Oct 052009

DK rips into a leftie who appears to be claiming that raising the minimum wage to £7/hr (a ‘Living Wage’) will be good for workers and good for businesses. Like, automatically. Always. ‘Cause it’d sure be stupid to do it if it would make some people worse off.

Let’s experiment, shall we?

I own a widget factory.

I have 100 employees turning out widgets for £5.80/hr, 40 hours/wk, 52 weeks per annum.

My wages bill is thus £1,206,400 per annum. Add in Employers’ NICs, and that wages bill becomes £1,287,667.

Let’s pretend my factory is very cheap and costs me £25,000 per annum to operate.

Each of my widgets costs £1 to make; I sell each widget at £1.20 for a 20% (entirely reasonable) profit.

Fortunately I sell 1,500,000 widgets per annum, leaving me with a nice profit of £487,333 per annum. I share this equally with my three business partners, giving us each a yearly income of £121,833.25. Once I’ve paid Employers’ NICs, my own NICs, and income tax on this sum, I’m actually taking home £70,031.

Suddenly, the law demands I pay my employees £7/hr.

Now my wages bill is £1,569,216 per annum (including Employers’ NICs) plus £25,000 overhead.

Selling 1,500,000 widgets per annum, now my profit has shrunk to £205,784 per annum, which I share equally with my three business partners, giving us each a yearly income of £51,446. Once I’ve paid Employers’ NICs, my own NICs, and income tax on this sum, I’m actually taking home £32,800. In raising my employees’ wages by £1.20 each per hour, my own income has shrunk by more than half.

If my widget sales fall, my income becomes even smaller. If my overhead rises (energy bills go up, you know), my income becomes even smaller. If I want to offset this by raising the price of my widgets, my customers’ business costs rise (at a time when they have already risen, because they too have to pay their employees more); alternately, sales of my widgets fall. I realise I can earn more than £32,000 as a school teacher.

Best-case scenario, my business becomes more expensive to run, my customers’ businesses become more expensive to run, the prices of our products rise, and our incomes shrink.

Worst-case scenario? My partners and I sack our 100 employees and sell the factory. My employees are now earning £0/hr. My partners and I go off to teach maths to left-wing dunderheads who, despite our efforts, will never understand that occasionally, just occasionally, raising the costs of a business means it is no longer worthwhile to operate that business.

Tax figures found here.

  6 Responses to “Simplistic minimum-wage experiment”

  1. But with 100 minimum wage employees working at minimum wage efficiency, you’re running a horrendously inefficient operation. Employ fewer people at a higher wage and you won’t be affected by changes in the minimum wage, and you’ll get the same level of output.

  2. And now I see what you mean, having read DK’s post as well. Didn’t get the context of your post, it could have done with a reference to Kezia Dugdale’s living wage idiocy :)

  3. Maybe the minimum wage will be good for employees in the long run, since employers will invest in more machinery and their work will be more productive?

  4. not sure if ive calculated it correctly but 5.80 wage leads to about a 12 grand a year income.

    anyone earning that wage who has a family would be entitled to a variety of benefits, working tax credits, child tax credits, council tax rebate, all of those benefits obviously come from the state via the taxpayer. and to me it looks like those who earn more pay to support those earning less and while in the case you illustrate is a small business which may go bust if it had to pay a living wage to it’s workers, many big business earn simply millions for their stakeholders leaving the government to shuffle money from peter to paul (and creaming a bit off for themselves in the process).
    i’m wondering how liberatarianism would address this. i’ve read many advocate getting rid of taxes altogether and i can’t see how that would address the problem of the very many people who work but simply aren’t paid enough to live on.

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