Be Careful What You Wish For

We have a movement afoot to raise the minimum wage by 39% from $7.25 per hour to $10.10.  It is said that 900,000 people will be ‘lifted’ out of poverty.  That sounds great.  However, it is also estimated that an additional 500,000 folks will become unemployed from this single action. A quick math check says that 35% of the impoverished will join the ranks of the unemployed.  So what did we gain?  If you ask those who become unemployed I bet they would say we went backwards.

I was recently at a packing shed in South Texas.  The operations manager told me that he would seriously consider automating more of his process if he had to raise the wage paid to the unskilled labor force. The full time employee who stacks boxes on a pallet at the end of a packing line can easily be replaced by a robot. As the cost of that employee goes up due to forced wage hikes or mandated benefit packages, so does the incentive for the employer to find a way to cut the job.  The robot is happy to work 3 shifts per day all year long without any breaks (except for a little grease).

Look at the math again; the employee works around 2000 hours per year at a proposed $10/hr or $20,000 annual wage.  Add to that the taxes for FICA, FUTA, SUTA plus benefits like holiday pay, vacations, Workman’s Compensation and mandated health care (or employer penalty). The total cost to the employer quickly rises to $30,000 annually. If the operation runs 2 shifts per day, that position on the end of the packing line amounts to $60,000 annually.  If the robot costs $100,000 to install and $10,000 per year to maintain, the payback is 2 years.  After that, the employer gains $50,000 per year in savings for each robotic station. Multiply times the number of stations and there is some serious cash at stake.

The unintended consequences of interference with the free market could easily put a half a million people out of work. Then what? The unemployment rate in South Texas is over 10%. The average age of the workforce is 27. That doesn’t add up to a bright future for a generation of young hard-working Americans.  Be careful what you wish for- you might just get it.