Who really ends up paying the cost to raise minimum wage?
Do those receiving an increase in their pay, due to an increase in minimum wage, actually benefit from the pay increase? When we raise minimum wage, are we ultimately hurting the ones we say we want to help?
Asking, “Who really ends up paying the cost?” is a legitimate question. A pay increase is a real cost. It’s not fictional, it’s not imaginary; it’s a real, tangible cost. Someone has to pay for that.
Unlike our national debt, corporations cannot put on blinders and simply say “we’ll deal with that tomorrow.” Unlike our national leaders, corporations cannot print their own money and print their way out of high expenses. The truth is, if some smaller corporations are forced to pay, it might be the end of that company.
When costs increase, it immediately and negatively affects the corporation’s bottom line. One may be saying right now, “So what, we don’t care about the corporation.” But, you should care.
As costs increase, the corporation is now left with a decision to make:
- Do we, the corporation, absorb these costs? Do we simply bit the bullet, so to speak, and suck it up?
- Or, do we pass these costs on to someone else to pay?
Which would you choose?
That’s the question that must be answered. These are real cost; this is not a game of monopoly. Someone must pay. From the corporation’s perspective, that someone will either be them or you.
Here’s how it works, imagine a 3-legged stool:
- The Corporation
- The employee
- The consumer
One or a combination of the three is going to pay for this added cost. Will it be the Corporation? Will it be the employee? Or, will it be you, the consumer?
Studies show a 20/80 rule. Employees pay roughly 20% of the increased wage. So, although they see an increase in cash on their next pay check, they also see a decrease in other parts of their compensation. Reduction in vacation pay, reduction in overtime and healthcare benefits, free parking, free lunches and other benefits go away which once were used to offset lower wages.
Consumers, you and I, pick up the other 80% of the bill to cover the cost to increase wages. We see this increase when our products, at Walmart, goes across the scanner and we suddenly notice that that box of diapers that once cost $8, now costs $10.
When students come into my Corporate Finance class, somewhere within the first week of class I ask, “What is the primary goal of a corporation?” The students give every answer under the sun: minimize costs, maximize profits, increase market share, and on and on they go. The correct answer, however, is “to maximize shareholder’s wealth.” That’s it. This is Corporate Finance 101.
“How do they do that?” How do corporations go about maximizing or increasing shareholder’s wealth? Is it by sucking in and absorbing every cost that comes before them with reckless abandon? Or, by being strategic, prudent, careful, and judicious? It is the latter, I can assure you.
As it relates to raising the minimum wage and who pays for that increase, you can be assured, it is not the corporation who ends up paying. I can attest to this being a fact and not an opinion. During my time in the Wall Street environment, evaluating hundreds of companies, interviewing CEOs and CFOs; as well as, my time in corporate America, itself, it is not the “corporate way” to absorb these costs first. They all look, first, to pass these costs off to someone else to pay. In fact, most corporations have a whole department dedicated to managing this one line item (i.e., salary line-item) on their income statement.
It’s both the employees and you, the consumer, who ultimately ends up paying.
Who does NOT end up paying?
- The rich.
- The constant narrative, we hear by those who are in support of raising minimum wage, is that doing so will ultimately “stick it to the rich.”
- But, that is, most decidedly, not the case. The rich, typically, do not feel this pinch because they don’t typically shop where we shop.
They typically don’t shop at Wal-Mart. They tend to shop at Neimans and Whole Food, where employees are already being paid above minimum wage salaries. So, an increase in the minimum wage does not directly impact them.
Those who are hurt are those we say we’re trying to help. Not only do they pay for a portion of their own pay increase by receiving reduced benefits, but they tend to shop where they work. So they and the middle class, who are the cornerstone of our economy and who also tend to shop at these places, will be hit with the higher prices that were passed on to the consumer.
 Forbes.com “who-really-pays-for-a-higher-minimum-wage-the-workers-and-consumers-not-the-employers”
 Cato, “Policy Analysis, The Negative Effects of Minimum Wage Laws,” http://object.cato.org/sites/cato.org/files/pubs/pdf/PA701.pdf