When Minimum Wage Laws Hit Home

“It would be comforting to believe that the government can simply decree higher pay for low-wage workers, without having to worry about unfortunate repercussions, but the preponderance of evidence indicates that labor is not exempt from the basic economic principle that artificially high prices cause surpluses. In the case of surplus human beings, that can be a special tragedy when they are already from low-income, unskilled, or minority backgrounds and urgently need to get on the job ladder, if they are ever to move up the ladder by acquiring experience and skills.”  — Thomas Sowell, esteemed economist, author, columnist

You know, it’s one thing when hard times hit people and places that you aren’t personally connected to. You can distance yourself from the hardship, in a way, because it isn’t really affecting you. For example, if a local diner or Starbucks or clothing boutique or hardware store is forced to close down because it’s no longer profitable, it doesn’t bother me that much. Sure, I feel badly for the owners and workers, and I am upset by the economic factors that led to the closing. But, since I don’t frequent those establishments or have an affinity for them, I don’t really “feel” it much. (Unless, of course, a good friend was employed there.) But,… when businesses that I do like are forced to shut down, especially when due to bad laws resulting from foolish economic policies, that torks me off!

Borderlands Books storefrontSo, imagine my dismay when I heard/read about the closing of a bookstore — one specializing in science-fiction, at that — because of particularly onerous minimum-wage laws. The store in question is the famous Borderlands Books in San Francisco. I have never been to the store, and I live roughly 2800 miles away, but the situation still really bugs me, because it is so unnecessary.

As a bastion of progressivism within the liberal state of California, the city & county of San Francisco not surprisingly has long been at the high end when it comes to minimum-wage laws. (Not that such laws are only advocated by progressives. There are some “conservatives” who don’t understand their true impact, too.) In 2012 it broke the $10/hr mark and, as of Jan. 1, 2015, it hit $11.05/hr. As if this wasn’t enough, last November voters passed Proposition J, raising the minimum wage to $12.25/hr on the first of this month (5/1), with subsequent increases over the next three years bringing it up to $15/hr on 7/1/2018 (plus annual CPI bumps) and tying it with Seattle’s as the highest in the nation.

You might think this is great for the workers, but imposing such laws goes contrary to free-market principles that have been proven to work, and it actually does more damage than good. Alan Beatts, owner of Borderlands, found this out the hard way, as did his employees and customers. While he supports minimum-wage increases in principle and is confident that it’s still good policy, Beatts did the math and realized that it was going to kill his business. In an exchange with the New Yorker‘s Vauhini Vara, Beatts maintained,

“There are tens of thousands of people in this city that are going to benefit. Businesses are going to pass the costs to consumers, and the product of that money that’s being spent is going to go to the lowest-paid people in this city. I think that’s a good thing. But the mathematics of it says that I can’t keep running my business.”

The report issued by San Francisco’s Office of Economic Analysis regarding the new laws projected that minimum-wage workers would have increased spending power. (Well, no kidding!) But, it also admitted that about fifteen thousand private-sector jobs would be lost. The hope is that these losses would be compensated for by expected overall economic growth. Beatts’ sunny outlook for the bigger picture seems typical of those who have swallowed the liberal/progressive assurances that “it’s all good.” Unfortunately, it doesn’t usually reflect reality. Let’s see what Dr. Thomas Sowell has to say:

“Conceivably, the income benefits to those low-wage workers who keep their jobs could outweigh the losses to those who lose their jobs, producing a net benefit to low-income individuals and families as a whole — at least in the short run, ignoring the long-run consequences of a failure of many low-skilled people to acquire job experience and skills, which could be a larger economic loss in the long run than the loss of pay in an entry-level job. But to say that there might conceivably be benefits to low-income people does not mean that this will in fact happen.”

As is typical for a small, independent establishment, Borderlands’ profits are small and payroll takes up a large percentage of expenses — 42%, according to Beatts. To be fair, there are other factors working against small businesses in general and independent booksellers in particular, like rising rents, competition from large retail chains and department/warehouse stores, and sometimes electronic alternatives. But, Borderlands has been surviving this long, and the new minimum-wage laws exert an unnecessary burden which, in this case and others (see below), is breaking the proverbial camel’s back. According to Vara,

“Overall, raising wages to fifteen dollars an hour would increase the store’s operating expenses by nearly twenty per cent. In 2013, Borderlands turned a profit of about three thousand dollars; the higher expenses would mean a loss of about twenty-five thousand dollars.”

When he first realized the minimum-wage increases endangered his livelihood, Beatts considered a number of options that might help him stay afloat, but few were viable. A sudden 20% increase in sales was highly improbable, and he really didn’t want to cut his staff of five, which would also mean increased hours for those still employed. Price increases would not work, either, since people will not normally pay a premium over the retail price stamped right on the product itself. (Unless, of course, relatively low supply and high demand make it a “collectible”. But, that is not the bulk of their business.)

Still, there is a bit of good news to this story.

After Borderlands announced their closing on their website, the store got a lot of press, including much sympathy from Mission District locals. Beatts had some initial objections, but with the urging of some concerned customers, the Borderlands staff developed a Sponsorship Program, where (hopefully) a minimum 300 people would pay $100/year apiece. (Go here for more info, including what the sponsors get in return.) The program was announced on Feb. 19th and within a week they had over 500 sponsors, allowing the store to stay open at least through March 2016 and adding a little bit of much-needed cash reserve. They will solicit for sponsors again next year. “This process will continue each year until we close, either because of a lack of sponsorship or for other reasons.”

That’s terrific and a true testimony to good marketing and customer loyalty! I hope enthusiasm for the program continues into subsequent years. But, it is not something that will work for most small businesses, nor does it justify the high minimum-wage laws. If it was me, I certainly wouldn’t want to have my business’ viability dependent on such a program. (Of course, I would never live or work in San Francisco.)

Speaking of collectibles… (I did that earlier, remember?) …

Comix Experience storefrontAs if the Borderlands closing wasn’t bad enough, another iconic genre establishment in San Francisco may also be shutting its doors — Comix Experience (and Comix Experience Outpost)! You know I have a soft spot for comics and superheroes. (If not, check out my other blog: “Heroes and Aliens”.) Like Borderlands, Comix Experience has been around many years, eking out a small profit despite high expenses. Owner Bryan Hibbs, a “leading figure” in the industry, was “appalled” when he realized the new minimum-wage laws would result in an additional $80,000/year in expenses. (Holy paystubs, Batman!)

“I didn’t know that. I thought we were talking a small amount of money, something I could absorb.”

Hibbs seems a little more realistic about minimum-wage laws than his counterpart at Borderlands.

“Despite being a progressive living in San Francisco, I do believe in capitalism. I’d like to have the market solve this problem. We’re for a living wage, for a minimum wage, in principle…. But I think any law that doesn’t look at whether people can pay may not be the best way to go…. Why can’t two consenting people make arrangements for less than x dollars per hour?”

Why not, indeed?

Like Beatts, Hibbs can’t raise prices over what is on the covers. (Not for regular, new(ish), non-collectible books and other items, anyway.) Nor can he go above market on collectibles. He says he can’t really cut hours, and he and his six employees are already stretched thin to cover 7 days at two stores. Thus, another brainstorming session was in order.

Though reluctant to go the “crowdfunding” route, Hibbs decided to implement something rather similar to what Borderlands did. Their new “Graphic Novel-of-the-Month Club” costs $25/month on a month-by-month basis or $240/year for annual membership, for which members get a monthly graphic novel (duh!) plus other perks. (Younger customers can pay $15/month for more kid-friendly fare.) Beyond the 334 memberships (at the annual rate) required to cover the extra $80K, any profits from additional club dues will also be split between the employees. (Personally, I would have put any extra into cash reserve, since the employees are already getting higher wages.) The Comix Experience staff like this solution because it is more market-driven and it reflects the store’s values and strengths.

Notice that in both cases above, the small businessmen did whatever they could to keep not just some but all of their employees on payroll. (I wonder if either might have a better shot at survival if they reconsidered cutting store hours and one or two employees. Maybe Comix Experience could just shut down the “Outpost” location?) It is great that they have been able to do so for so long and still stay afloat (barely), despite excessive expenses (including minimum-wage laws) in “progressive” San Francisco. But, not all small businesses can manage that, and even Borderlands and Comix Experience are being pushed to their breaking points.

The bottom-line, though, is that misguided laws — e.g., for minimum-wage / “living wage” — just make it harder for small businesses to make it and keeps many of those who most need entry-level jobs from getting and keeping them and climbing the success ladder. Don’t believe me? Okay. Here’s a little more of what distinguished economist Thomas Sowell has to say on the matter:

“Most [unemployed] workers are perfectly capable of producing goods and services, even if not to the same extent as more skilled or more experienced workers. The unemployed are made idle by wage rates artificially set above the level of their productivity. Those who are idled in their youth are of course delayed in acquiring the job skills and experience which could make them more productive — and therefore higher earners — later on. That is, they not only lose the low pay that they could have earned in an entry-level job, they lose the higher pay that they could have moved on to and begun earning after gaining experiences in entry-level jobs. Younger workers are disproportionately represented among people with low rates of pay….

Among two million Americans earning no more than the minimum wage in the early twenty-first century, just over half were from 16 to 24 years of age — and 62 percent of them worked part time. Yet political campaigns to increase the minimum wage often talk in terms of providing ‘a living wage’ sufficient to support a family of four…. But 42 percent of minimum-wage workers live with parents or some other relative. Only 15 percent of minimum-wage workers are supporting themselves and a dependent, the kind of person envisioned by those who advocate a ‘living wage’.

Nevertheless, a number of American cities have passed ‘living wage’ laws, which are essentially local minimum wage laws specifying a higher wage rate than the national minimum wage law. Their effects have been similar to the effects of national minimum wage laws in the United States and other countries — that is, the poorest people have been the ones who have most often lost jobs.”

Ironically, even liberal activist organization ACORN tried to get its employees exempted from minimum-wage laws, arguing,

“The more that Acorn must pay each individual outreach worker — either because of minimum wage or overtime requirements — the fewer outreach workers it will be able to hire.”

Yes, indeedy.

The above quotes (including the one at the top of the post) were from Sowell’s book, Basic Economics, 4th ed. But, if you want something to read online, check out these two articles: “Minimum-Wage Laws: Ruinous ‘Compassion’” by Thomas Sowell and “The Minimum-Wage Myths” by Kevin D. Williamson.

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