How Paying Minimum Wage Costs Businesses in the Long Run

Source: Thinkstock

Source: Thinkstock

Many businesses skate by on razor-thin margins, constantly working and reworking the dynamics of its organizations in order to find the proper balance of spending and resource allocation. One of the fundamental tenants of business is to keep your costs low so that you can increase your margins and gain more profit. Cost-cutting can include anything and everything — from finding a cheaper supplier, to using new materials for your products. Unfortunately, cost-cutting also applies to wages, which is why there are basic minimum wage laws.

Many people — often those who are quick to identify themselves as ‘free-market capitalists’ — detest minimum wage laws. There is a belief that labor should work just like any other commodity. Namely, it should be traded on the open market at its face value. The idea is that workers should be paid what they’re worth, rather than what a state or federal government decrees. Now, that logic isn’t completely unsound, but there are definite issues with that kind of a system.

If you think inequality is bad now, imagine it under a system in which no minimum wage laws are enforced. It might sound nice and look good on paper, but would anyone really expect people to take jobs that pay $4 per hour? There is still rent to pay, kids to be fed, and tuition to think about. Even as individuals hone their skills to potentially become more valuable in the eyes of employers, those kinds of wages won’t cut it.

Many employers have vast armies of employees who work for minimum wage, or close to it. Businesses like Wal-Mart and McDonald’s are the most famous for coming up during these discussions, but they are far from the only ones. It’s true that many small businesses can’t afford to pay more than minimum wage, and that’s understandable. But when the heirs to the Wal-Mart fortune are splitting billions in revenue while great numbers of their employees suffer, it’s hard to stand behind them.