Two Burger Trucks

So Seattle just passed a $15/hr minimum wage and my question is, are people really that stupid?

I’m not talking about understanding the economics of price floors, or shortages, dis-equilibria, or any complicated theory on the voter side. I’m saying that aside from all of that, you have to be working with the assumption that employers and employees are GARGANTUAN IDIOTS to think that a minimum wage is anything but nonsense.

Maybe a little parable would help… This isn’t about detailed economics, it’s about extremely simple small business finance.

A STORY OF TWO BURGER TRUCKS:

Bob and I used to own two comparable burger food trucks. Both of our burgers were really good, and we found over time that at $5/burger we had solid lines from 11am to 11pm everyday. The only restraint on our total income was how many burgers we could make during those 12 hours, and what determined our “profit” was that total minus the cost of ingredients and the wage we paid to the cook. Continue reading

Twittering About Minimum Wage

@yipeedog I guess since higher wages hurt the economy, you wouldn’t mind giving up most of your paycheck.”

This lovely note was on my Twitter feed this morning in reply to this article – A Higher Minimum Wage Harms the Economy http://t.co/If1KpAX5Me. I repost it here because it is absolutely representative of the devolution and conclusion of every recent discussion I have had regarding minimum wage laws (and the prospect of a Federal increase in the same).

Each of these exchanges follow a fairly similar track.

I note that jobs are created when an activity can generate value in excess of the cost of performing the activity. Seems pretty straight forward, an employer will hire if the employee produces net positive revenue after all expenses (wages, benefits, taxes, computer, desk, pens, etc.) are factored in. Thus, if you raise the cost of one of the expense elements you decrease the net revenue (the “marginal value”). It also seems totally reasonable to then conclude that SOME increases will cause the net calculation to turn negative on SOME jobs. Net negative revenue being unsustainable in the real world, employers will have to respond by adjusting their employment structure. Continue reading