Committed Democrat: What I’d really like is living wages.
Heathen Republican: So you think the minimum wage is too low and people can’t survive on such a low wage?
CD: Yes. There is enough wealth in this country that we can afford to pay a reasonable wage that anyone can live off of. Companies make enough profit; they can afford to pay a little more to the bottom wage earners.
HR: You’d like the cashier at Taco Bell to make, what, $10 per hour?
CD: More like $12.50.
HR: You’d increase wages by 67%, from $7.50 to $12.50. Okay. But what if the cashier doesn’t provide more than $12.50 worth of value to the Taco Bell every hour?
CD: Whatever. $12.50 is nothing. What’s that, two or three orders per hour? The CEO can afford to pay a little more to the cashier.
HR: Well, let’s say it takes a minimum of four people to keep a Taco Bell open. That’s $50 per hour. Add to that the cost of the food, the lease on the building, the trash service, lights, and water. Do you think it’s possible to sell enough 99 cent tacos to cover all of those costs and increase wages by 67%?
CD: Maybe Taco Bell needs to raise the price of a taco to $1.19 or $1.29. It’s worth it to ensure every person earns a living wage.
HR: Okay, so you want to boost wages by 67% and you think raising prices by 20% or 30% will cover the extra costs? Is that progressive math?
CD: And the rest can come out of the company’s profits, yeah.
HR: Hmm, so now you’ve raised prices by 20%. Do you think customers will feel the price hike? What if they don’t go to Taco Bell as often? Maybe a competitor will undercut them on price and Taco Bells start going out of business.
CD: That can’t happen because all of Taco Bell’s competitors will have to raise prices, too.
HR: And the customers, they won’t feel the price increase? They won’t spend less at Taco Bell after the price goes up?
CD: They all have more money in their pockets now because everyone just got a 67% pay raise, like you said.
HR: Let’s play this out a little bit. Taco Bell gets lettuce and tomatoes from local growers. It buys cheese and ground beef from ranchers and dairies. It buys packaging materials from distributors. The farmer, rancher, and distributor also have to give 67% pay raises and have to increase their prices, too.
HR: So the rancher has to pay 20% more for feed for the cows and 67% more for labor. He raises prices enough to stay in business. He sells cattle to the slaughterhouse, and it has to pay the higher price, pay 67% more for labor, and raise its prices. The distributor buys the beef and cheese at higher prices, has to pay 67% more for labor, and raises its prices to stay in business. Now we have a taco made up of ingredients that are more expensive at every step in the supply chain.
CD: Wait a minute…
HR: Stay with me. Let’s be optimistic and say that 99 cent taco only has to be priced at $1.99 to still make money for Taco Bell. A 100% increase because of the 67% increase in wages. All of a sudden, the cashier who just got a raise from $7.50 to $12.50 per hour has to pay twice as much to afford her daily life. Food is more expensive, gas is more expensive, rent is more expensive. And it’s all more expensive than what she is now earning.
CD: Sure, prices will go up, but everyone is making more money and can afford it.
HR: You’re not listening. Prices go up at every step in the supply chain. Prices compound at every step. To stay in business, every company has to raise its prices to make up for this living wage you think is such a brilliant idea.
CD: But you’ve created the hypothetical. Prices may not go up more than the hourly wage has gone up.
HR: Well, that’s true. Do you think prices will go up about the same amount? If wages go up 67%, do you think prices will go up about 67%?
CD: That’s probably closer to reality.
HR: Then after all of this, after giving everyone a living wage, all prices go up so that the real world effects of your new wages are no net increase in living standards. If prices go up 67% and wages go up 67%, everyone is back where they started. And you’re going to come back next year begging for a new living wage of $20 an hour. Is that your grand solution?