the economy is creating jobs there will be fewer people available to fill them.  Which will cause employers to bid up wages so workers choose their jobs out of the many that are available.  But when the economy is so bad that only minimum wage, entry level jobs are available there will be few people moving up the career ladder.

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Minimum Wage, Obamacare and Unintended Consequences

Posted by PITHOCRATES - February 3rd, 2014

Economics 101

The Affordable Care Act greatly increased the Cost of Unskilled and Inexperienced Workers

The Affordable Care Act has changed the employment landscape.  In particular it changed a lot of people from full-time employees to part-time employees.  Especially at entry-level jobs.  Or minimum wage jobs.  Jobs that may be physically demanding but require minimum skill or experience.  Making them ideal for unskilled and inexperienced teenagers entering the workforce.

Not everyone, though, is a teenager in these minimum wage, entry-level jobs.  Some adults find themselves in them, too.  Older adults.  Single parents.  Widows.  Widowers.  People whose circumstances have changed.  And who don’t have the skills or experience for other employment.  So they find themselves struggling to get by on their entry-level, minimum wage job.

Then the Affordable Care Act (i.e., Obamacare) made their struggle more difficult.  For it required employers to offer health insurance to anyone working 30 hours or more per week.  Greatly increasing the cost of unskilled and inexperienced teenagers.  And their other entry-level, minimum wage workers.  So they did the only logical thing.  They cut their hours below 30 hours per week.  Shrinking the paychecks of both teenager.  And those who are struggling to live on their minimum wage paychecks.

The Unintended Consequences of Obamacare changed Full-Time Workers to Part-Time

We call it unintended consequences.  When a government program to solve one problem creates another problem.  In an attempt to give people with insufficient income to buy health insurance Obamacare forced their employers to provide health insurance for them.  This caused employers to cut hours for these employees.  To keep the cost of their entry-level, minimum wage workers from rising.  Thus reducing their insufficient income even further.

The rollout of Obamacare did not go well.  In the effort to give people affordable health insurance a lot of people actually lost the health insurance they liked and wanted to keep.  Another unintended consequence.  (Unless the Democrats designed the Affordable Care Act to destroy the private health insurance industry as many believe then things are going exactly as planned as people may soon start demanding that the government step in and provide national health care).  Causing a bit of a problem for the political party that gave us Obamacare.  The Democrats.  In the upcoming midterm elections.

It’s one thing causing people with individual insurance policies to lose their health insurance that may or may not have voted for you.  But to further impoverish the impoverished working those entry-level, minimum wage jobs was another.  For thanks to endless class warfare the Democrats put the impoverished into the Democrat camp.  So they needed to do something to replace the income they lost when Obamacare changed them from full-time to part-time employees.  And chose further class warfare.  By forcing those ‘rich’ employers to pay their entry-level, minimum wage workers a ‘living wage’.  By increasing the federal minimum wage.

Obama wants to Raise the Minimum Wage to replace Earnings lost when Obamacare made Full-Time Workers Part-Time

In the State of the Union address President Obama said he wanted to raise the federal minimum wage to $10.10.  But why $10.10?  The current federal minimum wage is $7.25.  And if you earned that working 40 hours each week for 50 weeks (assuming you take 2 weeks off over the year for personal reasons, holidays and vacations) that comes to $14,500 per year.  Raising the minimum wage to $10.10 brings those annual earnings to $20,200.  Or $5,700 more at the higher wage rate.  It’s a lot of money.  But probably not enough for someone to quit a second job.  For if someone is working 20 hours a week at a second job that would come to an additional $7,250 a year.  If they work 30 hours a week in a second job that would come to an additional $10,875 a year.  And some people have to work 70 hours or more a week to approach a ‘living wage’ when they don’t have the skills or experience for a job that pays more than an entry-level, minimum wage job.  So raising the minimum wage to $10.10 an hour probably won’t solve everyone’s financial woes.  But it will do something else.

If people who were working 40 hours a week went to working only 29 hours a week after Obamacare they would lose 11 hours of pay.  At the current minimum wage that comes to $79.75 less in their paycheck each week.  A significant amount for someone struggling to make it on something less than a ‘living wage’.  But look at what happens when we raise the minimum wage to $10.10 for those 29 hours.  If we multiply the additional $2.85 per hour to those 29 hours that comes to an additional $82.65 a week.  Which is a little more than the $79.75 they lost when Obamacare cut their hours.  So it would appear that the new push to raise the minimum wage to $10.10 is to put the money the Obama administration took out of these workers’ paychecks back into their paychecks before the fall midterm elections.  So they still won’t be angry and vote Republican because of what the Democrats and their Affordable Care Act did to their paychecks.

They want to sound compassionate to those with insufficient income by wanting to raise the minimum wage to replace what they took away from them with Obamacare.  To give these people a ‘living wage’.  For the current minimum wage is actually worth about 20% less than it was during the Reagan administration.  When it was $3.35.  Wait a minute, you say.  How can $7.25 be worth less than $3.35?  Because of the Democrats’ embrace of Keynesian economics.  The government wants to print money to spend.  To provide economic activity when the private sector is not.  And when President Nixon decoupled the dollar from gold in 1971 they ramped up those printing presses.  And have been depreciating the dollar ever since.  Because they made the dollar worth less and less over the years the purchasing power of the federal minimum wage fell.  Even when people were earning more dollars.  And raising the minimum wage won’t address this problem.  Only voting the Keynesians out of office will.

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Ashton Kutcher didn’t ask for a ‘Living Wage’ when he was Working Entry-Level Jobs

Posted by PITHOCRATES - August 18th, 2013

Week in Review

Ashton Kutcher made a speech the other day everyone is talking about.  Conservatives.  And liberals.  It’s become very political.  Especially for this part (see Ashton Kutcher Channels Steve Jobs In The Best ‘Teen Choice Awards’ Acceptance Speech Ever by Kyle Russell posted 8/12/2013 on Business Insider).

“I believe that opportunity looks a lot like work,” he began. He goes on to describe his first jobs: helping his dad carry shingles to the roof, washing dishes at a restaurant, working in a grocery store deli, and sweeping in a factory.

I never had a job in my life that I was better than. I was always just lucky to have a job. Every job I had was a stepping stone to my next job and I never quit my job before I had my next job.”

Could the repeating of the word ‘job’ have anything to do with his new movie “Jobs?”  Perhaps.  It’s something Greg Gutfeld pointed out on one of his umpteen television shows.  I think this comment was from The Five.  Funny guy.  And poignant.  In a warm, festering canker-sore of a way.  (Yes, you respect him.  Then you insult him).  One of my favorite libertarians.  But I digress.

Some on the left who reported this left out those earlier jobs he had.  Suggesting to the unaware reader he was talking about his acting jobs only.  And not those minimum wage jobs he was “lucky to have.”  That were merely a stepping stone to his next job.  These entry-level jobs gave him important work skills for his next job.  That’s what these jobs do.  They are not supposed to provide for a family of four.

The fast-food workers are striking to double their pay.  So they can remain in these entry-level jobs forever.  Which is not the point of these jobs.  These jobs are for kids entering the workforce.  Like Ashton Kutcher when he was a kid.  If they are unhappy they aren’t earning a ‘living wage’ in an entry level job then they should complain about the economic policies of the Obama administration that has left them behind in an entry-level job.

Anti-business policies like Obamacare have frozen new hiring.  And pushed people from full-time to part-time.  Or out of a job completely.  Leaving only entry-level jobs for many.  Who work one or two to replace the better and higher paying job the anti-business policies of the Obama administration destroyed.  This is what these people should be fighting for.  Repealing Obamacare.  And undoing all of President Obama’s anti-business policies that have left so many people working in entry-level jobs because they’re the only jobs available in the Obama economy.

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McDonald’s 2012 Annual Report

Posted by PITHOCRATES - August 6th, 2013

History 101

The Benefit of a McDonald’s Franchise is getting the Benefit of their Years of Building their Brand

Recently a late-night comedy show attacked McDonald’s for being greedy.  Because they don’t pay their minimum wage workers a living wage.  Because what were once entry level jobs are now the primary support for some families.  And why have entry level jobs come to support families?  Because the anti-business policies of the current administration have destroyed better-paying jobs.  But they don’t attack that on late-night television.  They attack a company actually providing jobs in a jobless economy.

Today McDonald’s is huge.  You can find them pretty much anywhere in the world.  Which can be a welcome site for a weary traveler.  For they know they can walk into a McDonald’s wherever they are and have the comfort of a meal exactly like that at home.  Which is pretty amazing if you think about it.  And why McDonald’s is so successful.  The sight of those Golden Arches can attract a foreigner in a strange land or a construction worker on a new project in a distant city.  They know exactly what they can get at that McDonald’s.  What it will taste like.  And what it will cost.  Even if they’ve never been in that McDonald’s before.

This is because McDonald’s has very successfully built their brand.  Which is one of those intangible things.  It has great value.  But you can’t physically touch it.  Those who own a McDonald’s franchise can enjoy a thriving business.  From day one.  Without doing any marketing to get people to walk into their restaurant.  They don’t have to.  Because McDonald’s has already done it.  And continues to do it.  This is the benefit of the franchise.  You get the benefit of all those years of hard work McDonald’s did to build their brand by simply paying a franchise fee (see Restaurants and Franchises posted 8/5/2013 on Pithocrates).  It’s not cheap.   But it’s such a fair deal for both franchiser and franchisee that McDonald’s had 27,882 franchised stores in 2012 (see McDonald’s 2012 Annual Report, page 11).

Owning a McDonald’s Franchise allows you to own a Restaurant that has been Successfully in Business for 72 Years

In addition to the intangible value of the brand the franchise fee also includes rent.  For McDonald’s “owns the land and building or secures long-term leases” for the franchisee’s store (see McDonald’s 2012 Annual Report, page 11).  While the franchise needs to foot the bill for the “equipment, signs, seating and décor.”  This makes sure all stores are modern and up to date and uniform.  Helping to maintain that comfortable familiarity for the customers.  While splitting the capital costs between the franchisee and franchiser.  So both parties have a major investment in the business.  And each shares in the profits of the business.  Perhaps the best of the deal for the franchisee is getting a mentor.  And a detailed operating manual telling them everything they need to know and do.

Owning a McDonald’s franchise is costly.  But you get to step into a restaurant that has been successfully in business for 72 years.  Give or take.  Considering that half of all restaurants fail within the first five years of business this is a HUGE benefit for the franchisee.  And something well worth the franchise fee.  As evidenced by 27,882 franchised stores in 2012.  So what is that franchise fee?  And how much money does the franchisee get to keep after paying the franchise fee?

Well, if you do a little number crunching with the financials included in the 2012 annual report you can get an approximate number.  McDonald’s also has stores they own and operate.  In 2012 they had 6,598 company-owned stores.  The average per store revenue was $1,358,594 (calculated by dividing the total revenue from the company-owned stores by the number of company-owned stores).  A similar calculation gives an approximate $667,205 franchise fee per franchised store.  Subtracting the typical franchisee fee from the typical store revenue (assuming all stores have the same average revenue as the company-owned stores) gives the franchisee an annual income of $691,389.  From this income the franchisee has to pay for food, labor and overhead.  And whatever is left over is profit.

High School Kids and College Students work at McDonald’s because they need no prior Restaurant Experience

The rule of thumb in restaurants is that costs are broken down into thirds.  One third is food cost.  One third is labor cost.  And one third is overhead and profit.  So if we divide that $691,389 by 3 we get an annual food cost per franchised store of $230,463.  Ditto for labor.  And overhead (gas, electric, water, insurances, taxes, licenses, fees, waste disposal, light bulbs, toilet paper, soap, garbage bags, etc.) and profit.  Let’s look at the labor cost more closely.  To see if McDonald’s is greedy when it comes to paying their employees.

The benefit of owning a franchise is that it comes with very explicit instructions.  A McDonald’s distributor delivers prepared food ready for the grill and fryer.  As delicious as it is, though, it doesn’t take a highly skilled chef to prepare it.  As the franchisee operating manual has it down to a science.  Which is why high school kids and college students work at McDonald’s.  They need no prior restaurant experience as it is an entry level job.  Typically their first job.  Where they learn what it’s like entering the workforce.  The importance of being on time.  Following instructions.  Being responsible.  Skills that they will use in later jobs.  Which most do.  As there is a high turnover of employees at McDonald’s as there is for all fast food.  Because these are entry level jobs for unskilled workers.  Who learn the skills they need on the job.  So let’s assume a restaurant that is open 24 hours a day, 7 days a week.  Assuming an hourly rate of $8.50 and an overhead of 40% for direct labor costs (workers’ compensation insurance, unemployment taxes, health insurance, uniforms, training, etc.) the average hourly labor cost comes to $11.90.  Dividing the labor cost of $230,463 by this hourly cost gives us 15,758 annual labor hours.  Or about 53.06 hours per day.  Or 17.69 hours per 8-hour shift.  Giving us an average of 2.21 workers per 8-hour shift.

During the breakfast and lunch rush a typical McDonald’s may have between 5-8 people working.  With fewer working in the evening.  And a skeleton crew over night working the drive-thru.  So the labor fluctuates during the day to correspond to the amount of business.  Which is why there are a lot of part-time workers at McDonald’s.  Ideal for high school and college kids.  In addition the owner typically works during those busy periods to help with the rush.  And works on paperwork during the slower times.  Putting in about 12 hours a day.  If you assume an overhead rate of 18% and multiply that to the franchisee annual income of $691,389 we get an overhead expense of $124,450.  Subtracting that from the $230,463 (overhead & profit) leaves an annual owner income of $106,013.  Or, based on a work week of 84 hours (12 hours a day X 7 days a week), the owner earns about $24.27 an hour.  A rate a lot of people can earn working for someone else without the headaches of owning a business.

That late-night comedy show attacked McDonald’s for being greedy.  Saying they should increase their pay rate to a living rate.  Like picketers were asking for.  $15/hour.  A labor cost increase of 82.6%.  Or an additional $190,382 each year.  Which would bring the franchisee’s annual income from $106,013 to an annual loss of $84,369.  So are these McDonald’s franchisees greedy because they refuse to pay a living wage?  No.  They simply can’t afford to pay more than the minimum wage for these minimum wage jobs.  Unless they can get people to spend $6-$7 for a Big Mac.  They are delicious.  But are they $6-$7 delicious?  And can a low-income family afford to take the family to McDonald’s when they are charging $6-$7 per burger?  Probably not.  No.  McDonald’s is just fine.  What we need to do is to un-do the anti-business policies of this administration that is killing those higher-paying jobs.  And forcing the primary earner in some families to work a minimum wage job.  Because that’s all that is available in this jobless economy.

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FT90: Minimum wage jobs are entry level jobs.

Posted by PITHOCRATES - November 4th, 2011

Fundamental Truth

There is Income Disparity because it Takes a While to Get Good in Whatever you Do

Minimum wage jobs are entry level jobs.  People need to remember this.  A minimum wage job is not to raise a family on.  It’s for the children of that family to get their start in the workplace.  To help college students pay their expenses.  Or it’s simply an unskilled job for an unskilled, inexperienced worker.  So he or she can become a skilled worker.  And gain experience.

So, yes, there is income disparity.  We pay people with less skill and experience less than those with more skill and experience.  That’s why a garage band doesn’t make as much money as U2.  It takes a while to get good.  In whatever you do.

Is this income disparity bad?  No.  It provides incentive.  Because everyone wants to get rich.  U2 did.  Even became tax exiles to escape the confiscatory tax rates of their country.  Everyone wants more money.  Whether they admit it or not.  Thant’s why people buy lotto tickets.  And go to casinos.  They’re not spending money to stimulate the economy out of the goodness of their hearts.  No.  They’re trying to get rich.

If the Minimum Wage is a ‘Living Wage’ what Incentive is there to Work Harder?

So the profit motive exists.  We do things because we’re greedy.  Whatever we have we want more.  That’s why we work hard.  To earn money.  To have more.  So our kids can have more.  It’s a great system.  Because we get a lot in return for this greed.  Doctors.  Nurses.  Engineers.  Skilled trades.  And a lot of neat stuff.  Like iPads.  Smartphones.  Computers.  Cameras.  DVDs.  Buildings.  Cars.  Trains.  Airplanes.  Etc.  And we’d have none of this if the minimum wage was a ‘living wage’.  A wage to raise a family on.

If you could make, say, $75,000 a year flipping burgers at McDonalds would you go to college to become a doctor?  With massive student loan debt, the high cost of malpractice insurance, the lawsuits, the long hours, the constant reduction in Medicare reimbursements, etc., probably not.

Would you work in the skilled trades?  Spend 4 years as an apprentice?  Became a journeyman?  Then a master?  Work long and hard to master your craft only to see a kid out of high school with no skill and no experience ‘earn’ the same wage?  Probably not.  Because we just don’t voluntarily work harder if there is no financial gain.  If you don’t believe this ask some of your friends if they would work overtime without additional pay.

Raising the Minimum Wage is just a Political Ploy so Democrats can Gain Votes

You know what a higher minimum wage does?  It makes your work less valuable.  The more we pay unskilled people the smaller the income disparity gets.  And the closer skilled workers get to unskilled pay.  When there is no gap there will be no one doing the harder jobs.  Because when a janitor can earn what a doctor can earn people will want to be janitors instead of doctors.  Because it’s easier.

Raising the minimum wage is just a political ploy.  So Democrats can gain votes.  Because a higher minimum wage favors the young.  And organized labor.  Two large Democrat constituencies.  The young get more for doing less.  And have no reason NOT to stay ignorant.  Keeping them loyal Democrat voters for the indefinite future.  Whereas unions don’t have to compete against lower wages.  And without any wage competition they can enjoy the high wages the lack of competition gives.

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If it weren’t for High Labor and Regulatory Costs there would be no need for Currency Manipulation

Posted by PITHOCRATES - October 2nd, 2011

Minimum Wage Earners only become Valuable after Costly on the Job Training

Minimum wage jobs are entry level jobs.  And they’re starting to get that in the UK (see Minimum wage harming job opportunities for young by Richard Tyler and James Kirkup posted 10/2/2011 on The Telegraph).

Firms may be reluctant to create jobs by recruiting inexperienced staff because they are put off by the increased wage bill, the Low Pay Commission has suggested.

The Commission’s intervention comes amid calls from businesses for minsters to freeze or even cut the rate to enable more young people to find work…

Official figures last month showed that almost 1 million of the 2.5 million people officially counted as unemployed in Britain are aged between 16 and 24.

Almost 220,000 have been out of work for more than a year and some economists fear a “lost generation” of young people who never learn the habits of work and face a lifelong struggle ever to find employment…

“The concern is that the current rate is discouraging some employees from taking on young people and giving them a chance to get into the workplace,” he said. “Some companies are finding the rate is a real problem.”

The New England Patriots pay Tom Brady more money than the Detroit Lions pay Mathew Stafford.  Stafford was the number one draft pick.  Brady wasn’t.  But Brady has 3 Super Bowl rings.  Stafford doesn’t have one.  Yet.  He may have one soon, though.  He’s having a very good season.  Undefeated through 4 weeks.  But Brady is better.  Because of his 3 Super Bowl rings.  And his experience.  It’s that experience that makes him worth more.

What’s true for quarterbacks in the NFL is true for workers everywhere.  Experience makes a worker worth more to an employer.  Inexperienced workers are worth less.  So they’re paid less.  Just like in the NFL.

The New England Patriots pay Brady a lot of money.  But they can’t pay everyone that amount of money.  Most players will make less than him.  Just like in the workforce.

Key employees are paid more.  And less critical employees are paid less.  Entry level workers with the least skill and the least experience get paid the least.  These are the minimum wage workers.  Who are just starting their working careers.  Most of who are grateful for the work experience.   Because they know if they show ability they can move up.  Gain more experience.  And earn more as they become more valuable to their employer.  Or to their employer’s competitor.

So of course employers oppose high minimum wages.  Because minimum wage earners only become valuable after costly on the job training.  That’s why they’re paid the least.  They come in with nothing.  And don’t provide any value until the employer gives them value through training.  Mentorship.  And experience.

If you Protect your Markets too much from Imports you will Hurt your own Export Markets

Costs are costs.  And labor costs are some of the more expensive costs.  Because there are a lot of other costs attached to wages.  They add up.  And often are a percentage of an employee’s wages.  The higher the wage, the higher these other costs.  Which makes it harder for a business to be competitive.  And in today’s competitive global economy, nations will help their businesses be competitive any way they can.  To try and make up for all those onerous regulations they impose on their businesses (see One more such victory posted 10/1/2011 on The Economist).

A YEAR ago Brazil’s finance minister, Guido Mantega, declared that the world had entered into a “currency war”. He worried that in a depressed global economy, without enough spending to go around, countries would sally forth and grab a bit of extra demand for themselves by weakening their currencies. The dollar, for example, fell by 11% against Brazil’s real in the year to August 2011, much to the chagrin of Brazil’s manufacturers. Like other emerging economies it fought back by imposing taxes and other restrictions on foreign purchases of local securities…

A cheaper real, zloty and rupee will help emerging economies win a bigger share of global spending. But that is small consolation if global spending declines…

Falling export orders was one of the complaints voiced by Chinese manufacturers in a preliminary survey of purchasing managers published by HSBC last week.

Yes, a cheaper currency gives you an advantage.  So a nation wants it.  But so do other nations.  And what’s more, these other nations don’t want your nation to have a cheap currency.  Because a cheap currency means more exports.

But a currency war is a double edged sword.  If you protect your markets too much from imports you will hurt your own export markets.  Yeah, you may succeed in having a cheap currency but little good that will do if your primary export market slaps a punitive tariff on everything you sell there.

And then there’s the danger of releasing the inflation genie from its bottle.  If you devalue your currency too much your own manufacturing costs will rise.  It’ll take more dollars to buy the stuff you need to manufacture the things you sell.  Which means you’ll have to raise prices.  And anyone who buys from you will have to raise their prices.  And so on until this inflation ends in a recession.  Which will slash overall consumer spending.  Making any win in a currency war a hollow one.

The Senate Bill to Punish China for Currency Manipulation is nothing more than Pandering to a Recession-Weary America

So rational thinking bets against any currency war.  Or antagonizing any trade relationships.  Of course, in an election cycle, rational takes a back seat to winning an election (see Senators court 2012 voters with China currency bill by Doug Palmer posted 10/2/2011 on Reuters).

For lawmakers eyeing their re-election prospects next year, this week provides a chance to show they mean business about cracking down on China’s currency practices and returning jobs to America…

“It is very easy to say that China is the bogeyman,” said Doug Guthrie, dean of business at George Washington University. He said the bill would do little to help U.S. jobs and would raise U.S. import costs, but said it might yet pass…

The Senate bill is the wrong approach because most of the goods the United States imports from China are no longer made by U.S. industry, Frisbie [president of the U.S.-China Business Council] said.

“I’ve always been of the view that, if the Chinese currency were to appreciate, we’re not going to get those jobs back in the U.S. They will migrate to Indonesia or Vietnam or Bangladesh perhaps Sub-Saharan African — the lowest next lowest cost place,” Lardy [a senior fellow at the Peterson Institute for International Economics] said.

So this Senate bill is nothing more than pandering to a recession-weary America.  It won’t help the economy.  And probably will end up making things worse.  By making life that much more expensive for the American consumer.  By replacing those cheap Chinese goods with almost as cheap goods from Indonesia, Vietnam, Bangladesh or Sub-Saharan Africa.  All the while creating zero American jobs.   It will just make life more difficult.  But it may elect a politician or two.  And really, now, isn’t that what’s really important?  I’m jesting, of course.

Why Exactly is the ‘Made in USA’ Stamped Stuff more Expensive?

Perhaps it isn’t the Chinese.  Or the other emerging economies.  Perhaps it isn’t the weak currencies of our trading partners.  Maybe it’s us.  I mean, why do we play with the currency in the first place?  To make our goods cheaper.

So the issue we should be addressing is why are our goods more expensive in the first place.  Why exactly is the ‘Made in USA’ stamped stuff more expensive?  Higher labor and regulatory costs.  Such as the minimum wage.  And the hundreds of other costly regulations American businesses have to comply with.  Remove these and America can be competitive again.  With anyone.  Anywhere.  And in any industry.

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