Saturday, August 30, 2014

There ain't no free lunch with increasing the minimum wage

Have you heard? San Jose, CA has raised its minimum wage (well, the government of San Jose, CA has passed a law that makes the minimum wage higher). Not bad for those poor minimum wage workers you say, but then again.....

On NPR they talked to a businesswoman about how this will impact her business. She said, "I was paying annual bonuses to my employees but now I will reduce the bonus size or cancel it all together." She also said that with the bonuses she was paying her employees receive more than the new minimum wage is going to be. That's OK because the government just wants all the business folks in San Jose to be 'fair' know, one size fits all....everyone equally poor....

Oops, looks like the employees that were working hard and being productive will not get a bonus and will be paid the same as those employees that are not working as hard or were not as productive.

If you think about it, or if you have ever run a business, you know that employee compensation is usually the largest expense for a business, typically about half of all expenses. Bonuses are, by definition, variable compensation while wages are fixed (until the poor fellow is laid off) compensation. 

Now we talk about 'risk' here at Lucky and Good and to control risk, variable expenses are always better for a business than fixed expenses. Transferring more compensation into fixed expenses increases risk. The result is that if there is a business down turn then the business folks have to do something to reduce their expenses. In the case of variable compensations (such as bonuses) they could be reduced and most likely all the workers would still have jobs. If there are no variable compensations then the fixed compensations will need to be reduced. To do that you will cut the workers hours or reduce the workforce. Like the old adage states, There ain't no free lunch....


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