tray of burger and fries

Risk & Reward in Increasing Fast Food Wages

The argument for increasing the minimum wage has gained political traction of late. Under the banner Fight for $15 and others, the movement is seeking an increase to the national minimum wage. There hasn’t been a federal increase in 11 years, though 29 states and many cities have some kind of adjustment to bring them above the national level. The minimum wage has lagged behind in inflation and is now worth 30% less than what it was 50 years ago.

Productivity gains for workers makes this gap even larger: employers are generating even more value for their workers than they were decades before, to the tune of about $24 an hour

Since its adoption in 1938, the consensus among economists was that the net effect of increasing minimum wages would be higher unemployment. Theoretically, making labor more expensive decreases its demand. The Econ 101 model shows a lower demand curve for workers necessarily leads to higher unemployment. Studies from the 1970s, though mostly looking at teenage employment, supported this. And most economists agreed with this for decades.

In 1994 economists David Card and Allan Krueger decided to study the real world impact. Neighboring states, New Jersey raised the minimum wage at a time when Pennsylvania did not. Card and Krueger’s study focused specifically on fast food workers. Their conclusion: not only did employment levels remain the same, the increase led to more economic activity. The economic activity results from a transfer in wealth from business owners to workers, or from savers to consumers.

Seattle was an important test case in the raising of minimum wages as it did this in 2014. And, for a while it was a cause celebre for people like the American Enterprise Institute as proof that an increase was a job killer. But despite their dissembling , the reality showed little to no decreases in employment and real benefits to workers. Granted that the economy in Seattle was robust over this period. Experienced workers did better than inexperienced workers. But the city did better than the suburbs in terms of employment growth, even though the suburbs did not have the mandated increase. It was not the debacle originally predicted and initially reported. And while lobbying groups resist any increases to minimum wages, many of the people who actually run restaurants have no problem with paying workers a living wage.

Upon closer examination, even in the youth employment studies cited by the opponents to minimum wage increases showed that an increase of wage of 10% decreased employment rates by less than 1%. And teens now comprise less than a fifth of minimum wage workers. What really matters is low wage jobs for adults. The most influential recent work comes from Arin Dube, who has found little evidence across studies that adoption of a higher minimum wage caused higher unemployment. The review of 37 studies over the last 15 years found a preponderance of data showing little or no employment effects from increases.

So how has this changed the consensus among economists?

In 1978, 90% of respondents to a survey of members of the American Economic Association (AEA) agreed that minimum wages substantially reduce employment among low-wage workers. By 2015, only 26% of top economists surveyed by the University of Chicago Booth School of Business’s Initiative on Global Markets concurred that raising the floor to $15 by 2020 would “substantially” lower employment.

While supply and demand curves are valuable to describe micro-economic theory, by nature they do not figure in externalities in markets. Using purely demand curve to describe labor markets requires two assumptions: one, that the operation has significant slack or excess labor that somehow can be reduced for purposes of efficiency or that the operation may do without – lose efficiency – because of the burden of those excess costs. Restaurant operations, whether smaller or franchise operations, focus heavily on labor efficiency and restaurants use part -time and hourly wage schema to manage labor costs. As someone who has worked in both, I can tell you there is no hesitation or stigma to sending employees home or reducing hours during slow periods. Secondly, it presupposes that prices can’t be increased to accommodate the increased costs. In a market where all labor costs rise, all other things being equal, all competitors can raise prices.

There are other arguments against the increase. Again, in theory, an increase in wages this widespread could be inflationary. This is a hard argument to make these days when Treasury Bill rates are close to zero. Inflation hasn’t been a problem in this country in a generation and many economists argue that a little more inflation would actually benefit the economy.

For smaller employers, it could cause business failure. One Harvard Business Review study found that the impact of increasing the minimum wage impacted lower end restaurants more; in fact it had no discernible effects upon 5 star locations. Allowances are made for smaller businesses based on revenue and number of employees. These need to be examined carefully and possibly expanded.

Increased prices at some level will certainly follow increases in minimum wage but $1.2 billion subsidizing poorly paid workers at McDonald’s through social programs like food stamps is a cost too.

There is concern that in specific markets with very low median wages, the hike could lead to lower employment. There is some data that suggests that the employment effects are small up to around 59% of the median wage, others say the effect doesn’t kick until 82%. States like Alabama, Louisiana and Mississippi have median wages that are only around $15 an hour. (There is a rabbit hole regarding monopsony labor markets that I won’t go into here but that argues raising minimum wages in markets with few employers is actually safer.)

Raising the minimum wage to $15 per hour would brings workers back to about the level of 1968 – a time when the minimum wage workforce was much more oriented towards youth employment. It would increase pay for 40 million workers and reduce poverty by 1.3 million workers. (Dube also found that the retention levels increased by 2% which sounds small but the restaurant industry is notorious for high turnover, this is a meaningful offset.) By not keeping the minimum wage in line with inflation, wealth has been transferred out of the working class and upward; fixing this is a start to fixing our problems with inequality. It is estimate that the increase will raise 20 million out of poverty. Increasing the minimum wage is good for workers, good for employment, good for the economy and a good way to address inequality. Even Mc Donald’s isn’t worried.

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