YOUR VIEW: Economics 101 With CFP Ilene Davis, ‘What You Don’t Understand Can Cost You’

the law of economics can be brutal for the unsuspecting

The May 10 edition of USA Today had a snapshot survey which asked people if they support a $15/hour minimum wage and 62 percent said they favor it. Add in those who favor an increase, but to a lesser amount and the total in support of raising the minimum wage approaches 87 percent.

However, would the answer be different if the question was framed differently?

For example, what if instead the survey asked “How much would you be willing to pay for a meal, products, services in order to cover the increased costs to a business if the minimum wage were increased by some specific amount?”

A headline appeared in the Wall Street Journal on the same day that read “Shoppers Feel Bite as Prices Begin to Climb,” and which mentions prices rising by double digit percentages for some products.

Here is a basic lesson that does not seem to be taught in school any more: The cost of labor plus materials plus overhead plus taxes plus profit = the price a business must charge for a product or service.

Keep in mind that the cost of multiple fundamental elements on doing business has direct impact on the ultimate price of overhead (for example utility costs are generally an overhead cost, but they include the labor, material, overhead, taxes, profits of the power provider).

If labor costs increase, the odds are that material costs that are integral for laborers to do their job will increase, thus increasing overhead costs across the board. Increased cost of labor, materials and other overhead elements added to the tax increases proposed by the Biden Administration and Democratic faction of Congress leaves the business owner only two choices: accept lower profits, or raise prices for customers.

Another article recently in the Wall Street Journal said that if corporate tax rates were increased, it would come either out of workers wages, or out of shareholders dividends. However, I would argue that a third option, in which higher taxes are passed on to customers in the form of higher prices, is much more likely.

There is an old adage that 80 percent of the work is done by 20 percent of the people. Studies have found a typical employee spends 2-3 hours out of an 8-hour day on personal business at the expense of his/her employer. That means an employer could eliminate 25-30 percent of workers, require and incentivize the remaining workers to actually work for the hours they are paid, and get the same amount of work actually done at a fraction of the price.

As for that $15/hour wage, imagine a company has a number of $10/ hour workers. A sensible employer will look at the productivity of each worker, lay off the least productive half, give a $5/hour raise to the more productive workers, and save $5/hour per pair of workers, plus eliminate the benefit costs of one worker.

My guess is that increases in corporate tax rates and/or minimum wage rates will result in job losses for the least productive workers, and increased prices for all consumers.

As I often tell people – be careful what you wish for – particularly if you don’t really understand the potential “side effects” of proposed changes. The law of economics is likely to win most of the time and it can be brutal, especially for the unsuspecting.

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ABOUT THE AUTHOR

Ilene Davis, a resident of Brevard County since 1971, is a Certified Financial Planner with a bachelors degree in Mathematics from the University of Michigan, a bachelors degree in Accounting from Rollins College, and a Masters in Business Administration from Webster University.  

Davis became a stockbroker in 1982, earned her designation as a Certified Financial Planner in 1984, and with a desire to serve clients more on her own terms, opened her own financial consultant office in Cocoa Village in 1986.

She has combined her professional and personal experience with keen financial insight and instinct into her first book, Wealthy By Choice: Choosing Your Way To A Wealthier Future, which was recently published by Tablet Publications of Cocoa Beach and is now available on Amazon.com, BarnesandNoble.com, TabletPublications.com and ChoosingWealth.com. 

She is committed to helping each client create their own “Financial Freedom Fund,” and believes strongly in free market capitalism and a “hand up rather than a hand-out” as the best path to prosperity.

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