Welcome back to another Young Economics Solution Session. For this episode, we piggyback off of The College Budget: Tips to a Healthy Wallet. Also, be sure to check out the Young Economics YouTube channel and be sure to subscribe. Enjoy.
What if a spike in minimum wage wasn’t as beneficial as politicians and economic analysts make it out to be? What if, from a callous business perspective, an increase in wages was completely impractical? By examining a simple supply-demand graph regarding wage floors and those employed, we can hypothetically observe what would happen if minimum wage rises to $10.10.
*Disclaimer: All values, except for the minimum wage prices, were arbitrarily chosen for the sake of simplicity and illustration.
In a perfect world, where micro/macroeconomic principles are fully applicable (never going to happen), all decisions are rational and based at the margin where marginal benefit equals marginal cost. In such a theoretical world, there is an equilibrium minimum wage value that would accommodate all perspective employees and all business owners looking to hire. On the graph, this quantity demanded and supplied is 150. The problem with this idea though, is that (A) unemployment will always be present in an economy, as there are frictional and cyclical unemployment levels that arise due to the ebb and flow of an economy, and (B) this ambiguous wage would be so low for the employees that they would not be able to support themselves or their families. This, I believe, is the general predicament with minimum wage. Employers believe the wages of unskilled labor should be lower than they actually are, and employees feel as though they have the right to higher wages so that they may live affordably.
Looking at the graph, we can see that at the current minimum wage of $7.25 an hour, the number of laborers employed is 100. This is because of the quantity demanded, or the number of workers that business owners are willing to hire, is 100. Contrastingly, the number of workers unemployed is 100 (quantity supplied minus quantity demanded at the intersection points of the minimum wage rate). If the national minimum wage were to rise, what would happen?According to the graph, the quantity of labor demanded would actually decrease to 30 and the quantity of labor supplied would increase to 300 (just think about it, a lot more people would now be searching for jobs if they discovered the new minimum wage to be $10.10). As a result, the number of those unemployed is more than double the unemployment value at $7.25.
Imagine yourself as a small business owner and think about the consequences of such a spike in wages. At a higher minimum wage price, you would have to allocate more funds for paying your employees. Where does this money come from, you ask? It could be taken from the wages of your veteran workers, which means they would be taking pay-cuts to help fund the pay of new, lower-level employees (not to mention their incentive to work efficiently and productively is probably gone). The money could also come from the manufacturing budget, which results in less production. If the company is producing fewer goods and services, the firm does not need as many employees, which, or course, leads to people being laid-off and increasing the levels of unemployment. Moreover, the most important facet of your company that could lose money is your profits! I’m certain this would not fly with you considering you opened the business to make money.
For sake of argument, let’s say the minimum wage appreciated and stimulated the economy, like some economists believe would happen. If you read my last post , you understand that stimulation would increase the number of jobs available. The issue that may arise through this theory though, is the law of diminishing returns. This law states that in all productive processes, such as the work of a frier at McDonald’s or of a shelf-stocker at a grocery store, adding more of one factor of production (an employee) will eventually yield lower per unit returns. In plainer terms, this suggests that adding more and more employees results in decreased marginal production. Why reduce this factor of production when firm’s could maximize production until marginal benefit equals marginal cost?
Lastly, it is feasible that by raising the minimum wage we reduce the chances of unskilled laborers (e.g. people who did not finish high school or people who only have a high school diploma/GED) receiving job offers. The graph already indicates a shortage of 270 jobs at a wage rate of $10.10, so when firms do hire people they are probably choosing the best possible applicants who have the best chance of improving their skills, making it that much more difficult for unskilled workers to find jobs.
I’m personally not sure if a spike in the national minimum wage floor is a good idea for the U.S., for there are factors on both sides of the argument that are swaying me in every direction. From a purely financial lens, it seems like raising wages does not bode well for a firm. At the same time though, I do not think its acceptable for some of our nation’s hardest workers to live below the poverty line. Especially when thinking about out larger corporations, like Walmart and McDonald’s, I do not think it would be an extreme burden or great loss of profit to pay their employees above the minimum wage. Not only would their employees be able to live more comfortably, but the corporations would probably see increased production due to the whole efficiency wage principle…just a thought. This issue is so intriguing because economic theory is not the end-all-be-all. People across the country will be affected by whatever decision is made regardless of an appreciation. Emotions, rationalities, and the view points of business owners throughout our nation are involved. I’m not sure we even know exactly what would happen with a wage increase, but hopefully this post made the topic clearer so you can arrive at your own conclusions.
Stimulating the Economy
The argument can be made that raising the minim wage to $10.10 would stimulate the economy due to more money spent on goods and services. President Obama and additional researchers argue that lower-income workers, or those who depend on minimum wage, spend their earnings more quickly and locally than do higher-income workers. In fact, the Federal Reserve Bank of Chicago noted that every $1.00 increase in the minimum wage would increase the spending of a low-wage worker’s household by $2,800 yearly. This provides the local, small businesses with the customers and demand they need to maintain and expand their own labor forces. As a result, we would see a reduction in the nation’s unemployment rate. More specifically, our nation could be looking at 85,000 new jobs, which is 9,000 more than the job creation between November and December that yielded a .3% reduction in the unemployment rate. These small, yet impactful resultants of an appreciation in minimum wage would also affect the U.S. GDP by $22 billion. This stimulation is three fold. As the minimum wage increases, our blue-collar labor force is injecting our economy with discretionary income expenditures, which then fuels our local shops, and by reaction, our shop owners can begin to hire more laborers.
At the current wage rate, there are nearly 8 million workers who work full-time, yet they continue to live below poverty levels. These hard-working Americans, who rely on government subsidies, are struggling to provide basic necessities for their families. Not only would raising the minimum wage help these workers and their families, but it would also alleviate some of the pressures on the government to support such people. According to a study by the University of Massachusetts’s Arindrajit Dube, an Amherst Economist, the poverty rate would reduce by 1.7%, which would also erase more than half of the increase in poverty caused by the recession. This translates to almost 5 million people being lifted out of poverty. An increase in minimum wage would directly affect the wellbeing of millions of Americans who, at the current wage-floor, struggle day-in-and-day-out to supply the goods, which many of us take for granted.
Lastly, the council of Economic Advisers estimates that, when fully phased in, 28 million workers would see a raise in wages. According to the Fair Minimum Wage Act, the entire wage scale would appreciate due to inflation rates. This suggests that even those who are currently earning more than $7.25 an hour, such as $8.25 or $9.00, would also see their pay rise past the $10.10 mark. Although the nation’s inflation rate has been relatively steady (between 1.5% and 1.7% from 2012 through 2014) it is important that our laborers are able to keep up with the rising costs of goods and services.
Tomorrow in part three, I will examine minimum wage graphically and also talk about the law of diminishing labor.
The topic of minimum wage has been under discussion for quite some time. It is one of the United States’ most controversial political issues because there are many different ideologies surrounding the proper value of the minimum wage floor. Over the past several months it has received much more attention due to President Obama’s State of the Union declaration of raising the minimum wage for all new federal contracts to $10.10. This comes just one year after he urged Congress to raise the minimum wage to $9 per hour in his 2013 State of the Union. Currently, the minimum wage stands at $7.25. The present-day wage contributes to about 49 million Americans (14.5% of the U.S. population) living impoverished.
Minimum wage is such a debated issue because of the paradigm it creates for unskilled laborers. Economists and politicians often argue that the wage levels should differ because unskilled workers are earning more money than they should. We have this predicament because it is difficult to place a value on labor in the first place. On the other hand though, skilled workers who may have been unemployed before taking a minimum wage paying job are now working for pay that correlates to living below the poverty line (a full-time employee earning $7.25/hour will make $15,000 a year, which is below the poverty level for a family of three). Moreover, other analysts and politicians (Republicans) argue that raising the minimum wage will result in less job creation and more unemployment. On a strictly economic and financial basis, I can understand this point of view. Logically speaking, why would business owners offer more jobs to prospective employees if they must allocate more money for wages? Economics is based on the belief that all decisions are made rationally, and rationally speaking, I would not provide job opportunities for people if it were more expensive for my business. I will look more in-depth at this scenario in part three of my series.
As an attempt to improve our nation’s current economic situation, President Obama has signed an executive order that will raise the wages of all new federal contracts to $10.10 per hour. Notice, this executive order only affects all new contracts, so, unless restructured, all old contracts will remain at $7.25 an hour. While this only makes a dent in the overall conversation of minimum wages, it is expected to affect more than 2 million employees. Furthermore, it will hopefully spark an initiative by our legislative branch to pass the Fair Minimum Wage Act, which will effectively raise the minimum wage to $10.10 for all laborers across the country by July 1, 2015.
In part two of my series, I will focus on three principle ideas regarding the potential increase of minimum wage, all of which are positive and outline the possible benefits of such an appreciation. In the meantime, read up on the Fair Minimum Wage Act and it’s economic implications.
J. Crew, a brand that is one of Michelle Obama’s favorites, a brand that is defined by utility; contemporary style and an essence of preppiness has been rumored to be in talks with financial giants, such as Bank of America and Goldman Sachs, to refinance their debt and possibly become a publicly traded company, once again. Just several years ago, J. Crew went private in a $3 billion deal with investment partners, TPG Capital and Leonard Green & Partners. The reason being for such a departure from the trading floor was a decrease in sales. During that year’s third quarter, net income had fallen by 14% due to weaker women’s clothing sales (J. Crew must certainly be grateful for our First Lady’s endorsement). Moreover, stores that were open for at least one year saw their revenue fall by 1%. In terms of the financial sector of the retail industry, J. Crew has been inconsistent; perhaps this is due to the constant shuffling of chairs in the New York based offices.
However, with the revitalization of J. Crew by CEO Millard Drexler and President Jenna Lyons, we are seeing an increase in sales and popularity. Sales last year rose 9%, which was more than publicly traded brands, like Gap and Ralph Lauren. I believe more time is necessary to see the true growth of J. Crew, but if it were to go public, the company would look to mirror the successes of similar brands that are ruling pop culture, such as Michael Kors (trading at $98) and Vince, a newcomer to the public market in 2013 seeing its stock rise 43% in its debut.
Further indicators of a public offering shall be debated with news surfacing about Japan based Fast Retailing Company’s Tadashi Yanai (chairman, president and CEO) wanting to acquire the J. Crew brand. This would align Uniqlo, one of Japan’s largest clothing purveyors and one of my personal favorite shops, and J. Crew under one umbrella, making it an immediate giant in the fashion industry. The $5 billion deal would enable the ambitious Yanai to attract more customers in the U.S. market to the rapidly expanding Uniqlo stores. As J. Crew weighs the option of an IPO, stay tuned for more news on this potential acquisition.
As a prospective investor, pay attention to companies such as these, as their audience is global and quickly growing. I’m certainly a novice when it comes to the financial sector, but I would suggest to invest in what you know. Why would you financially concern yourself with corporations that you yourself are not personally involved with? I love clothing. J. Crew is a staple in my wardrobe and when I walk around my campus I can see its increased popularity. If I were to invest in such a company, I wouldn’t just monitor its daily position in the market. Since J. Crew is a part of my wardrobe, because I like to shop there and because the college style is very much catered to the J. Crew look, I would be able to observe my investment in a much more profound way. Much like the clothing brands I mentioned above, J. Crew is a chic, urban brand while remaining relatively affordable for their followers. I find this especially important for the college crowd, which is why J. Crew’s audience has room to expand. Whether J. Crew is actually seeking to release an initial public offering remains to be seen. The company may not even be a suitable long-term investment option, but for new, young investors and short-term stock options, J. Crew may be viable.
Societies’ perception of beauty is completely based on a false reality that is perpetuated by television, the fashion industry, and even the dolls our children play with today. The debate over this issue, this craze, has long been discussed; however, little has changed. Each year we can count on watching “Angels” seductively walk down a runway which promotes borderline unhealthy physiques that women all across the world painstakingly try to achieve. Every time we walk into a toy store we can count on seeing the iconic Barbie doll, an idealized, yet implausibly, shaped blonde figurine which millions of girls and boys have grown up with. Nickolay Lamm, creator of Lammily , has finally challenged these surreal desires.
Lamm, a Pittsburgh based artist and researcher, has begged the question: What if fashion dolls were made using standard human body proportions? Provided by the CDC, Lamm has used the average body measurements of a nineteen year old women to generate a 3D digital prototype of a doll he hopes to produce.
Just two days ago, Lamm used Crowdtilt to garner crowd-sourced funding for his venture. His target amount to cover the costs of manufacturing was $95,000. Today, he has succeeded this goal by over $100,000 with twenty-nine days left in the first round of financing.
Lamm has been lauded for his previous work by Buzzfeed, Business Insider, Huffington Post, and many more news outlets. The USA Today featured Lammily just yesterday. Lamm’s ability to ask the unthought of questions and then visualize the answers in artistic renderings is the reason why Lammily is so innovative. In our terms, Lamm is an entrepreneur. A clear void in the fashion doll market was apparent and he has created a way to effectively exploit it.
I would also like to comment on his use of crowd-funding, a brilliant idea in my opinion. Rather than trying to meet with investors to back his project, which we know can often lead to failure, he opened Lammily up to the public for support. This suggests (A) his confidence and the market potential for the fashion doll, and (B) his understanding of the intended retail audience. I do not think crowd-sourcing works for every entrepreneur, as it is necessary that your product receives the proper amount of attention for such a decision to pay off. With that being said though, I believe this way of financing is an under-utilized option within the entrepreneurial community.
Nickolay Lamm and Lammily are prime examples of why entrepreneurs and innovation are integral parts of our society. Lammily challenges a convention that, frankly, is unattainable while creating a new socially progressive alternative. This is what pushes boundaries. This is how new paradigms are created. Congratulations on a wonderfully thought out product.
High school seniors (I, too, came down with the self-diagnosed ‘senioritis’) and you college freshmen who think you’ve got a grip on the whole college experience after several months of your new found freedom, keep reading. This is the Young Economics guide to making sure you don’t break the bank (or mommy and daddy’s) buying booze for the lovely sorority ladies down the hall from your dorm room.
I go to The George Washington University, a city school, so its no secret that the temptations for me to spend money everyday on shopping at the local Nike store, eating at delicious restaurants, and traveling by cab are all too real. When I first arrived on campus, I gave in to these temptations. I had a new found freedom, a fat wallet due to my summer job, and an irresistible impulse to walk just a few short blocks to one of America’s most luxurious shopping centers, Georgetown. I controlled myself, a little bit, but if I knew what I know now, my urges would have definitely been tamed. Trust me, I know how you college students in New York City feel, although I’m sure your wallet might be hurting a bit more than mine considering how expensive the costs of living are in the Concrete Jungle. Like me, I bet you could’ve used some tips to help combat the lust of the city.
1. At the beginning of the year, suffer through it, ACCOUNT for all of your SPENDING BIG and SMALL. After a couple of months, you’ll be able to know exactly how much you spend per month. Also, depending on this and your level of discretionary income, you’ll be able to craft a budget and refine it as necessary.
2. If you feel as though you want/need more money, GET A JOB! Other than making that one and only call home to mom and dad, this is honestly the fastest and most reliable way to acquire the cream. I feel like people dread the process of actually finding a job, but in actuality colleges are creating much easier ways to help you find one. Check your college’s career website, they most likely have a job postings tab. If you received a Federal Work Study grant, all the less stressful and time consuming. If both of these options are a no-go, ask around. I’m sure the local coffee shops, restaurants or retail stores are hiring…they usually do at the beginning of the school year.
3. SIDE HUSTLING is a thing! Find a way to make your childhood hobby into a money-maker. I’ve seen people take their love of graphic design to designing posters for certain events and organizations around campus, I’ve heard of students offering to take other students’ trash out after late Friday and Saturday nights (you’ll know what I’m talking about), and I personally cut hair. This was easily one of the best decisions I’ve made my first year here. I charge $5 a cut (I’m not a professional, why charge like one?), I’m 50+ haircuts into the venture and it funded my Christmas purchases.
4. GET A CREDIT CARD. This tip may seem unrealistic for folks, but its really not and it can help your prosperity ten-fold in the future. Plenty of credit card companies offer special deals to new prospective students (if you received financial aid, you’re probably receiving mail from these companies now) and since you don’t have a credit score, it is quite easy to apply for one. You may pay the bill each month or your lovely parents may take care of it, but discretion is a must. You do not want to get carried away with your spending right off the bat. Having a credit card and paying the bills ON TIME establishes a good credit score, so when you graduate and its time to buy a car or maybe even a house, your bank will be able to see you have a long standing history of paying off your debt in a timely fashion.
5. SAVE. Maybe you don’t go out to eat tonight or maybe you choose to go shopping when your parents come to visit in the spring, decisions like these could be the difference between having $500 in your bank account or $1000. Which would you rather have?
I understand, college is a time where you have all the freedom in the world and no responsibilities, but if you become disciplined with your finances now, you’ll be rewarded in the long-run.