The True Cost of Raising Minimum Wage

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It’s nearly that time of the year again. For my part of the country, it’s a ritual marking the return of fall, like Halloween and tailgate parties (even if only a few people recognize it as such).

What “ritual” am I talking about?

The Florida sugarcane harvest, of course. All 1.8 million tons of it.

What’s the big deal about Big Sugar, you say?

Well, how this seasonal rite is performed each year is a lesson every politician, pundit and investor ought to pay close attention to. It says plenty about economics and wages as the nation discusses the pros and cons of a $15 per hour minimum wage.

It also says plenty about a certain law that few pundits or policy wonks care to think about these days.

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America is facing the potential for economic collapse and the shifting job market is going to be at its core. In fact, we’ve already gotten a glimpse of this future from the Florida sugarcane industry.

You’ve probably read or heard plenty about Florida’s sugarcane barons at one time or another. Together they cultivate about a half-million acres of mucky swampland, with the harvest starting in the first days of October.

These days, the cane harvest is heavily mechanized and automated. Drivers sit in air-conditioned cabs, steering powerful combines through the mucky fields. The cuttings are dropped into a truck driving alongside the harvester, ready for transport to a nearby mill.

But even into the beginning of the 1990s, cane growers such as U.S. Sugar, Florida Crystals and others, eschewed the use (and investment) of mechanization. Most hired out a huge temporary human workforce each fall — up to 9,500 farm laborers from Jamaica and elsewhere in the Caribbean —  to do the same job.

What happened to force the change from harvesting by people, to harvesting by machine?

Worker demand for higher wages, to put it simply.

In my days as a finance reporter, a Big Sugar insider once told me that human cutters were much preferred to a mechanized approach. Human cutters, he said, can cut a sugarcane stalk much closer to the ground than a machine. The end result is higher per-acre crop yields and less waste.

But as minimum wage demands mounted, sugarcane growers made their calculations again. What they lost using machines for their harvest (in terms of reduced crop yield and efficiency) was more than offset by the cost savings from not hiring out a large migrant labor force every season.

Which brings me to a discussion about a certain ignored law these days…

Can’t Fight the Law

The Law of Unintended Consequences. Wal-Mart presents a fascinating case study.

The retailer raised its minimum wage to $9 an hour for roughly 100,000 of its workers. As far as minimum wage advocates go, it’s the “feel-good movie of the year.”

But guess what? Wal-Mart isn’t going to altruistically take the full hit for the extra $1 billion in costs to its own bottom line. It’s going to pass them along where it can, when it can:

  • From Bloomberg we learned that Wal-Mart recently asked its vendors and suppliers, about 10,000 in all, to pay new “storage fees” at its warehouses and distribution centers.
  • According to leaked internal memos, the company soon plans to cut up to 1,000 jobs at its Bentonville, Arkansas headquarters (about 5% of its present HQ staff).
  • Bloomberg also reported the company is cutting back on workers’ hours.

We’re only just starting to see the ripple effect created by the demand for a significantly higher minimum wage. We can also ponder what might happen in the fast-food industry and other sectors with a low-wage business model. I don’t believe we’ll see lots of restaurants or other businesses close. There’s little evidence of that to date, even in Seattle where the $15 minimum wage has been on the books since April (and perhaps as many as 400 restaurants close each year for various other reasons).

But business and franchise owners have choices. They’ll go back and re-do their math, just like the sugarcane barons. And if it means investing in a fancy new oven, buying the proverbial “burger-flipping robot” or redesigning how their businesses work so they can function with even fewer employees — they will do it.

Over time, it means fewer jobs available in what was previously a reliable employment sector for people seeking their first jobs, or still building the skills they need to get those higher-wage positions.

Try as they might, minimum wage advocates will find they can’t repeal the law of unintended consequences and the impact will be dire for the U.S.

Regards,

JL Yastine
Editorial Director, The Sovereign Society