SHRM Magazine, the trade publication put out by the Society of Human Resource Management, added a new feature in September: A point-counterpoint in which two individuals sound off on a particular issue, giving opposite sides of the argument. The first topic: Whether or Not to Raise the Federal Minimum Wage. You can read the full text here.
Not a bad idea unless one of those people is James Shrek (oops – I meant Sherk) of the Heritage Foundation – that bastion of the fallacies of uninhibited free trade and trickle down economics. If it had its way, there wouldn’t be a minimum wage at all. Not that the pro-minimum wage author, with the Economic Policy Institute, is unbiased, but at least his arguments are based on the realities of the workplace.
I take several issues with the argument opposing the minimum wage – too many to detail here. As I’ve said before, I have this crazy belief that anyone who works hard all day should be able to earn enough to put a roof over his or her head and food on the table. All workers, no matter what the job, deserve a certain level of respect, and pay is one indication of this respect. Raising the minimum wage is a moral and ethical issue, not just an economic one.
But from a human resource standpoint, one argument particularly got to me. In his piece, Sherk states that minimum wage workers are unskilled and therefore, “…cannot yet produce $10.00 an hour for prospective employers.” This shows a complete lack of understanding of how compensation works. He implies that employers determine pay by looking at how much that employee earns for the organization. This is not only untrue, but impractical. It is almost impossible to do such a cost-benefit analysis on most jobs. Take a registered nurse, for example. An RN’s job is to care for patients, whatever that might entail. While they may record services for billing purposes, they aren’t paid according to these billings. They wouldn’t be doing their job if they were (and we wouldn’t want to be under their care).
This method may work, and is often used, for certain sales positions. Even then, however, it’s not perfect. Sales people generally have a whole group of service, technical and administrative people in support of them whose contributions can’t be measured so easily. It can also be difficult to determine how much of their success or failure depends on their own efforts, and how much could be attributed to other factors such as timing and luck.
Sherk only has to look at one of his own examples, the high paid techies at Google, to see the error in his statement. According to him, the average Google employee makes $140,000 per year. After benefits, that’s probably closer to $180,000 per year. Are all those people producing enough to warrant that kind of money? No, and I’m sure some aren’t even expected to. A tech firm survives on innovation, and that takes investment into R&D. I’m sure many Google employees are working on systems and applications that haven’t made the organization a dime, and maybe never will. But it’s what the company must do to stay ahead of the competition.
Sherk ignores this. Instead, he points to McDonald’s workers to argue his case against paying a higher wage. He claims they aren’t worth more $10.00 per hour, but by his methodology, the are. Let’s say a family of four comes into a McDonald’s and orders meals for each person. The cost comes to about $30.00. Four people work to put the meals together – one to run the register and pour the sodas, one to prepare the fries and two to make the sandwiches. The order is ready in less than five minutes. During this time, each $10.00 an hour worker earned 83 cents, for a total of $5.81. Let’s add another 30% for other benefits (which I’m sure most don’t get) and you have about $7.50. Last I checked, $7.50 was less than $30.00. Even accounting for overhead (McDonald’s profit margins are 19.31% including those labor costs) the McDonald’s workers are producing more than that $10.00 per hour for their employer. McDonald’s, and most low-wage employers, are getting much more out of these workers than they are putting into them.
So if this is not how compensation is determined, how does it work? Why are Google engineers valued more highly than McDonald’s cashiers?
It’s simple supply and demand. Google is in competition with neighboring tech firms for skilled, experienced, well-educated and experienced talent that is hard to find. Low supply, high demand equals higher prices (wages). McDonald’s is hiring low skilled, lower educated, entry-level workers, of which there are many. High supply, low demand = lower prices. Google doesn’t pay these people high salaries because that is what their work is worth. It pays them that much because that is how much it costs to attract and keep them from going to a competitor.
I was once charged with hiring structural civil engineers right out of college. Despite having a great work environment and benefits, every one we offered a job to went to another employer because the other employer had offered a higher salary. It didn’t matter that all the salary surveys, all the analysis, all the determination of what we could bill for these engineers said we were offering a competitive wage. The reality was we had to start offering more or we wouldn’t have anyone to do the work that was coming through the door. Sure, there is a breaking point in which it would be better to turn down the work than pay employees more, but we were nowhere near that point.
The reason the owners and stockholders don’t want to pay more to low wage workers has nothing to do with how much they are worth, but how much profit they can squeeze from them. They don’t pay more for hamburger than they need to, why should it be any different with workers? These misguided employers believe their reason for existence is to maximize profit. They do not see themselves as having any obligation to their workers, or see their workers as stakeholders, equal with the investment bankers on Wall Street. That’s why we need a minimum wage in the first place. And even if the Heritage Foundation was right, those employers and their investors wouldn’t lose a cent. They’d just raise their prices and pass the cost on to consumers. Fine with me. I’d gladly pay an extra quarter for a meal if I knew it meant the person on the other side of the counter could pay to by a meal that didn’t come out of a cardboard box.
Sherk doesn’t get the simple basics of compensation, but why should he? He works for a non-profit funded by private donors to promote a particular political viewpoint, not to create any product or produce any service of real value. I’m sure the Heritage Foundation never determined whether he is producing enough to bring an equivalent amount of donations in. I do know one thing, though, whatever he is being paid, it’s way too much.