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Why do we even need minimum wage laws?

[Before you think I'm against minimum wage laws (I'm not) and complain in the comments, read the whole post.]

An article in the Huffington Post points out something that I think should be obvious to all businesspeople, but apparently isn’t. The article is about Costco CEO Craig Jelinek, who recently came out in favor of increasing the federal minimum wage. But for him, paying good wages is just good business:

At Costco, we know that paying employees good wages makes good sense for business. Instead of minimizing wages, we know it’s a lot more profitable in the long term to minimize employee turnover and maximize employee productivity, commitment and loyalty. We support efforts to increase the federal minimum wage.

And indeed, Costco just announced that its profits are up over 36% from the same period a year ago.

Ironically, Costco would be largely unaffected by raising the minimum wage. In 2011, the average Costco worker made around $45,000. And Costco provides health insurance for part- and full-time employees. Compare this to another well-known big box membership store, who famously skimps on health insurance and pays its employees an average of $17,486 per year. So, does paying (much) better salary and benefits pay off? Obviously, Costco isn’t in precisely the same business as Walmart (or its membership store, Sam’s Club), but Costco makes more than $10,000 per employee, while Walmart makes $7,400 per employee. And that’s not counting other benefits, like lower employee turnover and better customer satisfaction by having employees who actually like their job and have been around long enough to know how to do it.

Other companies (including Starbucks) have figured this out. Keeping your employees happy and healthy leads to profits. Google is another example of a company that figured out that providing really good benefits to your employees provides even better returns in increased productivity.

I work in the computer industry (including as a CEO and starting multiple companies) and I know that the most important thing you can do is hire the best talent and make them happy. Studies have shown that good programmers can be more than an order of magnitude more productive than their peers. Recruiting and keeping these people can not just increase profits, but make the difference between a successful company and failure.

But as long as our country is obsessed with cost cutting and short term profits, we will need minimum wage laws. It is time to raise the minimum wage. Not just because it is the right thing to do, but because it is good for business.

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25 Comments

  1. Richard wrote:

    Well said.

    We need to support companies that are doing good by their employees (and have great products) and pull support from companies who aren’t and don’t.

    Costco, while far from perfect is a great place to shop (if you have discipline). Kirkland products are excellent.

    King Arthur flour is a great product and the company does profit sharing with employees.

    Patagonia makes excellent products and also does profit sharing with employees.

    We need to keep track of these companies and spread the word.

    Wednesday, March 13, 2013 at 10:04 am | Permalink
  2. PatriotSGT wrote:

    Ok I have several points to make, bare with me.
    There should not be one minimum wage. There should be 2. One that is lower like the current rate and one that is higher like the proposed rate. The reason I think this is there are different types of minimum wage earners; those who are getting their first job at the local sub shop and are dependents on someones tax return. Many of these jobs are temporary, part time and not a career path. Having run small service oriented businesses like restaurants and janitorial services and having worked for them as a high school kid, we need lots of these type jobs and kids need them too. Otherwise, mom and dad have to shell out for burger nite, or the latest sunglasses that kids ought to be able to buy on their own. Raising the minimum wage for everyone will eliminate these entry level, temporary, short term, part time jobs. It is a fact of business and while i was managing those types of establishments, every time minimum wage went up, a bus boy or dishwasher got less hours and had to do more work or one of his buddies lost a job. So keep a lower minimum wage right where it is today and give more kids jobs.

    Now if you’ve been working already and over 18 and you are only making minimum wage it’s likely that you’ve had something to do with that for precicely the reason stated above. My permanent full time employees at the same types of establishments did not make minimum wage, if they came to work, did their job and contributed to the businesses success. They were paid more, because happy productive workers are in demand and you needed to keep them satified with their earnings to keep them from going to work for the competition. Thats a fact of all business life unless you work in a town with only 1 source of employment like the mining towns where you got company tokens as pay that could only be spent at the company store, (note not legal any more). If there is anyone who has a good work history in this country that is only making minimum wage I’d like to hear from them. If you’ve been workng somewhere for 1 plus years and been to work every scheduled day and done your best to meet the requirements of the job and are only making minimum wage you are either lying or need to walk accross the street and work for the competition.

    I cannot figure out exactly who would benefit. If your 28 married with 2 kids and only making minimum wage that means this is either your first job, or you had no experience you could use to get the job because you screwed up before. The ripple effect in business that as the min wage rises so do the wages of everyone else, or in the case of small business that uses alot of summer, short term, part time temporary first time workers those already making more then minimum wage will now be earning the same as those they are training. Even when I was hired at such a job as a 16 yr old, within 4 months I got my forst raise. I realized that my hard work could benefit me and indeed my wage was increased regularly as my ability, experience and talent grew as well. In my mind this is as it should be.

    Yes it’s great politics to raise the minimum wage and increases the tax base, it a easy sell to constituents, but is it really necessary? Somebody give me an actual example where an experienced employee with a good work history and some kind of skills is only making minimum wage and I’ll listen.

    Wednesday, March 13, 2013 at 11:15 am | Permalink
  3. Michael wrote:

    “those who are getting their first job at the local sub shop and are dependents on someones tax return.” So, you are openly advocating the legalized exploitation of child labor? In fact, you are incentivizing companies to do so because they can pay teenagers less money than an adult who has no advanced skills. The net effect of this would be increasingly long-term unemployment for unskilled workers.

    The minimum wage is called “minimum” for a reason. It is the lowest legal wage that can be given to the least skilled, least experienced workers in our society. It does not go to “experienced employee[s] with a good work history and some kind of skills.” It is designed to set a rock-bottom wage that we are willing, as a society, to accept for those at the lowest rungs of society. They are either experienced, have a history of problems (e.g., jail time, delinquency), have no kind of skills, or are some combination of the three. It doesn’t mean you have to keep them on as employees if they aren’t working out. It’s your business. You can fire them. However, if you hire someone who is inherently vulnerable and powerless and want to pay them below minimum wage, you are immorally exploiting (and profiting) from their labor.

    To go back to IK’s original point, there is a problem with comparing Costco et al. with the likes of Walmart. Costco strives for efficiency. Less waste (lower turnover) for good enough profits. Walmart doesn’t give a damn about efficiency. Walmart cares about sheer, brute force as a means of maximizing shareholder profits. It’s about increasing scale. If I can open two stores that give me $500K each, I end up with more money than one store that gives me $750K. Sure, the latter is more efficient, has happier employees, happier customers, lower turnover, etc. But the former approach gives me more net profit. From an economic standpoint, a rational actor would always choose the two stores. It is irrational to choose the more efficient approach.

    …that is, if your utility analysis is based solely on finances. However, if your net utility also incorporates a sense of community, a sense of ethics (based on some foundation other than ethical egoism…though utilitarianism can also be a problem), a desire for a good reputation, etc., the economic analysis changes. The problem with our society is that the objectivists and free market zealots that argue only financial-based analyses are sound have had far too much influence.

    Wednesday, March 13, 2013 at 11:42 am | Permalink
  4. Max wrote:

    There’s nothing “ironic” about Costco supporting the minimum wage – it can only help them, since it doesn’t affect Costco but might affect Costco’s competitors. In general, when a business supports something, it’s because of narrow self-interest, the almighty dollar, and certainly not because of social conscience!

    Wednesday, March 13, 2013 at 2:13 pm | Permalink
  5. Iron Knee wrote:

    PSgt, small businesses with revenues under half a million dollars (and not engaged in interstate commerce) are already exempt from federal minimum wage laws.

    Wednesday, March 13, 2013 at 2:43 pm | Permalink
  6. Bard wrote:

    I’ve worked on and off in retail for the last decade or more. My last job was working at a Kohl’s. It was seasonal so I worked hard to show them that it would be a good idea to keep me around. They decided to keep me around, and then proceeded to give me 4 hours of work a week (which at nearly minimum wage came out to 28 bucks a week). I immediately started looking around and got hired at Lowe’s for 10 bucks an hour and nearly full time. I’d do anything for my bosses there, and I’m seasonal again so I’m trying to work extra hard to get a full time job.

    Wednesday, March 13, 2013 at 3:28 pm | Permalink
  7. oregonbird wrote:

    I’d just like to point out that if your profits go up 36%, and your beginning wages are *just* over minimum, and you aren’t raising those wages by at least 10%, then you REMAIN part of the problem, the saintly halo and benevolent speeches aside.

    Any company making huge profits that don’t go back to the workers has nothing to say that isn’t pure hypocracy.

    Wednesday, March 13, 2013 at 5:45 pm | Permalink
  8. PatriotSGT wrote:

    IK I’m not sure if that’s always or currently is the law, but up until about 1997 when I was still an employer the federal min wage applied to all businesses including those under the 500k in revenue, at least in my state.

    Bard, I’m glad to see that and it is exactly as it should be. Kohl’s lost a good employee and Lowes gained one. Their business will improve and hopefully your wages with it.

    Really Michael, encouraging a 16-20 year old to develop the skill set of earning a paycheck is child exploitation? What world do you live in? In my state 16 yr olds are not “required” to attend school and I live in a very blue state. How do you propose they feed themselves or pay for their cell phone? Who advocated paying workers below min wage, certainly not me.

    Oregonbird, I agree, and good companies do reward employees that help them be successful. Those that don’t should be very afraid of losing those valuable assets and those valuable employees should sell their skills to the highest bidder.

    Wednesday, March 13, 2013 at 7:33 pm | Permalink
  9. Iron Knee wrote:

    PSgt, I’m talking about the federal law. Many states have their own minimum wage law that may be tighter.

    I am intrigued by having an exception to the minimum wage law for (young) people who are dependents on someone’s tax return. But I’m not sure how to do that without encouraging companies to fire more expensive workers in order to hire kids.

    Wednesday, March 13, 2013 at 9:35 pm | Permalink
  10. Anonymous wrote:

    Another point to PSgt’s issue is that sometimes cheap child labor can replace an adult. I agree that kids should earn less, but let them do it mowing lawns and such. They shouldn’t compete with adults for minimum wage jobs.

    Wednesday, March 13, 2013 at 10:16 pm | Permalink
  11. PatriotSGT wrote:

    I understand that temptation to say companies would replace adults in the workplace with kids. But I don’t think that’s as much an issue. Yeah they’ll get a few more of the McDonalds jobs, but not the managers job, or shift leader. Trust me those businesses don’t want a 16 yr old counting their deposits or running their business, that’s for more experienced employees, the adults. I’m sure their will be some business that thinks it’s a good idea, but it would be some unskilled position, and sooner or later they’d pay the price in lost revenues and realize their mistake. Kids are great in some positions and it helps them develop skill sets and gives them a sense of pride and accomplishment and of learning to be an adult. They no more want to flip burgers or wash dishes for eternity then me or you, but it gets them a lower pressure start.

    Big desirable companies do something different all the time using interns. They pay the kids nothing just work for the experience. I know they sometimes offer them some scholarship(and take the tax deduction), but many work for free. And that makes sense. Bring in a kid, for free, and give them some experience in a job they otherwise would have no shot at getting. The kids get an invaluable opportunity and the employers minimize their risk in return. Nobody seems worried that interns will replace permanent workers at law firms, tech businesses, research labs, government and the like. Why, simple, the interns don’t want to work for free forever either.

    When I ran a particular restaurant in the late 80′s where there was competition all around me for employees I had to be the best to be successful. Sure if you had no previous job experience and I had an opening for a busboy or dishwasher you could get the job for minimum wage. But when I had a cook, kitchen prep or other more critical opening I first looked at existing employees, (known commodities) then to experienced outsiders. I had to offer more to get those types of employees and I had some of the highest paid staff in the chain. The corporation was skeptical, but when we turned the place around and became one of the best in both sales and profit increases they said great. But I still needed some unskilled first time job seekers to make the profit margins and they needed an opportunity to gain experience and move up. I had a vested interest in seeing them move up, because the restaurant 100 yds to my left and right would crush me if I didn’t, and their employees wanted to work for me.

    Thursday, March 14, 2013 at 6:50 am | Permalink
  12. Michael wrote:

    The definition of exploitation is: “1. use or utilization, especially for profit; 2. selfish utilization…” [http://dictionary.reference.com/browse/exploitation].

    Note that the definition does not say that the person being exploited does not benefit, as well. They can earn a paycheck, they can gain skills, etc. The fact that they benefit does not automatically mean there is no exploitation. Rather, it simply states that the person doing the exploiting benefits by the use of someone else. In the sociological terms, it typically implies that there is a power imbalance, the person doing the exploiting has the freedom of choice, while the person being exploited has limited options.

    If you want to pay a 17-year-old less money than a 21-year-old for doing the same job, that is exploitation. The choice to hire the 17-year-old is selfish utilization for the sake of your own profit (you are paying less for the same work, which means you net more). If you meet the definition of exploitation and the person your exploiting is a child (and 16- and 17-year-olds are still children), well, that’s pretty much a textbook definition of child exploitation. Sure, that kid is learning some skills and getting a paycheck, but they are still being exploited.

    Like most teens where I grew up, I worked in various food service jobs as a teen. Moreover, I (like many others in my area) didn’t start when we were 17; a lot of us started when we were 14 or 15. I saw plenty of 17-, 18-, and 19-year-olds who were shift managers, counted money, etc. I saw plenty that continued to work there into their mid-twenties. They were working full-time while going to school part-time, the pay was good enough and the stress was low enough, that it was worth it. If there were two minimum wages as you described, their employer would be required by law to give them a possibly large pay increase (say, $2/hour). At that point, the incentives set up by the law would encourage the employer to fire the 21-year-old, promote a 19-year-old, and hire a new 15- or 16-year-old to train. As I said, there were plenty of teens that were good enough and responsible enough to do that kind of work.

    Thursday, March 14, 2013 at 10:38 am | Permalink
  13. Michael wrote:

    By the way, in my original post, the first and second paragraphs were separate paragraphs for a reason. The first paragraph was specifically about your proposed two-level minimum wage approach. It incentivizes undesirable behavior.

    The second paragraph was not about your two-level approach anymore. It was about the very notion of minimum wage. You seem to have taken offense to the last sentence in particular, which reads, “if you [...] want to pay them below minimum wage, you are immorally exploiting (and profiting) from their labor.” In a logic class, this is called a conditional proposition. If you are not trying to pay people below minimum wage, then the sentence doesn’t apply to you.

    Also, note that here I added the term “immorally.” As I said in my previous post, “exploitation” does not necessarily mean you are evil and the person being exploited sees no benefit. However, if someone (I’ll avoid the term “you,” since you seem to be taking it as a personal accusation) wants to pay below minimum wage to increase their profit even more, we, as a society, can call that action immoral because it goes against the very notion of minimum.

    Thursday, March 14, 2013 at 10:47 am | Permalink
  14. TJ wrote:

    Michael, how do you propose we address the problem of teen unemployment then?

    Thursday, March 14, 2013 at 11:10 am | Permalink
  15. TJ wrote:

    It’s easy to get on your high horse and say a minimum is a a minimum, but teen unemployment is a real world problem that is only going to get worse if the minimum wage is raised.

    http://bigstory.ap.org/article/more-seven-10-us-teens-jobless-summer
    http://www.frumforum.com/solving-teen-unemployment-problem/
    http://www.wgbh.org/articles/index.cfm?tempid=5678
    http://tudecidesmedia.com/news-rising-summer-teen-unemployment-a-growing-problem-for-our-nation-p2081-128.htm

    Thursday, March 14, 2013 at 11:14 am | Permalink
  16. Dan wrote:

    Henry Ford realized it payed to pay more over 100 years ago went he started paying his workers an unheard of wage of $5 per week. He was called a socialist for doing so, but he knew if his employees could afford the cars they built he would sell more. This was part of a social contract that you may read about in “Aftershock” by Prof Reich.
    Supply side economics is a lie. Death to the Plutocracy! End corporate personhood now!

    Thursday, March 14, 2013 at 2:24 pm | Permalink
  17. PatriotSGT wrote:

    Michael- I get child exploitation, but in your description (use or utilization, especially for profit)then every employer including the government is exploiting workers albeit the government doesn’t make a profit but does get services for a wage. In that context then your whole argument is a fallacy. Even if we traded work for goods it could be fit into that definition.
    I’m not against min wage, but I am against arbitrarily raising it by 38% over 2 1/2 years. That increase will either A) put lots of small business out of business or B) eliminate quite a few jobs or C) cause price increases for everyone
    First time job seekers are not competing for adult jobs and I doubt there are many adults who want to life guard at the local pool for 20hrs a week during the summer for min wage, so again your point that children are steeling good jobs from adults is not accurate.
    As to the 14-15 yr olds yes they can work , but on a very limited basis and for most employers it’s hard to hire them due to restrictions, but if one wants to work he should be allowed. Heck I had a paper route when I was 11.
    And I agree we should as a society not allow business to get away with paying less then min wage, but I never advocated that in the first place. I think it’s perfectly reasonable to have a 2 tier min wage, although I’m sure it won’t be doable in this political atmosphere.
    Question, if you want the min wage to go up, would you be willing to take a 38% pay cut over the next 2 years so others can have a pay raise, or not lose a job or to keep prices down? That could in certain business become an option unintended by the advocates of raising the rate.
    Great discussion by the way from all.

    Thursday, March 14, 2013 at 3:40 pm | Permalink
  18. Iron Knee wrote:

    Yeah, good discussion.

    BTW, I *have* taken a significant pay cut in order to pay my engineers more. What’s ironic about this is that my actions were viewed with shock, but they weren’t (entirely) altruistic. The company did well, and we sold it, and I made a lot of money. What is interesting is that what I did was only shocking if you have a short attention span. Unfortunately, that describes many people in business today. They give themselves big pay raises and cut pay for their labor force, but they don’t worry because when the company gets rid of them, they have a golden parachute so they don’t care. And that pisses me off, because it is what is destroying American business — short term selfishness and greed.

    Thursday, March 14, 2013 at 6:41 pm | Permalink
  19. oregonbird wrote:

    I know of at least three states that want ‘child labor pay’ to apply to anyone 21 years and younger. Because anyone that young really doesn’t deserve or need a day’s wage.

    Except the young couple who married out of high school. Or the college student whose parents are divorced and unemployed, due to the economy, so she’s on her own. Or the single mother, abandoned by the single father, who has to pay childcare. My grandparents married at 15 and 19, and both were working adult jobs — because EVERY job is an adult job.

    Thursday, March 14, 2013 at 9:25 pm | Permalink
  20. Anonymous wrote:

    Henry Ford may have paid his people well, but he also exploited them. He invaded their private lives, they were not allowed to do many things on their own time. He also expected them to be available beyond what we would accept as reasonable. He did not do it for his employees.

    Thursday, March 14, 2013 at 9:35 pm | Permalink
  21. Dan wrote:

    That’s my point, Henry Ford was a bastard, but he paid his employees a good wage. Iron Knee is absolutely correct, too many focus on the short term and their own well being. Part of that is the low tax rates. The last CEO of Maytag when on a “cost cutting” binge,closing factories and cutting the work force. In his 2 years the stock’s price was cut in half, and the company was taken over by Whirlpool as he gently drifted to the ground with his golden parachute. His previous job had been with Whirlpool.
    If we really want to help employees, and at the same time business, then a one payer or socialized health care system is needed. It is after all a free market solution- a free market will always find the most efficient allocation of resources. I learned that in Econ 101.

    Friday, March 15, 2013 at 7:40 am | Permalink
  22. Michael wrote:

    TJ, I agree that teen unemployment is a problem. Hell, ADULT unemployment is a problem right now. However, there is a lot of evidence to suggest that modest raises in the minimum wage have little or no effect on employment. See http://www.cepr.net/documents/publications/min-wage-2013-02.pdf.

    Dan, you’re missing a subtle disclaimer that goes along with your Econ 101 claim. Unfortunately, it often gets swept aside in intro courses as a trivial detail distracting from the larger picture. Your statement should be, “a free market will always find the most efficient allocation of resources, given the assumptions of perfect information for all and rational actors.” These assumptions tend to break down in the real world (which is why socialized health care tends to be more efficient than free market versions). I recommend looking at the work of Joseph Stiglitz (who specializes in the effect of information asymmetry) and the book The Myth of the Rational Market by Justin Fox.

    Friday, March 15, 2013 at 8:25 am | Permalink
  23. Iron Knee wrote:

    Dan, I totally agree! If we have to depend on the largess of CEOs in order to have decent salaries and benefits for employees then we are lost. Instead, the case has to be made that it is good for business. Henry Ford might have been a right bastard, but he was smart enough to figure out that he would sell more cars if people earned enough money to buy them (rather than throwing the same money at executives or shareholders and waiting for it to “trickle down”).

    I can’t believe that shareholders allow executives to get “golden parachutes”, or for that matter any compensation not directly tied to company performance.

    Friday, March 15, 2013 at 11:59 am | Permalink
  24. PatriotSGT wrote:

    IK – I agree on the evils of profit makers versus business builders. That’s not to say if someone builds a great business and spends a lifetime nurturing and growing their business they shouldn’t stand to reap some rewards. But I bet even those CEO’s only take what the really need and leave the rest to businesses next generation.

    Shareholders have too little say. I may have said this before, but to all our legal eagles and financial wizards out there is there a way to create a shareholder union? Some entity that could pool the shares of smaller stake holders together to create a more meaningful voice and actually have some say in what a corporation does like in the case of golden parachutes.

    Saturday, March 16, 2013 at 11:28 am | Permalink
  25. Anonymous wrote:

    I think the big problem with shareholder representation is that many holding companies have significant shares in many companies. They get their people on the boards of companies, and get their cuts as boardmembers, then vote against their own interests as shareholders.

    Sunday, March 17, 2013 at 9:36 am | Permalink