Real Value Vs. Deferred Cost Value: Does a Minimum Wage Help?

//Real Value Vs. Deferred Cost Value: Does a Minimum Wage Help?

Real Value Vs. Deferred Cost Value: Does a Minimum Wage Help?

This is something I didn’t realize was up for discussion. Not because I think it is a matter of respect, which I do, but because it isn’t exactly rocket science. That isn’t to say that people who don’t think about these things are idiots, there are a ton of things that I never think about and then one day someone points it out. That moment is wonderful and I’m hoping I can manage that for some new people today. I’m not an economist but the things I’ll be covering in short order should largely be correct. I’ve read a fair amount on the topic and I do actually follow economic news constantly.

As always, take what I say with a grain of salt. Also if you are an actual expert feel free to correct me in comments below. Anywho, let’s get moving.

What is a Real Value Business?

Firstly a real value business must be self-sustaining. If you are not managing this you are not an RVB. The next step is that you must be able to achieve this state while not cutting corners. A Real Value business uses quality goods, follows most regulations (if not all), and an increase in the minimum wage would not impact the cost of their products. If you cannot achieve these bare minimum steps then you are likely running a Deferred Cost Value Business (DCVB).

What is a Deferred Cost Value Business?

Any business that cannot maintain the cost of its products during a minimum wage increase will fall into this category. If a business uses cheaper goods to make their products they’d fall under this category. If they outsource to other countries because those countries have little or no employee protection laws. If they skirt laws and regulations. Basically any practice beyond selling a good at its value would fall under a DCVB.

So what do I mean by Deferred?

To put it simply. Every product has a value. Every service has a value. We don’t necessarily know what that value is. The most accurate answer is that everything is worth what the purchaser will pay. However this does not take into account creation costs. In order to have people service places or things you need to give them money. In order to create a doodad you must first create or purchase all the widgets to make it. Every product has a complicated network of costs that ultimately end up determining its value.

It is very difficult to create a good product that brings people in by virtue of being good. Goodness is not something that everyone can understand. However making a product cheap is something everyone can understand. We live in a debtor’s economy and this means a lot of people have stretched themselves very thin. That thinness makes “value” a very important quality of a product.

However, often, that value is actually lower than the “real value”. In order to sell your apples at a cost that will get you customers from your competitor you must defer some of the overhead. Paying your employees minimum wage is an example of just this sort of tactic. The end customer is not actually getting a cheap apple. They are getting an apple that was subsidized by the employees being paid the bare minimum that the law would allow. Similarly if clothing is outsourced to another country you are not getting 12 dollar pants. You are getting 22 dollar pants that have shaved off some of their real value by abusing citizens of other nations.

An ideal economy would likely enforce a global minimum wage. If we are to have fair trade across nations we must also have uniform pay structures. That minimum wage would be a ratio matched with the whatever is above the poverty line in that nation. Arbitrarily I’d say that minimum wage should cover all life costs in an area with an additional 20% for luxuries. Keeping in mind that every luxury good purchased is keeping your local economy alive. Paying people the bare minimum is actually a great way to kill your economy.

What about other factors? Cheap processed foods defer some of their real cost by passing it on as healthcare bills. You eat food with high levels of fat, sugar, and salt, because these things are very very cheap. Their actual cost comes from the higher levels of obesity, type 2 diabetes, and high blood pressure. Billions of dollars are lost every year because people are unwilling to part with their daily fast food binges. Binges that are only possible because of the DCVB model.

This all seems somewhat vague. How do I know when a business is being genuine?

That’s a bit tougher. I would argue that all businesses should have fair wages. Say what you will about fast food workers and bag boys but you are likely using their services. I am not aware of very many jobs that I would list as “better” than others. Most tasks are equally important in the grand scheme of humanity. I don’t like fast food jobs not because they are “beneath me” but because they proliferate a fairly sizeable problem. This would be less irritating for me if they also paid their employees fairly. The argument could be made that their job is “easy” but I would counter that there is no such thing as an easy social job. People are difficult, look no further than politics for proof positive in the millions.

Prepare yourself for a long strand of if statements.

If a business can produce a product for you that you desire. If that product is charged at a value you find desirable. If they can do so without breaking any laws. If they can do so without outsourcing for the sole purpose of lowering costs (I’m totally fine with supporting other nations, other than the pollution problem of transportation). If they can do so while using the best possible ingredients [this is not the same as the most expensive possible]. Then, if all these things (and possibly some I’m not thinking of) are true, you are dealing with a real value product or service.

Alright then, so I suppose I should ask. Does raising the minimum wage ultimately defeat itself by raising the cost of products?

This on the surface does not seem like a dumb question. Recently Chipotle raised their wages by 14% in some areas and then raised their prices by 14%. On the surface that seems like the same increase. However there are a few things at work here. The first is that Chipotle arbitrarily raised their costs by 14%. A 14% increase in the wages of their employees is overall fairly trivial. When you consider that they bring in 1 billion dollars in revenue every quarter and that almost half of that (well closer to 40%) is net (after cost), they are doing far more than fine. They didn’t increase their cost by 14% because they needed to, they did it because they know that people will see the same number twice and think “Oh then nothing changed!”

[For the record their SG&A was 289.69M dollars. Increase that by 14% and you are at 330.2466 million dollars. That means they would make a profit of roughly 404 million dollars, rather than the (equally nice) 444 million dollars. Yes, I’m sure that cost increase is murdering them.]

However, lets just assume that this is not the case. Let’s assume that every burrito from Chipotle now costs 200 dollars. Because we can safely assume that most employees would be seeing a few hundred dollar increase in their pay. I realize that sounds absolutely ridiculous but that is the proposition being put forth apparently.

How much did their utilities increase? If you say by 0% you would be correct. Most of a minimum wage workers cost of living comes from Real Value businesses. These are services that do not skirt costs by paying their employees minimum wage. You could raise minimum wage by a fair deal before I’d ever see a pay raise from it. If every single DCVB raised their minimum wage to 15 dollars an hour the cost of living in most places would not increase. This is because most of the things you are paying for, internet, electricity, garbage, sewage, etc are not paying their employees minimum wage.

The few places where this technically would matter won’t even matter because most of the production done for various DCVBs are done overseas. So any increase in minimum wage here is not going to impact costs in India, Taiwan, or China.

Rent goes up every year regardless of wage increases. It also goes up far far more than wage increases. In general the cost of living has moved far faster than wages in basically all factors. This means that a growing number of people work and still require state aid. Again, deferred cost. You get a cheap burrito but you pay for the actual cost of that burrito in emergency care visit costs, taxes, or elsewhere.

To put it simply, Minimum Wage is not self defeating because the vast majority of costs in the average person’s life are not coming from DCVBs. If you saw an across the board increase for minimum wage you would see an overall increase in cost of some small fraction of that. Fast food would become more expensive, clothing would become more expensive, and so forth. But for most of these things it would increase by a nickel to a quarter. Any increase beyond that would be a matter of making a statement. Much like Chipotle has done.

Ultimately every time a person, myself included, decides to give money towards a DCVB they are just putting the real cost on credit. And much like a credit card that cost will be extruded from them in the future. There is no such thing as a free lunch. You either pay in full or you feel it later.

By | 2015-07-16T21:15:00+00:00 July 16th, 2015|Journal|Comments Off on Real Value Vs. Deferred Cost Value: Does a Minimum Wage Help?