Why A Living Wage may not be possible

Political tensions are riding quite high again, and it has become the time of year where people “say whatever will get them elected”. What better way to collect votes than to stick it to those big, bad and greedy business owners?Though while it certainly sounds compassionate to say things like “if you can’t pay your employees a living wage, you shouldn’t be in business”, the reality of the situation mandates that this is an impossible goal.

First, mandating a living wage violates the most basic rule of business: to make money. Business is a dance between profit and loss, revenue and expenses, And contrary to what is unfortunately becoming popular belief, the profit margins in many industries is razor thin. The two proverbial genres of work for those just entering the workforce – restaurants and grocers – have profit margins that are notoriously in the single digits. Regardless of industry though, labor is very often already the biggest expense of a business. To mandate “a living wage” immediately puts the business owner in a tough decision: hire less people and automate entry-level functions, or raise prices to pay for the increase in wages. Choosing the former will be counterproductive to those pushing for higher wages, as it leads to higher unemployment. Choosing the latter will result in the lower-income people among us being able to afford even less than before.

Secondly, mandating a living wage will lead to fewer choices for the consumer. Business is very much a battle of “economies of scale”. Say for instance there are two farmers – Farmer A who farms 100 acres, and Farmer B who farms 10,000. While it is true that Farmer B by planting on 100,000 acres will make more money, expenses mean more to Farmer A. Hypothetically, a new tractor costing $100,000 will cost $1,000 per acre for Farmer A, but that same tractor will cost $1 per acre for Farmer B. To extrapolate that to our discussion, the small business that has to negotiate with suppliers, keep the lights on, and now pay even higher wages, is bearing a far heavier burden than the corporation that has a bigger economy of scale. That small business’s growth will be stunted, as they often can’t automate and lack the pricing power of corporations. The end result is that corporations become more entrenched and powerful.

Third, mandating a living wage disincentives advancement inside the workforce. If I am guaranteed that if I work, the money earned will be enough to satisfy my needs (whatever the living wage advocates say they are), then there is little incentive to be better, let alone be best. There is little incentive to take courses to become better trained, or to sign up for extra work in order to be seen as more productive. Furthermore, if I am guaranteed a living wage so long as I’m working, there is a constant temptation to do as little as possible in order to “get by”. In fact, in such an environment, the less motivated ones are indeed the smart ones. This leads to the necessary conclusion, that an employee who is not interested in becoming better-trained, is not interested in being or learning to be more productive, is not interested in career advancement, and as a result is not aligned with the goals of the business they work for, and that does the least possible work possible, is not a desirable employee.

While it is certainly compassionate on its face, mandating a living wage will always be a moving target. Higher prices, fewer choices and a less motivated workforce will eventually always be the result.