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Minimum Wage Analysis

Posted On: 2006-09-06
Length: 32.53

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Well hello everybody this is Johannes Ernharth and welcome to tonight's edition of Vigilant Investor via streamcast. If you are interested in calling in and asking questions or being part of the conversation generally, we encourage you all to visit Talk Shoe's web site straight away and download their software which enables you to [...] chatting as well as [...] for a [...] questions if you have any [...] of course you've got to dial on in if you have any verbal questions that you want [...] instructions are all there. We encourage you to do that and definitely hop on it. Well, today's show is called Minimum Wage, Good, Bad or Just Ugly? And, well if any of you guys have been reading the Vigilant Investor site you know that we're no big fans of government meddling, we just find that it tends to cause all sorts of problems out there. Gradually it tends to make things dislocate where they would otherwise [...] minimum wage is one of those thing that we think is a [...] broader problem, it's one of many small little things that build [...] really ought to be. And [...] start something along the lines of a minimum wage [...] doesn't seem to cause too many problems over time, it can build and build [...] really not all that great of things, we're going to get into that today [...] Before then we just want to hit on a couple of key things that we've seen in the news this [...] typically you're not going to see [...] on our list today is CPA's are pessimistic about the economy. It turns out the more than half [...] Certified Public Accountants pulled [...] many of those are CFO's and control [...] turns out they're pessimistic about the state of the U.S. economy [...] old [...] survey. Last time that they [...] sort of mirrors the other recent statistics [...] up what we already are seeing [...] it's a, you know one of those, just another one of the things piling on and [...] investor, you know that the broader theme of [...] there or journal [...] hope people tie together these loose ends [...] you'll find articles out there throughout the [...] nobody is really connecting them together [...] generally when you flip on your MSN [...] overly bullish bias towards what [...] economy and what's [...] otherwise until usually it's too late and then everybody [...] prior to that everybody was just, you know [...] everybody's interviewing the [...] nobody's bothering to [...] you put the odd person on here and [...] bullish [...] again if the CPA is pessimistic about the economy, that's one [...] elsewhere the housing depreciation rate has been [...] out there basically home prices [...] quarter by the slowest rate [...] total depreciation rate of about 1.1 [...] just another [...] housing bubble. But still, you know [...] always move on to that, 10 percent higher than the 3 month end of June [...] that really doesn't give me a [...] prices are still clipping along at a high [...] rate [...] the harder they fall we've posted a graph [...] a survey done by Robert [...] use it as a steady [...] in prices pretty much from [...] in flux enabled by the U.S Government Federal Reserve [...] the prices up if demand increases [...] money available [...] credit available of course that's [...] policy of inflation is that [...] inflation is just going to be something that steadily applies evenly across the entire economy and that's some of the fiction or maybe the mythology that we get from CPI which is the official [...] and from 19 [...] pretty much plateaus by the mid 50's [...] market back to it's prior level and then [...] current boom started in the mid 90's, and that pretty much corresponds [...] peddle to the metal that we've seen [...] credit again [...] going from about one hundred and [...] that's a bit of a tangent there but it's [...] crucial to look at [...] housing appreciation. And when we take a look at [...] flowing [...] that's one of the [...] you got to do some of those things. But, moving on last week [...] investor service [...] has risen, that's according to [...] give you an idea of how quickly the [...] growth rate was falling at about 27 percent annually [...] based on 11 months we've seen a [...] sharp, a very, very sharp deterioration [...] and again, that's just another one of those [...] months ago with people the overwhelming majority [...] for the current [...] we shall see but again [...] our final recap [...] second quarter prime [...] activity [...] basically U.S. [...] invested you're basically getting inflationary [...] simultaneously with [...] economy [...] and [...] big believers that [...] basically never really emerged from the [2001 recession] has been a lot [...] that's just based on some of the [...] and it's a standard measure for growth. And what's happened over the last 30 years is [...] who knows. We would argue political expediency [...] GDP, you know, makes things look good [...] try to calculate GDP [...] come up with some pretty decent [...] right now if you go back and [...] we are in a recession by [...] quality of a particular good, even if [...] this year as you did last year the [...] actually shows [...] not exactly how it goes but [...] the gist of what's generally [...] all that said, you know [...] keeping in line with where [...] connecting these dots we think that the economy is definitely not healthy, that debt and [...] credit bubble has caused a lot of problems [...] Next to that, we now have big calls for raising the minimum wage. So [...] today. Now [...] currently I don't see anybody who is [...] is, please make sure to [...] part of the show just like that but [...] Moving on to our [...] well it seems like every couple of years, especially around election time [...] Bush [...] pressure from [...] mostly the democrats trying [...] for not having voted to raise the minimum wage [...] calls for taking it up anywhere [...] Pennsylvania [...] based and a lot of our [...] is that, you know, we need to get [...] those [...] generally you're collec -[...] wage [...] they want to take it up and be [...] competitive [...] what often is missed is [...] when you go up and raise the minimum wage. Now most economists out there who aren't driving a specific agenda for politics [...] will come clean and tell you, "look, there really is a [...] effect on low wage workers are more [...] accurately described [...] low skilled workers, people who don't come to the employment table with a whole lot to offer. Those unskilled workers basically, you know [...] capable of a certain amount of output. And the argument holds that well these people need to [...] apparently still [...] minimum amount for them to be able to live and therefore they need to [...] gist is that when you start cranking up the minimum wage is you actually start [...] pretty straight forward economic principle [...] saying that, "oh boy, by raising the minimum wage you really didn't cost any jobs but oftentimes [...] purely by lost jobs or people who are on the unemployment side of things you're not necessarily [...] look at it as lost hours because what ends up happening is that a lot of people [...] Basically what happens is that, you know, government forcibly raises the employment [...] what you're doing, the labor can barely cover it's costs relative to what an employer is able to charge [...] number two, you know everybody has a, you know [...] that comment, maybe I'm getting a little bit ahead of myself, what's missed in this whole thing is that in the end it's not the employers who are being forced to pay for these increases [...] they end up raising the minimum wage, who ends up paying for the minimum wage increase? [...] employers are going to have to build that cost into the price of their goods [...] what's going to happen is the price of the good is going to get passed on to the consumer in the end. So what it ends up being is a tax on consumers in the U.S. when we raise the [...] those unskilled workers. So that's one factor that's [...] basically comes out of the hide of everybody else out there and [...] you know as long as we're on that tangent it should also be considered that if you are a low wage earner yourself [...] you might be getting paid more for the minimum wage if you [maintain] your job [...] a lot of people are getting their hours cut back of losing their job [...] But if you manage to be one of the lucky few who keep their job, prices begin adjusting upwards, so did you really get that big of a gain? Well, ordinarily it does out pay some of the price increase, but also came at the expense [...] economy all the [...] and it also came at the expense of other low [...] workers who have had [...] and their jobs [...] together. But, I mean really, what's also oftentimes missed is that, you know, we talk about a minimum wage people say, "you know, what's the big deal, you know, right now you're paying $5.15 an hour that's not a whole heck of a lot and what's, you know, the big deal if we take that up to $6.15, $6.50 or $6.75 that's not a terribly explosive cost." But, what's oftentimes missed with [...] they're trying to gauge is the minimum wage [...] are additional costs for an employer to have a minimum wage person on board [...] keep in mind these are unskilled workers. The average person out there does not earn minimum wage. The average person out there who [...] being, becoming valuable to an employer, their getting paid well above the minimum wage. But minimum wage tends to be for people who just don't have skills, oftentimes it's teenagers and [...] or you know, people in their first jobs. Bottom line though is that you know [...] $5.15 an hour currently is only a part of the cost for an employee. You've got to figure that the employer has to put in an initial [...] 7.65 percent into a Social Security account [...] don't often do that but, it's amazing how many people [...] years doing [...] corporations rolling [...] asked how many people knew that their employer was also withholding an additional amount that you know, that basically doubles what they were seeing on their pay stub for being withheld for Social Security, most people didn't know that. They see the 7.6 percent or so being withheld on their own pay stub but they didn't realized the cost of hiring, another 7.65 percent that the employer has to withhold, not even withhold, the employer has to set aside as a cost for that employee. So that's basic overhead right there is 7.65 [percent] that plus another two, the 10 percent for unemployment compensation accounts plus, you know, depending on the employer, anywhere from 10 percent to 100 percent for workmen's compensation. These, you know, employees who are injured in the [...] work. And that varies from state to state but the levies generally when you add them all together, pretty much doubled the employment costs [...] many occupations. That's not for all of them but for a lot of them. Now, we consider that, the total, you know, we total that up the fringe costs can be another 5 dollars added on. Currently, you're looking at about a 10 dollars 15 cents, you know, upwards of 11 dollars to have a minimum wage employee. Now, you've got to look at it from the standpoint of the employer; are they actually able to get out of an unskilled employee 11 dollars worth or 10 dollars worth of [...] of service. That, you know is a big question because, you know, you have to take a look at what that service has produced, what it turn can the employer sell, whatever that service was, out in the open market once it's packaged together into a product or service. The bottom line is that anybody who can't render anywhere from 10 to 11 dollars a service really becomes non-productive to the employer. They become extra cost, they become baggage and they become really a drag on the overall business. So, you know that's a really important factor to understand. And it's not terrible complicated to understand, but it should be looked at, you know, from the standpoint of, you know what's that going to do to an employer in terms of their competitiveness on a global scale. What most players end up doing is they look for alternatives to higher costs of labor at that end of the labor scale, okay? So, in other words, if they can find a robot or another piece of machinery that ends up costing less than $10.95 an hour, pretty quickly you're going to find that that employees job is going to be replaced with that piece of machinery. [...] happen time and time again over the years, but most people don't recognize that what you're really doing is that when you artificially apply this minimum wage onto an economy, the economy is not going to just sit there blindly and take it. The economy is going to adjust to it. And that means that entrepreneurs out there are going to say, "holy smokes, you know, these people are now being saddled with extra costs. You know what, this gadget that I invented over here, if I tweak it a certain way it can start doing this job of these people," and end up providing a value to an employer and therefore make them more profitable by enabling them to charge lower prices for the same good. And, therefore they can get more of the market and in the end it becomes more profitable to be an entrepreneur doing whatever they are doing. People forget that when they look at labor. Especially, you know, the pro-labor crowd out there, the big labor crowd that wants you to talk about the intrinsic value of a human and so forth. But, the bottom line is that if an employer cannot sell its products in the market, all that is crap, I mean, it's meaningless in the end. [...] nothing to that employee if his wages get so pricey that it puts that employer out of business. And we've seen that happen to the U.S. auto industry. We've seen that happen to the U.S. steel industry. [...] time and time again, you know, benefits get over promised, wages get over promised and that efficiency and effectiveness on a competitive standpoint goes out the window and minimum wages are really no different than that. And it seems that though the funny thing is, the U.S. economy or at least the U.S. general population seems to understand the foolishness of [...] what happened with the U.S. automotive industry. You don't see a lot of sympathy out there anymore for the steel workers who had 8 weeks off a year, were making, you know in the 70's making you know, well about the average, you know, wage for someone who was doing medial, you know granted hard work and so forth, but well above what the market would have otherwise supported. The bottom line is that it just makes it competitive. So, what have we done with the minimum wage here, we basically have begun driving the low skilled labor out of business. The value that they could have brought to the table is no longer there because the employers cannot afford it. So, like I said before, employers start looking for alternatives, and one of those alternatives is machinery and, you know, granted that machinery might have been on the horizon anyway, but more likely than not it probably would have been, you know down the road by a number of years of not, you know [...] 5, 10 years who knows how long. But the day would have come eventually where technology would have brought that to the table; but what you've done is you have wound the clock forward, it's like you know and economic time machine where you basically drive things ahead by, you know so many months, so many years and force the hand of employers to adopt strategies they wouldn't have adopted until much later, because by forcing the wages up, you make that alternative feasible much sooner than it would have been naturally and on its own. Number two, you begin driving labor offshore, okay? Now we're seeing that happen in the United States for a variety of reasons, but one of those is that our wages are just way too pricey across the spectrum. And your minimum wage is one of the, you know it's the base end of it, but unskilled labor that you need, the economy needs to do certain tasks [...] but making [...] prices go up and immediately employers are going to look for that unskilled labor elsewhere. Believe me, the world is filled with uneducated, unskilled workers. There are, you know [...] call it callous if you will, they really are a dime a dozen out there. You go to China, you go to Indonesia, you've got just these untapped, you know, vast resources of labor ready and willing to work for pennies compared to what people work for in the U.S. and for that matter what the U.S. government will allow them to pay. It's important to understand in that context that the you know $5.15 minimum wage level actually drives a lot of other wages. A lot of contracts are tied to minimum wage when you get into labor agreements, so though the minimum wage is X the particular pay scales will be X plus a certain percentage [...] or a dollar amount above that. So, when you start monkeying with the minimum wage, everybody's wages start going up isn't that nice? But the bottom line is, what you're going again is your hastening the adaptation of the U.S. economy to accommodate alternative to using U.S. labor. And that's not just the minimum wage labor, that's labor across the board. And what we've done in the United States again, and there's really no going back with this one, is by driving up the cost of labor in the U.S. we've basically forced the hand of U.S. employers to in order to remain competitive verses their global competition to seek labor abroad far sooner than they would otherwise. And, if you really think about it, I mean heck, it costs an awful lot to bring in something manufactured in China. You've got to put it on ships, you've got to sail it thousands of miles across the ocean, and you know that's a huge cost. And then there's the adaptation cost where you've got U.S. business models having to integrate into foreign environments. That's, that takes time especially in developing worlds where, you know it's not the easiest thing to get, you know to get the mentality of the locals to shift into a U.S. time type mentality. And, believe me I was in the Peace Corps in Uganda years ago, not years ago, but 10 years ago I spent some time there and I'll tell you what good luck at getting people to do, you know have the mentality that we do in the U.S. about general business. It's amazing how we are more or less groomed I mean compared to people in a lot of the world just by watching television day in and day out we're virtual marketing geniuses relative to everybody else because we're so used to seeing it day in and day out. Just by getting up and working at McDonald's we've learned so much more about employment and how things can function and so forth. Now, granted, there are a lot of cool things, and pretty spectacular cultural things about the lifestyle in Uganda but just the same, people there were very much hand to mouth, throwing seed out into the back yard hoping they would grow and that was their [...] trade for anything. But bottom line, back to the point, we're making [...] much more of a draw for U.S. employers to seek labor abroad despite all the hassles and headaches. And [...] environments that you have for doing business in the third world, or in China for that matter. And yet, also consider things like the political risk, I mean doing business China, this is Red Communist China for goodness sakes. You think about it as being a better business environment than the United States. We really ought to be scratching our heads there, it's like wait a second you know, it's all nice that we can say that they're you know, slave labor and boy they don't pay their people at all but, on the flip side of it think about, you know what, it's more efficient to do business in Red China then it is in the U.S. How does that sound when it comes to manufacturing? A lot of that is simply because an unskilled wage is basically got to be $5.15 an hour arbitrarily, and that starts driving up the costs for everything. And low and behold here we are with a sagging economy, and we have our politicians not pandering around election day trying to, you know not come across as tough guys and being mean to the poor and boy, just you know, what does it matter if we raise the wage by a buck fifty or a buck seventy, who's it really going to hurt, it's, you know, it's good for everybody. You know, the bottom line is what we're going to do is we're just going to be packing in a few more additional nails, the [...] often for the U.S. economy. And again, regular readers, listeners know what I mean by another nail in the coffin. If that seems like an extreme statement, I encourage you to step back and listen to some of our previous Podcasts that you can [...] through Talk Shoe as well as read through our archives. A lot of that material on vigilantinvestor.com is timeless. And even though we're quoting various articles and so forth, oftentimes putting a lot of links in there. Just do searches on minimum wage or do searches on trade wars and so forth to get a feel for where we are [...] Generally speaking, I mean the U.S. economy is facing tremendous headwinds, and most people seem to be totally indifferent to it. You know, they couldn't care less and oh we hear so much from the investment community about just play the averages and over the long run it works out. But, I'll tell you what, if you're playing the averages that's all fine, you better have 60, 80, you know 100 years if those averages smooth out to be. Because the last thing you want to be folks is a retiree this year, next year or the next couple of years in the face of an environment where maybe we have a 25-year period or a 20-year period where the economy severely under performs. And, consequently the U.S equity markets and bond markets end up getting hammered [...] giving you a rate of return that is you know 2, 3, 4 percentage points lower than what you built into your retirement model. Because, I'll tell you what folks, if you plan on retiring on an 8 percent average return and it only turns up 4 percent you're going to find out that your money is going to run out a lot sooner than you expected on that static distribution chart that you might have done on your own on a web site, or maybe you're [...] really got to take a good look at that kind of stuff. In any event, you know that's the minimum wage, I could talk about this stuff for hours and hours and hours but we only have a half hour for this particular topic tonight. And, I want to wrap up with inviting people to tune in; our nights are Wednesdays at 9PM. And again we're looking for people to call on in to the Talk Shoe Hotline and listen to the Vigilant Investor and ask questions and get some dialogue going. That's what we're really looking forward to. And we certainly hope we can encourage you to do that in the future. But all that said our [subscription] is available through our RSS feed, our feed on the Talk Shoe web site. You can also subscribe to us via iTunes and until next week, Wednesday night, 9 o'clock. Everybody take care, this is Johannes Ernharth for the Vigilant Investor, make sure to stop by often and we'll talk to you then. Take care.

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