Tuesday, June 22, 2021

Minimum Wage Economics and Fallacies Addendum: The “Raise Everyone’s Wages and Companies Will Earn Greater Profits” Fallacy

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5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff provides an addendum to his recent column on the “raising the minimum wage will increase the firm’s profits” fallacy.

In our previous column on minimum wage economics and fallacies we examined the often repeated claim by higher minimum wage advocates that raising pay for low-skilled workers will actually increase a firm’s profits.

This argument was dissected on multiple fronts including:

1) It assumes no workers lose their jobs.

2) It assumes raising prices won’t suppress consumer demand.

3) Each dollar of additional worker pay actually costs the firm $1.0765 (including employer-paid payroll and Medicare taxes).

4) Each dollar of additional worker pay is whittled down by taxes too, 7.65 cents going to employee-paid payroll and Medicare taxes and a typical 12% marginal federal income tax rate plus variable state income taxes (assuming no federal earned income credit).

5) Whatever the employees spends at his own workplace (the worker decision required to generate the promised profit boost) costs the employer money to produce.

When measuring based on net profit margins at the recently controversial grocery retailer Kroger, each $7.75 sacrificed from profits to increase hourly pay generates at best 15 cents in returned profit for a net loss of $7.60. Hardly a model for higher net income.

But there’s one more fallacy we shall expand even further on:

6) The employee will not spend their entire raise at their own workplace. For example, a fulltime Subway employee who gets a $7.75 per hour raise will not spend (after taxes) $49.60 on Subway sandwiches every day. Rather much of their pay will be spent elsewhere and the employer will get even less than 15 cents per hour back.


When confronted with the simple math that proves raising wages does not magically produce higher profits for firms, more sophisticated "Fight for $15" proponents will often argue it really does work, but only if it's applied to every industry, to nearly every worker, and to nearly every wage level (excluding high earners) simultaneously.

The argument goes something like this:

“Sure, if you force wages up only at Subway then the extra purchasing power of Subway employees may ‘leak out’ to other firms and deprive Subway of higher profits. But if wages are raised everywhere—including for the entire middle class—then the massive wave of additional dollars spent nationwide will provide a net benefit for all industries.”


“Even though Subway workers may spend their raise on Apple phones which employ few minimum wage workers, raising wages for middle-class Apple engineers will result in Apple employees spending more money at Subway. So all companies and industries will see their profits rise and the asymmetric flow of spending that previously hurt only Subway will become symmetrical and harmonious.”

Although this theory once again ignores completely the impact of “leakage” through taxes on the employees’ raises, and commits the even greater error of ignoring that employees who spend more are buying something that costs businesses a lot of money to produce (hence only a small fraction of the raise is secured as recaptured profit), there’s a cornucopia of real world evidence that the “raises for all” strategy has actually been tried already, and on the grandest scale: the entire United States workforce.

To call the outcome a miserable failure would be an understatement. It was the Great Depression.

One of the greatest policy blunders of the Great Depression was wage controls, both under the Hoover and FDR administrations. The Correspondent has written extensively on this period but will give a brief description here. If you’re interested in more detail go to:




Herbert Hoover’s first act as President after the 1929 stock market crash was to convene a series of White House conferences with business leaders and strongarm them into not lowering wages during the coming slump. He made an articulate case that keeping up purchasing power among all workers nationwide would actually improve business due to higher demand/spending, and he promised that maintaining high wages would end the recession in a matter of months. 

Business leaders were inspired and promised to keep wages up. In fact, as deflation set in, prices fell by 30% over the next three years and nominal wages remained constant, so workers actually got a real 43% pay raise. 

The “benign pay raises” lobby couldn't have asked for a better experiment.

The demand-side theory of higher universal wages would predict the economy boomed with all that extra purchasing power floating around. Nearly all workers make 43% more in real terms so the extra spending must have sent corporate profits into the stratosphere.

But instead businesses ran huge losses as their revenues fell but wages remained high, cutting into gross margins, and they were forced to fire workers en masse to survive. By 1933 the unemployment rate was 26% and the economy had entered the worst slump in U.S. history.

So much for the “giving everyone a raise will be greater for business” theory.

Giving the entire laboring and middle classes a pay raise was not only not good for business, not only did it not deliver unprecedented prosperity, not only did it not achieve something as modest as stemming the tide of recession, it actually plunged the United States into the Great Depression.


FDR tried to raise wages broadly again in late 1933. 

After convincing bank customers to redeposit their money the economy began a strong recovery, and had FDR left well enough alone the depression may have been over by 1934 or 1935 at the latest

Instead FDR signed the National Industrial Recovery Act in late 1933. Written into the NIRA law was the Presidential Reemployment Agreement (PRA) which mandated a high minimum wage that exceeded market wages even for many factory workers.

The economy promptly U-turned and immediately contracted in the equivalent of a 2007-09 Great Recession, only instead the slump was compressed into a harrowing four months. The unemployment rate rose five points in just four months, back to 22%.

Ironically since the crash only lasted four months it doesn't go into the history books as a technical recession—defined as two consecutive quarters of negative GDP growth—even though it was more painful than the 2007-09 Great Recession.

The Supreme Court eventually ruled the NIRA unconstitutional and the recovery once again resumed.


FDR tried one more time in 1936 with the National Labor Relations Act (aka. the Wagner Act) which marked the most significant empowering of labor unions by government decree in American history. Over the next year the number of nationwide strikes, striking workers, and labor hours lost to strikes more than doubled across the board. With their hands tied by federal regulation, firms were forced to raise real wages nationwide.

Number of strikes 1936 to 1937: 2172/4740 (+118%)

Number of striking workers 1936 to 1937: 789K/1.86M (+136%)

Number of work-days lost to strikes 1936 to 1937: 13.9M/28.4M (+104%)




Combined with tax hikes in 1936, raising the top income tax rate to 79% (something else "Fight for $15" proponents campaign for) the following year delivered the Depression of 1937-38, the third worst slump of the 20th century. The recovery U-turned yet again and the unemployment rate rose 10 points in just twelve months, up to 21%..

In fact if one looks at a chart of unemployment from 1929 to 1946, it’s easy to see three distinct episodes of rising joblessness, all of which are obvious and steep: 1929-1933, 1934, and 1937-1938 (see attached chart).

All three coincide perfectly with novel government “high-wage” policies that were applied to far more than just the lowest-skilled sectors of the workforce.

So the great demand-side, “raise-everyone’s-pay” experiment has already been tried on a nationwide scale—three times during the Great Depression.

It’s not hyperbole to say the result each time was unemployment disaster. Both the theoretical and empirical evidence contradict the “force every worker’s pay up” proposal, and it’s no coincidence that the failures of universal wage floor policies during the Great Depression have since been struck from the history books and remain ignored by the present day media.

Tuesday, June 15, 2021

Energy CEO Disparages The North Face's Woke Fail on Oil and Gas Production

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A few days ago CO posted a story about outdoor recreational equipment company The North Face’s disapproval of the oil and gas industry and very public and sanctimonious refusal to fulfill an order of several hundred logoed jackets for a petroleum firm—citing its product (fossil fuels) as “not up to our standards.”

The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff generally prefers not to post simple YouTube links, but Liberty Energy CEO Chris Wright’s three-and-a-half minute critique of North Face’s hypocritical virtue signaling is one of the best takedowns of left-wing corporate wokeness ever.

Not only does Wright remind North Face that the nylon, polyester, and polyurethane in nearly all their clothing products are petroleum-based, he goes further into a long list of other North Face products and the entire outdoor recreation industry’s inescapable reliance on fossil fuels. 

For a product that isn’t up to North Face’s standards, they sure use a lot of it.

Watch to see the rest.

Comments are golden, but perhaps the most on-point is the very first listed: “Outstanding pragmatic response that shoves it right in the face of pompous, hypocritical virtue signalers. Love it.” Runner up goes to “And for you real climbing experts, try scaling North Face's hypocrisy.

Thursday, June 10, 2021

Chuck Schumer Announces He Doesn't Understand the Concept of Collateral and Student Lending

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From Yahoo! News:

"The federal government is charging our students and those who have student debt 7% interest," Schumer (D-NY) said during a press conference...."

"You can get a mortgage for 4 or 5%, you can get a car loan for 4 or 5%."


The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff would like to remind—or more appropriately educate—Senator Schumer that if a borrower defaults on a mortgage or car loan the lender can repossess the house or car as collateral to recoup some of his loss.

But if a student defaults on student debt their paper diploma is worthless to the lender. Thus higher interest rates compensate for the greater credit risk.

This is yet another example of how financially and business illiterate most politicians are.

Also from the article: 

“Schumer is most likely referring to historical interest rates on student loans: In the 2006-7 year period, interest rates were 6.8% for subsidized and unsubsidized loans. That rate has decreased over the years and currently stands at 2.75%. The interest rate will increase to 3.73% for 2021-22.”

Great so he’s comparing mortgages rates in 2021 to student loan rates in 2006. So “you can get a mortgage for 4 or 5%,” or you can get a student loan at 2.75% (because it’s already subsidized by the government). So what exactly is the problem again Chucky?

Wednesday, June 9, 2021

Minimum Wage Economics and Fallacies: Marginal Factor Cost (Part 2 of 2 -The Henry Ford Wages Myth)

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7 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff continues analyzing minimum wage, expanding the concept of Marginal Factor Cost to the much larger “Henry Ford” fallacy: the claim that boosting aggregate demand through compulsory wage hikes will generate higher profits for business.

MFC-BASED FALLACY #2: “Paying higher wages will increase your company's profits”

Tangentially related to our last MFC fallacy (the burger flipper) is another common progressive minimum wage fallacy:

“Paying a $15 minimum wage will be *better* for companies because the workers will have more money to spend on the firm’s product, hence increasing its profits.”

One obvious problem of many here is the assumption that businessmen are so stupid that they didn’t figure out centuries ago bumping all their low-skilled workers’ wages to $1 million a year would send their profits soaring (OK, sarcasm off). 

Clearly the math already sounds dead on arrival and gives us a preview of much that is wrong with this narrative. So we’ll first focus on the fundamental arithmetic failure. 

Every additional dollar diverted to higher minimum wage is $1.0765 that comes straight out of the firm’s profit margin: one dollar in higher wages plus additional employer-paid 6.2% payroll and 1.45% Medicare taxes. 

Hence even if all workers paid zero taxes on their entire raise, the only scenario where the firm’s profits don’t decline precipitously is one where employees spend the full 100% of their marginal income on whatever product the boss is selling.

Not likely. Subway or McDonalds workers who are lucky enough not to be laid off will spend most if not all of that extra income on something other than $7.75 per hour worth of footlong subs and Big Macs.

But even the unrealistic scenario where a Subway employee spends every new dollar of wages on Subway sandwiches is made more impossible by the fact that most workers can spend no more than 80 cents of the diverted $1.0765—due to taxes.

A single earner making $15 per hour and taking the standard deduction pays a marginal federal tax rate of 12% plus varying state income tax rates. After payroll taxes at most they’d only have 80.3 cents (one dollar minus 7.65% minus 12%) of the marginal dollar earned left.

Hence of the $1.0765 of marginal cost to the employer, at least 25.7% is lost to taxes (27.65 cents / $1.0765).

(the Economics Correspondent is aware of the Earned Income Credit that will give some of those federal taxes back, but the worker is still nowhere close to retaining 100 cents on his gross dollar earned)

But the far bigger problem with the “raises are better for business” discussion is the old “zero Marginal Factor Cost” fallacy discussed in Part 1.

That fallacious assumption is that whatever the worker buys from his employer costs nothing to produce. 

Well employees don't hand over their raises as a charitable act. They expect something of value in return, and incurring zero cost to secure the sale is obviously impossible.


This problem is particularly egregious in the famous historical fallacy of Henry Ford, repeated for years by labor proponents. That very similar parable tells us that:

“Henry Ford gave his workers huge pay raises because he knew they’d spend the money on his cars which would be better for his business, raise his profits, and make him even richer. Businesses should learn that giving your workers big pay raises will make your company more profitable!”

Although it’s true Ford gave his workers large raises in 1914, the truth pretty much ends there.

Let’s start with the real impetus behind his pay raises where the parable reverses cause and effect:

Henry Ford didn’t pay higher wages out of charity or because, being some kind of math illiterate, he thought it would make him richer. He awarded large pay raises because his revolutionary productivity-enhancing invention—the moving assembly line—created a bonanza in labor efficiency first.

It’s no coincidence that Ford awarded large pay raises in 1914. He introduced the factory assembly line in late 1913.

The assembly line allowed Ford to cut the number of labor hours required to assemble a car by a groundbreaking factor of eight, an amazing feat that's not likely to be repeated anytime soon.

That’s worth saying again: Before the assembly line Ford had to pay 12.5 man-hours of labor to produce one car. With the assembly line, Ford only needed to pay 1 hour and 33 minutes.

With such huge labor cost savings Ford was able to simultaneously expand production, give his workers a raise, cut their workday by one hour, increase returns to his shareholders, pocket some extra profit for himself, and most importantly drastically cut the price of automobiles for consumers.

Incidentally there's a bonus, non-fallacious lesson in the Ford story: In a market economy it’s the consumer who enjoys the lion’s share of productivity gains through lower real prices… which someone should explain to activists who complain that CEO’s enjoy all the spoils and leave workers nothing.

Economic productivity has risen relentlessly since the birth of capitalism via deployment of constantly improving, more efficient labor-saving capital tools, machines, and production processes, and even some workers who might get few inflation-adjusted wage hikes have still benefited from the availability of more, better, and cheaper products all around them.

The reason Americans enjoy levels of consumption many times greater today than 100 or even 50 years ago is the same reason a haircutter from Somalia who moves to the USA in 2021 will find the same work buys 20 times more goods and services in Atlanta than in Mogadishu: a more productive economy offers a greater abundance of goods that cost less in labor-hour terms.


The larger macroeconomic lesson from the assembly line story is one that any competent economist knows: In the long run the only thing that truly raises wages (defined as higher sustained levels of material consumption) is higher productivity.

Even liberal New York Times columnist Paul Krugman can’t deny it. He himself is on record writing:

“Productivity isn’t everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

Which brings us finally to the most glaring error of all in the Henry Ford myth: the Marginal Factor Cost omission.

Even if a Ford worker spent his entire raise on a Ford automobile, Henry Ford’s cost to produce and deliver the automobile was not zero. There was no way he was getting all of that raise back let alone growing profits by taking more wages out of his profit margins.

Because, as is always the case, labor was only one input cost he or any other present-day automaker incurs. In order to secure a sale, be it from his workers or the general public, Ford had to deliver a car. Which meant producing or acquiring a chassis, engine, transmission, starter/generator system, cooling system, steering, body panels, mechanical fluids, wheels, tires, glass, paint, seating… all the physical components that make up a car and which cost far more than assembly labor, not to mention the cost of expanding his capital equipment's production capacity (see attached photo).

By the time Ford was done manufacturing the final product to sell to his own workers, his marginal dollar of revenue—that he had already sacrificed in the form of a raise—was whittled down to less than his original gross profit margin. 

If we look for an example using the recent controversy of Kroger grocery stores, that gross profit margin is about 22.7% (source: FY2020 SEC 10-K income statement).

Then after removing selling, general, and administrative expenses, depreciation and amortization, debt and interest expense, and income taxes the final net profit margin is a mere 1.95% (Kroger, FY20: Net income of $2.58B on sales of $132.5B).

If we look at Ford Motor today, during the last four quarters the company’s gross and net profit margins have been 13.6% and 3.09% respectively (lower gross margins due to the capital-intensive nature of auto manufacturing) although Ford is a very different company than it was in 1914.

So the conclusion? Losing $7.75 an hour in profit to get 24 cents back (3.09% of $7.75) is not “better for business” and it only serves as another example of the near-zero level of understanding certain minimum wage proponents have of arithmetic let alone basic business accounting.


Some people have asked “OK, Ford made his firm more profitable by introducing the productivity-enhancing assembly line. He could expand output, lower car prices, increase shareholder returns, and pocket something for himself without giving his workers a raise. So why did he?”

Indeed, the worker already benefitted from Ford’s higher productivity since cars were now cheaper in the marketplace and normally yes, he would have had no obligation to raise pay.

But in the case of the assembly line he found that he had to.

Assembly line work where the laborer performed the same single task over and over, day after day, was much more monotonous than each worker performing multiple assembly tasks in the pre-assembly line production model. Hence Ford found his best workers were defecting to competitors who, until then, paid competitively and offered more interesting work tasks to perform.

The dull nature of assembly line work compelled Ford to pay more to retain his best employees, but it was the assembly line’s productivity gains that made that pay raise possible to begin with.

Sunday, June 6, 2021

Yellen and the G7's "Historic" Global Minimum Tax: Anti-Collusion and Price Fixing Laws Don't Apply To Us

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2 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff would like to remind the G7 finance ministers that price-fixing and collusion is illegal in their countries.

If CEO #1 calls competing CEO #2 and they casually mention raising prices by one dollar they can both be prosecuted and go to jail since firms setting price floors (ie. minimum prices) is a violation of antitrust and competition laws.

But it’s just peachy for governments to openly agree and boast about uniformly raising and fixing minimum corporate tax rates with Biden Administration Treasury Secretary Janet Yellen acting as price collusion ringleader.

The G7 governments claim absent their recent cartelization efforts revenues have undergone what Yellen calls a "30-year race to the bottom on corporate tax rates" where nations have competed to attract companies by offering better deals than the other guy.

But when companies compete for customers by relentlessly innovating and lowering costs the Correspondent has never once heard a G7 finance minister complain about the “250-year race to the bottom” for inflation-adjusted consumer prices and suggest price floors need to be set other than minimum wages.

Competition is a good thing and must be encouraged—under penalty of prosecution, fines, and jail time—unless it lowers governments’ tax revenues in which case it must be squashed. Governments shouldn’t be inconvenienced by competitive market forces that entrepreneurs have to deal with every day.

"Companies will no longer be in a position to dodge their tax obligations by booking their profits in the lowest-tax countries." - German Finance Minister Olaf Scholz.

"This is a starting point and in the coming months we will fight to ensure that this minimum corporate tax rate is as high as possible." -French Finance Minister Bruno LeMaire.

In other news, the seven largest U.S. retail grocery store chain CEO's announced they have agreed to set a minimum price for eggs at $10 per dozen.

"Consumers will no longer be in a position to dodge their obligations to us by buying their eggs at the lowest priced store," Kroger CEO Rodney McMullen said.

"This is a starting point and in the coming months we will fight to ensure that the minimum price for eggs is set as high as possible," exclaimed Safeway CEO Robert Miller.


Thursday, June 3, 2021

Minimum Wage Economics and Fallacies: Marginal Factor Cost (Part 1 of 2 - "Just Flip Two More Burgers Per Hour")

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7 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff continues analyzing minimum wage, applying Marginal Factor Cost (MFC) to the popular “just flip two more burgers per hour” fallacy.

In previous articles we examined Marginal Revenue Product (MRP), a major variable many businesses account for when deciding to hire or retain one more worker. MRP is the amount of additional revenue a firm can secure with the labor of an additional (ie. marginal) worker.

To go back and read MRP basics, visit:


A correlating factor businesses must also account for when hiring more workers is Marginal Factor Cost (MFC). 

As the marginal cost of securing a new worker’s Marginal Revenue Product, MFC is closely associated with MRP since MRP minus MFC is roughly the gross profitability of producing and selling one more unit of output.

It’s critically important to note however that although wages plus employer-paid payroll, unemployment, and Medicare taxes are major components of MFC, raising new revenue involves more costs than just worker pay.

For example, the new employee(s) may require a marginal addition of capital tools/machines to work with, or existing capital tools/machines may wear out and have to be replaced faster with the extra employee using them.

There could be the cost of an additional uniform or two, fringe benefit costs, and there are always HR and compliance costs associated with hiring a new worker. 

And most importantly there’s the often-ignored (by higher minimum wage proponents) cost of inputs to bring the final additional product sold into existence.

As an extreme example the hiring of one new salesperson at a jewelry store may capture $10,000 in weekly MRP with the sale of one additional Rolex watch, but it would be a mistake to argue the store’s marginal gross profit is 90%+ just because the worker’s wage is $1,000 per week. In fact, when selling Rolexes MFC is far higher than the employee’s wage since the wholesale cost of the actual product—the Rolex itself, at likely several thousand dollars—represents the greatest share of MFC, not wages.

So the key lesson here is that for a new-hire to be profitable, MRP can’t just equal or negligibly exceed wages. The difference has to be great enough to account for all non-wage costs as well.


As a resident of San Francisco the Economics Correspondent has heard this headscratcher from Bay Area left-progressives more times than he can remember, and MFC demonstrates just how incredibly illiterate many of them are about the most basic aspects of business.

In their minds, “Fight for $15” proponents understand the minimum wage math perfectly:

“$7.25 per hour to $15 per hour is an increase of $7.75 per hour. Therefore, if a Big Mac costs $4 then don't tell me there's any harm to the employer. All the worker has to do is flip two more burgers per hour and that pays for the higher wage. How hard is that? This proves that greedy employers are lying about not being able to pay higher wages.”

“Logic” like this is why San Francisco progressives aren’t running businesses and restaurant managers and executives are.

1) First, every business—restaurants included—works and obsesses 24 hours a day on marketing schemes to get just one more customer to walk in the door every day, let alone two per hour. That Fight-for-$15 activists think restaurants arrogantly turn away customers at the door like a club bouncer and only need wave a magic wand to sell two more burgers per hour shows real ignorance about the persistent challenges businesses face in increasing sales profitably. 

Firms either have to offer incentives or flat out lower prices to entice more customers (which cuts into margins), and/or they have to increase marketing budgets or invest in new products or facilities to make the business more visible or attractive to a larger market of consumers. 

All of this costs money because two extra orders per hour aren’t going to magically appear cost-free out of thin air. 

So flipping two extra burgers per hour is neither as easy nor cost-free as imagined in the mind of the progressive activist.

2) Even if the business were able to magically produce a consistent two additional burger sales per hour—hour after hour, day after day—the polemic solution fallaciously focuses on only a single employee: the burger griller. 

But he’s not the only one getting the raise. 

“Fight for $15” advocates forget the employer has to pay $15 an hour to *every* worker, including those engaged in supporting activities other than burger grilling: the counter cashiers on shift, the drive through worker, employees dealing with deliveries and garbage or constant store cleaning and sanitation. 

The Economics Correspondent doesn’t know all the roles workers perform in a McDonalds, but he knows something social justice arithmetic doesn’t: the store is not staffed by a single employee, ie. one guy standing at a grill.

If there are say, six employees on duty during a specific shift, the store has to sell not two, but twelve additional burgers hourly to compensate for all their raises. How quickly some people forget it takes more than just a single burger flipper to run an entire restaurant.

3) Even if the store magically can sell twelve more burgers per hour (this is now a ridiculous assumption, but we’ll keep going), there are also those Marginal Factor Costs beyond just the higher wage.

For starters, the burgers being grilled don’t come free to McDonalds. The assumption in the progressive “model” is that the only Marginal Factor Cost is wages, and somehow the actual product—food—costs zero.

Well food at the wholesale level might not be outrageously expensive, but it’s also not free. Selling twelve more burgers means buying twelve more of everything: patties, bread, veggies, as well as napkins, condiments packages, wrapping, etc… 

The model also assumes stagnant utilities costs for additional food preparation. It also assumes that such a huge increase in production will have no impact on the rate at which restaurant supply equipment (fryers, drink machines, dessert machines, ventilation systems, cash registers/POS devices, ie. capital equipment) wears out. 

With the additional customer traffic restaurant tables and chairs will wear out and have to be replaced faster. Garbage bags are filled faster and have to be attended to more frequently. Entrance doors, restroom doors, tiling and carpeting, will wear out faster. Even restroom hand soap, hand dryers, sinks, paper products, toilets, cleaning chemicals, etc… will have to replaced more frequently. 

Each one of these items individually may not cost a fortune, but add them all up and they will cost considerably more than the assumed “free” in the "living wage" model. An actual inventory of the additional costs incurred to prepare and sell 216 extra burgers a day (12 per hour across a 6AM to midnight operation) and accelerated depreciation over the course of a year or two might surprise a lot of people—social justice warriors the most.

And in case you didn’t already figure it out, costs associated with more food, more restaurant energy, more supplies, and costs associated with depreciation of capital equipment, etc... are all part of Marginal Factor Cost *on top of* the higher wage. Hence we’re reminded that MFC is an important concept and higher wages are just one piece of that story.

Businessmen have to account for all these costs, but they're ignored by the progressive “Fight for $15” activist’s model that insists all one guy has to do is just flip two more burgers per hour for minimum wage hikes to magically pay for themselves.

If such activists were set loose to run a fast food restaurant themselves they’d quickly lead the enterprise into bankruptcy, much how Hugo Chavez took over Venezuela’s private assets and bankrupted an entire nation.


We’ve used a fast food restaurant for an example, but minimum wage jobs extend into other trades such as travel, hospitality, or other forms of retail. 

The same MFC constraints exist for a company like Walmart: additional customers are not easy to get, luring them in costs money, and whatever product you ultimately sell them costs money too—whether it’s apparel, electronics, food, or auto parts.

If Walmart sells one more HDTV it might mean $250 in additional revenue. But is the cost of acquiring, distributing, marketing, inventory, transacting, and delivering that HDTV really zero? 

Many “Fight-for-$15” activists believe so.

Lastly, once the firm collects Marginal Revenue Product and pays Marginal Factor Cost it’s left with a marginal gross profit. But as we shall examine more closely in a future column, gross profit is not final profit—far from it.

The firm must then subtract selling/marketing costs—which have likely risen to attract those twelve additional customers per hour—and general corporate and administrative costs. 

The firm must also subtract depreciation (which we already covered as capital equipment wear and tear in our example) and amortization.

Then there’s servicing interest on debt and debt repayment. 

And finally there’s corporate income taxes.

Only then, after all “non-cost of sales” budget items are subtracted can the company report a net profit, assuming it realizes one on Marginal Revenue Product once all those additional costs and the higher minimum wage are factored in.

We’ll apply MFC to even larger-scale minimum wage fallacies in Part 2.