Minimum Wage and the Middle Class

“Amongst the novel objects that attracted my attention during my stay in the United States, nothing struck me more forcibly than the general equality of conditions.”

Alexis De Tocqueville (Democracy in America, 1831)

Americans have always considered themselves “middle class.” Traditionally, that self-identification was embraced by people from just above the poverty line to those near the top 1% of incomes ($350,000 annually.)

The last two decades saw corporate CEO incomes rise from 40 times that of the average worker to 400. Young tech billionaires don’t maintain the low public profiles of earlier super-rich, but instead embark on grand projects (space flight, education, medical research) that were formerly limited to government sponsorship. A voracious media, in its quest for content, does it best to make certain that everyone is a voyeur of lifestyles they can never afford.

In the meantime, technology and global competition continue to erode the middle. When the job of someone making $35,000 a year is eliminated, they don’t just step up to a $50,000 job. In reality, most have to accept something less. The Department of Labor now counts 6,400,000 Americans who are working part time jobs, but say they want full time work. (Working as little as 1 hour a week means you do not count in the most widely published U-2 unemployment statistics.)

stairway to successAs the quadrennial election cycle heats up, a popular solution for income redistribution is to mandate a huge jump in minimum wage. Pay the lowest tier of workers more, the logic goes, and we will have a more stable democracy. Besides, the money will only come from business “profits,” and therefore be relatively painless for the payor.

According to the compensation survey company PayScale, the average small business owner with over ten years in business (a success, by most measures) makes just over $105,000 a year. That isn’t a shabby living, but it’s a long way from being rich; and it includes those profits.

Those small business owners create 65% of the new jobs in this country. Although Obamacare is a more direct tax on employers, minimum wage is similar in that it doesn’t apply if you don’t hire someone. One of the reasons for the huge growth in unwilling part-time employees (up 50% since 2008) is employer avoidance of the requirements for health insurance. It doesn’t take an economist to see the consequences of adding a high minimum wage to the cost of employment.

  • If high minimum wages are implemented piecemeal (by city or state)  then there will be some cross-migration. Businesses will select lower-wage areas, while employees will gravitate to places with higher wages.  The assumption of politicians that because a business has bricks and mortar it is stuck in their jurisdiction is erroneous.
  • If such a wage is enforced nationally, it’s hard to understand why offshoring to low-labor cost countries wouldn’t accelerate for those businesses that are able to do so. Those that can’t are concentrated in retail, hospitality and personal services — already among the lowest-margin areas of business ownership. So entrepreneurs who make the least money will shoulder the bigger burden.
  • Small businesses, typically laggards in adopting technology, will find the return on investment far more appealing. I can see fast food restaurants with touch pads for customers, and one long line for the computer illiterate.
  • Those currently making minimum wage will discover, much to their dismay, that between about $17,000 a year and $23,000 a year 85% of their income increase is offset by the loss of Earned Income Tax Credits; leaving them essentially even.
  • Starting a small business with employees will have much less financial appeal. Those with entrepreneurial instincts and ambition will recalculate the benefits. That may well lead to fewer bootstrap startups, which are typically a starting place for many minimum wage workers.

Finally, a high minimum wage doesn’t fix the problem. There are jobs, especially in the trades, where employers are happy to pay $15 an hour or more for people with appropriate skills. Paying a sandwich wrapper the same as an electrician’s helper won’t make sandwich wrapping a stepping stone to the middle class.

Here are some of my earlier posts on this topic:

A Tiered Minimum Wage for Small Business (2013)

The Black Donut Hole (2010)

If you like what you read, please pass it along. Comments are always welcomed!

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Posted in Economic Trends, Entrepreneurship, Managing Employees, Politics and Regulation, Strategy and Planning, Technology | Tagged , , , , , , , , , , , , , , , , , , , , | 1 Comment

One Response to Minimum Wage and the Middle Class

  1. Mike Wright says:

    The only real way to solve the problem of the shrinking middle class is through technological advances and higher levels of universal education. Governments at all levels have failed to provide the education required and continue to take more money away from the private sector. Money that could be used to develop new technologies and train their workers to move into higher paying jobs. They are taking actions to get the political support of those who cannot, or choose not to, understand that their simplistic approaches will fail. The envy of astronomically higher salaries of CEO’s are playing right into their political strategies that are definitely not “for the people”.

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The Extinction of the Summer Job

I’ve read several articles of late discussing the decline in the number of older high school and college students that take jobs for the summer. Each of these reflected on how summer employment taught millions of Americans their first work habits.

Lifeguard poolAround 30% of students now seek summer employment. That is half the pre-recession level. While I’m sure that some don’t work simply because their Boomer parents or grandparents have enough money to support their leisure activities, many are doing other things to prepare for life. Unpaid internships serve just as well as entry-level job training. Volunteer community service can teach life lessons that are every bit as good, and probably better, than shaking French fries into a paper bag. What looks stronger on an application; a summer with Burger Buddy or one with Habitat for Humanity?

Of course, the “Summer in Europe” has become a hallmark of comfortable middle class. Parents recall their summers in hot factories or mowing lawns and take pride in saving their children from such experience by providing what is undeniably an educational alternative. Most of us can’t afford the graduation “Grand Tour” of nobility past, but four weeks of a group package tour is a close approximation.

The decline in Summer employment isn’t entirely due to more attractive options. The thinning of middle class jobs (more on that next week) has moved millions of workers into lower-wage hourly jobs that don’t provide paid vacation, and the resulting openings for temporary replacements. Kids between semesters are now competing with full-time adults for positions.

Similarly, the simpler repetitive jobs, especially in manufacturing, have either been replaced by technology or shipped overseas. Those that are left require too much training to waste it on a short-term worker.

Summer jobs were either for spending money or educational expenses. Spending money has changed as a concept. When I grew up, “having fun” for a teenager was synonymous with getting out of the house. Now it’s just as likely to mean holing up in your bedroom  with friends and your TV, chatting with them via social media, or making new friends around the globe through online gaming.

As to summer jobs to pay for education, that’s become a joke. My summer employment provided about half the cost of my college education. When my son took his first summer job, I tried promoting a strong college savings program. Some simple arithmetic made me realize that everything he could save all summer wouldn’t cover his student activity fees, much less make any dent in his tuition. If a student is paying all or part of his educational costs now, it’s by working year-round. The rest just graduate with a huge debt.

So, like most “sudden” demographic shifts, this one turns out to have many reasons. A shift in the full-time workforce, fewer entry-level or temporary positions, greater accessibility to resume-building alternatives, recreational options, lower travel costs and educational expenses that render summer income moot; all play a part.

How does this affect small business? Our paradigm when hiring for entry-level positions has changed. I hear it from owners on a regular basis. “He (or she) is twenty-something years old. By this time he should know that you have to show up on time, are expected to put in a full day’s work, and can’t ask for time off after only a few weeks on the job.”

Well, maybe he should know, but he doesn’t. Increasingly, an employee’s first job after college is his first job…period. Small business has always been the basic training ground for careers. Now it is the training program for work. Large corporations can afford to put new employees through extensive orientation on work habits and job expectations. Small business usually needs them to be productive from the first day.

If you can’t invest in basic training, look at that resume carefully for how the summers were spent. If there is a job or other structured activity, don’t just check it off. Find out what the prospective employee did, whether he stayed for the expected period, how he left and what he learned. It can save a lot of frustration for both parties.

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2 Responses to The Extinction of the Summer Job

  1. Hi John,
    Whoa, this describes the situation exactly (except I don’t know of any “middle class” folks that can afford summers in Europe)! As Chief Moderator at BizSugar, I feel your article hits home to small business owners the fact that most young people — not millennials, but generation Z, those who are about ages 15 through about 18–will be entering the job market with far, far less practical experience than even the millennials, let alone Gen X or the boomers, and this message may really deter them from giving these young folks a chance. As minimum wage jobs go up to provide underemployed adults with a means of providing for their families, perhaps it’s a good idea for small business owners to re-create those summer jobs of the past, by hiring a kid to scan some documents, run errands, do a little of this and of that and above all, get used to talking to customers and dealing with people. As a parent, I’d like to see this, but from the SMB’s perspective, they might not have the extra cash lying around after they pay the grownups.
    Hmm….food for thought.

    • John F. Dini says:

      Your point is well made, Heather. A new generation is coming into the workplace with less work experience than any before. It will be interesting, to say the least. Thanks for your input.

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Ageing Boomer Entrepreneurs: Fearful or Smart?

Do we become more cautious with age?

Startups are usually associated with younger entrepreneurs. By the time they reach their 50s or 60s business owners tend to tackle fewer big new ideas. Those that do tend to be successful enough that they can segregate the risk in a way that won’t threaten their core livelihood. Are they smarter, or just more fearful of failure?

There are any number of business axioms about the value of experience. “Experience is what you get when you don’t get what you want.” or “Good decisions come from experience. Experience comes from bad decisions.” Does the caution that accompanies age come from experience, or just from a natural reduction in adrenalin?

The youngest Baby Boomers turn 50 this year. Collectively, they represent over half the small business ownership in the United States. There is an important macroeconomic issue attached to the general ageing of owners. If risk-aversion is a biologic phenomenon, then we can expect millions of small employers to drift into “harvest mode,” maintaining their businesses as vehicles for current cash flow and retirement security. They will leave growth and innovation to a younger, but substantially smaller group of entrepreneurs.

Some of their caution is due to external influence. As companies grow and founders age, they become far more conscious of their responsibility to employees’ families and children. Putting everything on the line has potential impact not only on workers, but the extended small economy that depends on their wages. Greater responsibility generates greater caution.

danger aheadWhen you are starting out, have fewer people depending on you, and mistakes have fewer consequences (see my 2014 post The Luxury of No Resources),  it’s easier to take a leap. If you fail, you’re not much worse off than you were before. But there are costs to learning by trial and error. After a while, going back to the drawing board becomes tiresome.

Ideally, the caution that comes with age isn’t from fear. It’s because you’ve come to appreciate the value of planning. It’s not because you are afraid to make a mistake, but rather you want to avoid the delays that come with making repairs every time you hit a pothole.

Every school of business wisdom extols the value of planning. When we are younger, we tend to ignore it. We scoff at Abraham Lincoln’s quote “If I had eight hours to cut down a tree; I’d spend seven sharpening my saw.” The tree is right in front of us. The saw is in our hands. We can sharpen as we go. Sometimes that works. Often it doesn’t.

Many Boomer owners will operate from a fear of failure. Their businesses will fade as the world continues to change around them and they don’t adjust. Hopefully, they’ve been successful enough in the past to exit comfortably.

Some, likely a small minority, still seek to leave a bigger legacy. They have a shorter time frame, lacking the 30 or 40 years of a full career ahead of them. They’ve learned to spend the seven hours sharpening, so that the hour spent sawing is easier and more productive. Those entrepreneurs will adjust to change on their own timetable, but  with far better results.

Their caution isn’t from fear, but from experience.

 

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One Response to Ageing Boomer Entrepreneurs: Fearful or Smart?

  1. Cathy Locke says:

    Experience is what you get when you don’t get what you want.” or “Good decisions come from experience. Experience comes from bad decisions.”
    I agree with both of these. I really enjoy your blogs! I was forced into inventing a “new self employed start up” at 62. I have no regrets but with my “experience is what you get when you don’t get what you want” is an ongoing goal as well.

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Culture Counts!

Small businesses can’t compete with large corporations on salary and benefits. I’m not being unduly cynical, it’s just a fact. The top 1/10 of 1% in US household incomes start at $1.9 million annually. Of all those in that rarefied category, 60% are corporate executives.

When it comes to benefits, it’s no contest. Small employers, especially those with fewer than 100 employees, usually struggle to pay most of the health insurance premium, and may have some matching contribution to a defined contribution retirement plan. They certainly don’t have the bench depth at most positions to allow flexible hours, telecommuting, unlimited PTO (Paid Time Off), extended family leave or educational sabbaticals.

So how do you attract Millennials, who by the end of this decade will be 50% of the workforce, as long term players in your company? The answer is plain… culture. You have to create a workplace that appeals to the type of employee you want, and then work tirelessly to maintain and promote your culture.

It’s not easy, but it does work. For an excellent, real-life case study, let’s take the San Antonio Spurs. The Spurs are successful beyond question. They are the winningest franchise (by percentage) in the history of major professional sports, beating the New York Yankees, Montreal Canadians and Green Bay Packers. Moreover, they’ve done it in a market that ranks 37th for television viewers, and is 126th in average household income.

In the sports world, this qualifies as a small business. If the Spurs had a deep-pocket owner it might make up for some of their built-in disadvantages, but they don’t. One of their trademarks is working within the salary cap. They manage that by staying away from high-priced free agents.

Tim Duncan JD shotSo how did a small-market team with no more money than anyone else manage to stun the basketball world with the most successful recruiting season  in the country? They did it by attracting and grooming players that want to be in a certain culture, and who are willing to forego other material benefits to do so.

The re-signing of four key free agents, along with attracting two new All-Stars who had their choice of teams, comes down to basic business principles. That’s not surprising for a team that spouts Jim Collins and Patrick Lencione, and who has every new player take a course on values-based leadership.

How did they do it?

  1. A culture of selflessness. Despite having a roster with multiple all-stars, all-NBA selections and MVPs, the Spurs live a culture of “team-first.” Tim Duncan agreed to a salary about equal to first-round pick Karl Anthony Towns, who hasn’t played a minute of NBA ball yet. This isn’t a courtesy “grand tour” year for Duncan. He was still one of the top 10 players at his position in the NBA through 2014-2015, and will be paid about a quarter of what he could have demanded. Manu Ginobili and Danny Green also signed for far less than they could have made elsewhere. Seeing this attitude, David West in Indiana gave up over $11 million to come and play for the Spurs.
  2. A commitment to excellence. While other teams pursuing LaMarcus Aldridge emphasized their benefits (endorsements, fame), the Spurs kept to their true selves, sending 4 players to meet with him and discuss how they worked together as a team, and their focus on winning.
  3. Communication. The team shared their plans from the outset  with key players like Green and Kawhi Leonard, who both had enough trust in management to wait for certain contract deadlines to pass, allowing the team more financial flexibility.
  4. Planning. The Spurs did their homework on the player they wanted (only the second free agent they’ve chased in 20 years). They came prepared, pursued the objective intently, and quietly took home the prize without fanfare against much flashier competition.

Yes, I am a fan and (full disclosure) a season ticket holder. I expect people in other cities to root for their home-town clubs. As a small business owner, however, you have to appreciate the Spurs. They assemble a winning team that isn’t built around salary and benefits, but rather around a great culture.

 

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When Supervisors Become Managers

Any promotion means more responsibility. Few steps require as big a leap as the transition from supervisor to manager. Each step up the ladder involves a change in tasks, but an employee’s first managerial position necessitates a change in thinking; one which isn’t intuitive.

career climbingBeing named a supervisor is an adjustment, but one that can be handled largely through intuition. The likelihood is that the employee who is promoted from the ranks has already shown responsibility and initiative. He or she is a solid performer, and has shown leadership with peers, now subordinates. In most cases, the bestowing of a supervisor title is merely recognition of talent that is already in use.

When a supervisor performs well, the normal tendency is to consider him for manager. As a manager, he will have responsibility for other supervisors. His role becomes more hands-off, planning and directing teams from a tactical, rather then an operational viewpoint. Unless you take the time and effort to mentor a new manager, one of several problems are likely to arise.

  1. Staying too far from the work. New Managers sometimes avoid working side-by-side with their subordinates, in the belief that their new position raises them above all that. They risk losing touch with what is going on day-to-day.
  2. Dipping into the work. Alternatively, the manager may seize opportunities to act in a supervisor’s role, directing first-line employees personally. It’s a skill that got him promoted in the first place; and it’s easy to fall back on when efforts to work through the chain of command are frustrating.
  3. Placing too much weight on position. A title carries authority with it, but designated authority doesn’t replace leadership. As a supervisor, his subordinates did as they were told because it was clearly his job to tell them. As a manager, he is expected to lead others who have their own base of authority, and don’t follow orders blindly.
  4. Ignoring position. “I know I’m a manager now, but you can treat me just as when we were supervisors together. I’m not going to be one of those managers who acts as if he is above everyone. “ Collegiality is great, but the manager has been placed above the others, and needs to keep some distance.
  5. My way or the highway. It’s a supervisor’s job to instruct his subordinates on what to do and how to do it. A manager with competent supervisors should be focused on what needs to be done, and not so much on how to do it. A supervisor shows others how to do things just like him. A manager adjusts his style to fit different individuals or teams, so that others can do what they do best.

The shift from supervisor to manager has one more factor. As my friend and business owner Van Palmer says it, “Supervisors are in a customer facing position. Managers are in an employee facing position.” A manager’s role is to accomplish objectives through the work of others, and it is their success that defines his.

When you make your next managerial promotion, look beyond the high performance of an individual. Look also for the humility to take satisfaction in the success of others. Then take the time to teach the difference, and recognize the success of others as shared by their manager.

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