Venezuela's Minimum Wage Hike Forces 40% of Stores to Close
Venezuela just enacted a 3,500% increase to salaries and are not allowing businesses to increase the cost of goods and services to cover the increased wages. This is resulting in 40% of businesses simply shutting down due to an inability to function. Many people in the US advocate for higher minimum wages but there are those who say simply increasing wages will only hurt and not solve any problems. Recently Alexandria Ocasio Cortez lamented the closing of her old job, however the coffee shop closed because they couldnt cover the cost of increasing wages, something that Cortez actually supports. Will increasing the minimum wage help or hurt in the long run? Unfortunately current data is conflicting.
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Venezuela has just enacted a 3,500% minimum wage increase across the country, but they are not allowing businesses to increase the cost of goods and services to compensate for the wages they now have to pay.
Thus, 40% of businesses are shutting their doors.
They say they just can't pay the new wages.
Some people are even saying that if they go against this in any way, they will be immediately arrested.
And thus we can see socialist command economies just don't work because often when they try to meddle in the economy, they end up making things worse.
They can't predict exactly what will happen.
But this brings me back to the United States.
Recently, Alexandria Ocasio-Cortez, the famed democratic socialist in New York, was lamenting the closing of a coffee shop she used to work at.
But the owners of that coffee shop said they're closing their doors because they can't afford the higher wages that are being mandated by law.
Law that Cortez actually supports.
So my question today, does minimum wage law really work?
Is it beneficial to people or does it hurt them?
Let's start by looking at Venezuela.
From the Miami Herald, Maduro's huge salary hike deals fatal blow to 40% of Venezuelan stores.
Nearly 40% of all Venezuelan stores have closed their doors, some of them perhaps permanently, after the government of President Nicolas Maduro increased the minimum salary by nearly 3,500% in one fell swoop.
Many of the companies, which had been barely surviving the gradual collapse of the economy, saw the salary increase and other changes announced last month as the fatal blow in a string of policies that have been gradually strangling their operations.
The problem is that Venezuelan companies are being forced to sell at prices far below cost, Just as employee salaries are increasing by 60 times, the regime has banned stores from increasing their prices in order to cover the increase in salaries, arguing that it is not necessary.
If they do increase prices, store owners or managers can wind up in prison.
We have inspections, and they force us to sell at last month's prices, she said.
That takes money away from the business because of the hyperinflation, when you can't even sell at yesterday's prices because you lose money.
And anyone who protests against these measures runs the risk of going to jail, without the right to appeal, without the right to do anything, simply because the official whose turn it was to inspect the store just felt like arresting you.
He did it, and that's all.
About four out of every ten stores have not opened their doors since Maduro announced the salary increase two weeks ago, and some of the stores that did open are simply liquidating their merchandise and plan to close definitively when it's done.
Economist Orlando Ochoa said the stores cannot survive the salary increase, especially because the owners already had problems obtaining foreign currency to buy imports and buying national products in short supply to fill their shelves.
Naturally, people are going to say, look, Venezuela is an extreme example.
Increasing wages by 3,500% is ridiculously extreme.
And asking for a wage increase from, say, $10 to $15, while it is a high percentage, is not that extreme, especially when businesses will be allowed to compensate in their pricing.
This is what people in the United States are saying.
There's a group called Fight for $15, and many people believe that increasing the minimum wage is the right thing to do.
And perhaps it is.
But for me, I often feel that calling for companies to just pay more is a surface-level solution, and you have to look at the consequences of what that program will actually be.
While yes, on the surface, increasing wages means employees will get more money, you have to consider that some businesses can't afford it.
They may fire people, they may replace people with machines, or they might just reduce the amount of hours, or in extreme cases, they might actually close down, like we're seeing with Alexandria Ocasio-Cortez's old job.
Here's a story from last month in the Investor's Business Daily.
Ocasio-Cortez mourns restaurant driven out of business by minimum wage laws she backs.
This week, Cortez swung by to say goodbye to a restaurant where she used to work.
What she didn't say is that it was closing because the owners can't afford New York City's soon-to-be $15 minimum wage, the very job-killing policy Ocasio-Cortez and her fellow Democrats want to impose nationwide.
The restaurant I used to work at is closing its doors, Cortez tweeted on Monday.
I swung by today to say hi one last time and kid around with friends like old times.
She was referring to the popular coffee shop in Union Square, which was frequented by A-list celebrities and featured on Sex and the City.
Despite its popularity, the coffee shop is going out of business.
Why?
Co-owner Charles Malit told the New York Post that the main reason was the minimum wage is going up and we have a huge number of employees.
In New York City, businesses that employ more than 11 people, the coffee shop had more than 150 employees, saw the wage jump $2 an hour to $13 this year, and they face another $2 increase starting next year.
For businesses like restaurants that hire a lot of unskilled labor, that means a government-imposed 36% increase in labor costs in just two years.
Even a successful business will find it hard to absorb a cost spike of that magnitude.
As a result, 150 workers will soon see their actual wage drop to zero.
Many others will join them.
The American Action Forum calculates that wage hikes in cities and states around the country this year will kill 261,000 jobs, with most of the lost jobs concentrated in California and New York.
As we noted in this space recently, San Francisco saw far more restaurants close than open after its minimum wage went to $14 last summer.
It climbed to $15 this summer.
When TV host Trevor Noah asked Cortez whether a $15 national minimum wage would stifle economic growth, here was her answer.
Raising the minimum wage to a living wage will expand the economy, it will create wealth in our economy, and it will increase economic activity in this country.
Now this story is interesting because Cortez worked here, and she said that it's going out of business, but according to the owners, it's going out of business because of a law that she supports.
But it's not just anecdotal.
There is some research to back up that increasing minimum wages could actually hurt businesses.
In June of 2017, we saw this story from USA Today.
Seattle's $15 minimum wage may be hurting workers, report finds.
As companies look for ways to cut costs, Seattle's $15 minimum wage law may be hurting hourly workers instead of helping them, according to a new report.
A report from the University of Washington found that when wages increased to $13 in 2016, some companies may have responded by cutting low-wage workers' hours.
The study, which was funded in part by the city of Seattle, found that workers clocked 9% fewer hours on average and earned $125 less each month after the most recent increase.
If you're a low-skilled worker with one of those jobs, $125 a month is a sizable amount of money, Mark Long, a UW public policy professor and an author of the report told the Seattle Times.
It can be the difference between being able to pay your rent and not being able to pay your rent.
In 2014, Seattle City Council voted to incrementally raise the minimum wage to $15 per hour.
The wage increased from $9.47 to $11 per hour in 2015 and to $13 in 2016.
According to the report, under the law, businesses must raise the minimum wage to $15 for all workers by
Seattle Mayor Ed Murray said he stands behind the $15 minimum wage law, Reuters reported.
Raising the minimum wage helps ensure more people who live and work in Seattle can share in our city's success, and helps fight income inequality, Murray said in a statement in response to the study.
Now that study was from last year, and there may be new evidence to suggest that raising wages actually might work.
This story from the Chicago Tribune.
Chicago's minimum wage hike not a job killer, new study says.
Raising Chicago's minimum wage has boosted the paycheck of food service workers while not harming jobs, according to a new study, that adds to a growing and conflicting set of literature attempting to address the impact of recent wage hikes.
The study from researchers at the University of California at Berkeley examined how recent wage increases in Chicago and five other big cities affected earnings and employment levels at restaurants and bars, which employ many low-wage workers.
It is the first multi-city analysis of the consequences of hiking minimum wage beyond $10.
The study came to a similar conclusion as a report released this summer from the Illinois Economic Policy Institute and the University of Illinois at Urbana-Champaign's Project for Middle Class Renewal, Which compared Chicago with surrounding suburbs in Illinois, Indiana, and Wisconsin that did not enact wage hikes.
That study found that Chicago's wage increase had benefited 330,000 workers, about 25% of the city's workforce, with no negative impacts on business or employment growth.
But other studies have not been so rosy.
The story then goes on to talk about conflicting literature as they mentioned in the beginning.
They end by saying, The debate will continue as a growing number of cities and states raise their minimum wage.
As of August, 10 large cities, 7 states, and dozens of smaller cities and counties had enacted minimum wage policies in the $12 to $15 an hour range, according to the Berkeley report.
Once phased in, the wage increases will cover well over 20% of the US workforce.
Many problems that we face politically in the United States often have proposed surface-level solutions.
One example I give to people is imagine you have someone in the street waving a sign and protesting.
A police officer is ordered to remove that person.
And they think, hey, if I arrest them, they won't be in the street anymore.
The police officer arrests the protester, and the next day there are 10 protesters.
While on the surface, removing the person is as simple as arresting them, you have to think about consequences.
We want people to get out of poverty.
We want people to make more money.
But just forcing businesses to pay more isn't necessarily the right move, because we don't necessarily know what the consequences will be.
But there is one really famous Seattle example.
A company raised salaries to $70,000 across the board and actually saw their profits and revenue increase and to this day are successful.
But is this evidence that increasing wages works?
Maybe, maybe not.
The story was...
Dan Price, who owned a credit card processing company, decided to set a $70,000 minimum wage.
Dan Price decided to pay all 100 employees at least $70,000.
Grown men cried, profit soared, then things got really crazy.
This story is often cited as an example of how increasing wages can increase productivity and result in an increased profit for the company.
And technically, that's true.
According to Dan Price, the founder of the company, he said that when he increased salaries across the board, he found that productivity increased significantly.
And that allowed them to bring in more people, it allowed them to bring on more clients and make more money, and revenue kept going up.
As revenue went up, he started giving people more money and eventually found that there was a certain level where people were extremely productive and his company worked.
And I believe that's actually true.
I believe that if companies do pay well, above market, you're going to find your employees are extremely happy and don't want to leave and make sure they do their best to stay at a company that's taking care of them.
However, this is an anecdote and there are some reasons why it probably worked out for them.
For one, they were already successful to begin with.
Dan Price was making around a million dollars per year salary when he decided to make this move.
He had the money to do it, he had the clients to do it, and he said, we have more than enough money, we can do it.
He made the choice, and it worked out.
But not only that, the press he generated from doing this resulted in a massive wave of new clients trying to come to his company.
It was a PR move that paid off.
that won't necessarily work for everybody. But if you were to ask me, all this really proves
is that given the opportunity, when a business can choose to do this on their own when it makes
sense, it can work out. But simply telling all businesses that they have to do it can result
in businesses who are struggling, going out of business, or suffering. A broad stroke doesn't
necessarily work for everybody.
A Seattle tech company that's making a ton of money can definitely pull this off, but a small mom-and-pop shop, a small restaurant probably can't do it.
And thus, we are left with a conundrum.
How do we actually increase wages for people?
How do we make sure people can live?
Personally, I believe it's entirely unfair that we do expect people to work full-time jobs, but not be able to afford healthcare, not be able to afford their rent without stacking on tons of roommates.
There needs to be something we can do to make sure that if you are working in society, you have your needs met.
And it's a huge challenge.
Because unfortunately, it seems that in many circumstances, increasing minimum wages does not work.
And now we're seeing Venezuela meddle in their economy time and time again and only cause
more strife and damage to their economy, to their people.
Perhaps that isn't the solution, but honestly I don't really know what it is.
But maybe you do.
Comment below, we'll keep the conversation going.
I know a lot of people think that increasing wages works, there's big activist groups.
But in my personal opinion, it's short-sighted.
It's a surface-level solution that's only going to result in unintended consequences
hurting people.
But that doesn't mean we don't do anything.
Maybe there's something that needs to be done.
Perhaps less regulation?
I've seen people argue that getting rid of minimum wages would actually help people out, but I'm not sure that's the case.
I believe that companies, given the opportunity, would pay less than they already do, and that's not going to help necessarily.
But maybe I'm wrong.
I'm not an economist.
All I can say is that when I look at these stories, when I look at what happens in Venezuela, when I look at what happened in Seattle and California, it looks like this isn't necessarily going to solve anything.
But I don't want to leave people hanging.
I don't want to tell people in our country, look, I know you work full-time, but we're not going to let you survive.
That's just not fair.
What do you think?
Comment below again.
We'll keep the conversation going.
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