Do Companies Lay People off Because of Taxes or a Minimum Wage Rise?

Florida Senator Marco Rubio gave a “Republican Response” to the President’s State of the Union address. He said that taxes cause employers to reduce hours or lay people off. Others say that raising the minimum wage will mean layoffs. Let’s take a closer look at that.

In Wednesday’s post, What Do Republicans, Rubio And Rand Have If They Don’t Have Deficits? I focused on one line from Rubio’s speech,

One line of Rubio’s stands out: “Because more government raises taxes on employers who then pass the costs on to their employees through fewer hours, lower pay and even layoffs.”

With this Rubio is trying to scare people who are worried about jobs. Business taxes are on profits. Good businesses employ the right number of people, so a company that is making profits isn’t going to reduce staff or hours. That is simply preposterous to anyone who has ever run a business.

I was in a local CVS store today. There weren’t enough employees in the store, and there was a long line of people waiting to pay for items at the only checkout register. There was also a long line of people in line at the pharmacy. I saw one person give up, leave their nearly-full carrier on a shelf, and just leave the store. I saw another person come in the door, take one look at the line and leave. I left without buying anything and went to a different store — not a CVS, for what I was looking for.

Was this CVS “saving money” by employing fewer people? Or were they being “penny-wise and pound-foolish” and costing themselves business today as well as in the future?

How many times have you seen this happen at a business that is not employing enough people to “save money? You are at a business, they don’t have enough people working, and people give up and take their business somewhere else?

But there is more to it than that, because this misunderstands taxes. Taxes are not a “cost” as Rubio said. Taxes are on profits. A company pays taxes after all costs — including wages and salaries — are deducted from revenue. The fact of the company paying a tax at all means they have the right number of employees serving their customers and meeting demand so they make a profit.

It is the poorly-managed companies that employ too few people who are not going to do well enough to pay taxes. (I doubt very many companies are employing too many people. What are they doing, having them sit around reading the paper?)

Obviously being profitable — which means that they pay taxes — does not cause a business to lay people off or reduce hours. When Rubio says taxes make companies “pass the costs on to their employees through fewer hours, lower pay and even layoffs” he is just wrong.

Minimum Wage

The President’s proposal to increase the minimum wage is also being discussed today, and the opponents are using a similar job-scare to fight it. They say that increasing the minimum wage will cause companies to lay people off or reduce hours.

On Marketplace today they were talking to people working in a diner about the impact that raising the minimum wage would have. From the segment, What the minimum wage means at work, (click through to listen to the whole segment)

At the Marmalade Café in El Segundo, Calif., employees like 32-year-old food runner Alejandro Serbin earn California’s $8 minimum wage, plus about $35 a day in shared tips.

Serbin, an immigrant from Mexico City, says a dollar raise would help. “It’s so much different for me. Because I have a family I have to support. The rent is high. I have to pay bills, insurance.”

Serbin and his wife, who works as a cook, have a 3-year-old and pay about $1,000 a month in rent, not unusual for Los Angeles. He’s hunting for a second job and says most of the minimum-wage workers he knows have two or even three jobs.

So for the minimum-wage employee an increase means an immediate increase in demand at all the places he shops. Millions of people with a bit more money to spend because of a minimum-wage boost would certainly mean more hiring, because more customers would be coming through the doors.

How about the diner’s owners?

Selwyn Yosslowitz is one of the Marmalade Café’s founders. The restaurant employs about 600 people in nine locations in southern California. Yosslowitz says a dollar increase in the federal minimum wage would likely force him to raise prices or cut labor costs.

“It wouldn’t be layoffs,” Yosslowitz says. “But maybe you make the hours more efficient. There’s lots of people who come in at 9 o’clock right now. I would make sure they come in at 9:30 and cut off half an hour across the board to be able to afford the increase.”

Think about this. Yosslowitz says he will reduce hours if the minimum wage is increased. In other words, he is saying that he currently is mismanaging his business by having people work longer hours than the business needs them to work. Either that, or he is going to lose a lot of business because customers are not being served or tables are not being cleared after he reduces worker hours.

A Well-Run Business Employs The Right Number Of People

A well-run business employs the right number of people, period. If a business has too few people to meet demand, they lose business and they also can get a bad reputation that costs them future business as well. It is for this reason that a minimum wage increase would not mean people would be laid off. Some businesses that are not doing very well might be pushed over the edge, but the increase in demand from millions of people woth more to spend could well push those very businesses the other way.

Businesses hire when more customers are coming through the door, placing orders, etc. Businesses lay off when they don’t have enough customers, orders, etc. It has nothing to do with taxes.

Obviously the solution to employment problems is to do things that cause more customers to be coming through that door, like raising the minimum wage.