President Barack Obama should have earned an MBA or a Ph. D. in economics at the University of Chicago rather than a law degree. He then would know why wages rise, and why unilateral government edicts like the minimum wage law often backfire.
In Tuesday night's annual State of the Union address, President Barack Obama highlighted companies, such as Costco, which have raised wages "as a smart way to boost productivity and reduce turnover." He also talked about the co-owner of Punch Pizza in Minneapolis, who decided last month to raise the minimum wage to $10 an hour for its 300 employees. "It's got nothing to do with politics," he said, "it's good business."
What Obama apparently doesn't understand is that companies can't afford to raise wages unless they have the profits to pay those higher wages. Costco made a sizeable profit before it decided to raise wages. It made $2 billion last year and has $6 billion cash in the bank. Punch Pizza is first and foremost a highly profitable company. It can afford to pay its workers more and only then is it a win-win situation.
In my classes at Columbia and Chapman universities, I always told my students about when Henry Ford began paying his workers $5 a day, more than doubling their wages in 1914 because he had record profits.
Profits must come first. Wage increases can follow. Study after study shows that companies that earn higher profits pay their workers more.
Costco has received a lot of publicity lately for paying its employees more than Walmart. Costco's stock has done a lot better lately than Walmart's. But there is a cost (no pun intended). Costco's profit margins are thin, only 2%, while Walmart's profits are double that.
One final point: There's a big difference between persuading business leaders to raise wages and them making that important business decision voluntarily instead of government forcing them to raise wages. Profitable companies can and do pay higher wages; unprofitable or breakeven companies can't. It is business or economics 101.
President Obama needs to read our pamphlet, “Persuasion vs. Force.” I suggest you send him a copy.
In case you missed it, I encourage you to read my e-letter column about President Obama’s attack on investors that appeared last week in Eagle Daily Investor. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.
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