Published: Wednesday, 11 January 2017 17:33
The next time someone flashes a #fightfor15 hashtag, hit them with this.
This is a very simplified and incomplete model of how a physical product is produced. I am using this model to show how a forced raising of the minimum wage will send ripples through the entire chain that goods are produced. Here is a link to a spreadsheet that I used to produce the numbers in this article.
A concept Liberals don’t (or won’t) comprehend is that the pay a worker receives for their part in producing the product or service has to add an equivalent value to what is being produced. Brain Surgeons and 747 Captains are paid very well for what they do. Anybody can be taught how to do brain surgery or how to pilot a 747 in ten easy lessons because 99% of what they do are basic rote actions. The reason why the surgeon and the pilot make way more than a McDonald’s worker is because they know what to do when the patient’s brain starts bleeding, or an engine falls off the aircraft. They are paid the “Big Bucks” so they are in the right place at the right time with the proper training and experience to prevent the catastrophe.
I had a manufacturing job for a short time, assembling 3-D printers, so I got a peek into the manufacturing world. Each printer was composed of six (different) panels for the case, an electronics board, a wiring harness, a heated bed, the actual print head and the various gears, motors and pulleys to move the head and bed to produce what you want it to. There were also screws and other miscellaneous hardware involved as well. All in all, I dealt with about 30 distinct parts, many were used 2 and 4 times (motors, gears, pulleys, etc.) in a single unit. Each part had a different cost from the others, making this a slightly complex product.
The “product” I am making in this example consists of three parts, each made from three different raw materials. In real life, there are more levels, more materials and more sub-assemblies.
Again, this is a very simple model. Please do not fuss over the numbers at all, outside of the labor cost itself. If you do, that makes you miss the point.
The labor for each step is what is necessary to produce enough materials/sub-assemblies for one unit. The same with the transportation. A tractor-trailer can transport hundreds of units, so the labor cost for each unit is very low.
Each raw material costs nothing for the materials (it’s being pulled from the ground) and it takes 15 minutes of work by one person to extract the amount of material necessary to produce 1 part. The overhead is your equipment costs, administration staff, office supplies, etc. All of the things that help the workers bring the materials in and send the finished good out the door. There is also profit to be made.
These raw materials are then transported to another company that uses the materials to make the sub-assemblies. So the sub-assembly companies have to pay for the companies to produce and transport the materials, their own overhead costs and profit. Once each sub-assembly is created, it is shipped to my company so I can use the sub-assemblies to create the final product. I will have my own overhead costs and profit as well.
To keep this simple, I am paying everybody $10 an hour. At $10/hour, each sub-assembly pays $42.00 for their inputs. After labor, overhead and profit, each subcontractor gets their product out their door for $58.50. I pay $64 for each sub-assembly delivered to my factory for a total of $192.00 for my inputs. After materials, labor, overhead and profit I sell one unit of my product for $234. The MSRP/RRP (Manufacturers Suggested Retail Price, or Recommended Retail Price in the UK and elsewhere) would actually be higher, as it would likely have to be shipped from my company to a store (Wal-Mart, Target, Brookstone, et.al.) to be sold to you. For this exercise, I’m only concerned about my out the door price.
If a rise in the labor costs is caused by a forced inflation of the minimum wage to $15/hour by legislative fiat, provided all other costs stay the same (they won’t; I’ll explain why in a moment) my sub-assemblies will now cost me $74.75 and my out the door price will jump to $281.25. That’s a $48.25 or a 16.8% increase in price.
In the real world, my price will actually go up more than what these “pure” numbers reflect. What will go up in addition to the labor price is the overhead. Remember, “overhead” is the labor costs of your administrative staff, office supplies and the equipment you use to produce your product. The companies who provide me with goods and services covered under that "overhead" banner will have to increase their prices to compensate for the new minimum wage. The price of everything I use, from reams of paper, staples and all the way up to million-dollar fabrication machines are going to be affected by just like I am. The company that makes the paper, staples or fabrication equipment has the same “tree” as I do. And if everyone has to get paid a minimum of $15, the price of paper, staples and fabrication machines will inevitably go up.
Now, one of the companies that produces my sub-assemblies may not have to buy a new fabrication machine for 5 years, however because the cost of labor is jumping now, that company has pressure to raise his prices now, not just to cover the additional labor but to help save up for the additional price of that new equipment down the road.
Labor also does not exist in isolation. All jobs are connected and dependent on others. In real life, some workers in this chain are paid less than $10, others are paid more. Just to make this clear, let’s look at two workers in this manufacturing chain. Worker A is paid $9/hour and Worker B is paid $19/hour, if/when the minimum wage raises worker A’s pay to $15, you would have to be on a different planet to not realize that worker B will push for more pay as well. Worker B has to fight for his pay to increase about $25/hour because by raising the pay of worker A, you devalue the knowledge and experience that justified worker B their $19/hour.
Because economics is an indirect art form, if we raise the labor costs on January 1st, we will start seeing prices increasing about June. Prices will increase, I promise you. You may not see it, but they will increase.
Real-world examples can be found in your local grocery store. Products contained in jars (peanut butter, jelly, mayonnaise, etc.) will decrease in quantity by increasing the arch under the jar to reduce the internal volume while charging the same price. So if you have a 24 ounce jar that costs $2.49 in March, it transforms into a 20.4 ounce jar that costs $2.49 in October, that is a price increase of 15% (it costs 10.375 cents/ounce before, 12.205 cents/ounce after). Boxed products (like breakfast cereals) will retain the same front dimensions (height and width) but make their boxes thinner (less depth) to reduce their volume.
My advice is to be very careful what you wish for. You may get it.