Minimum wage hikes will be counter-productive

Fiscal conservatism 603

Wouldn't it be nice if we could just suspend the laws of economics and reality and just declare everyone a millionaire?

Isn't it sad that so many people are burdened with having to pay bills? And what is even worse is that some people who work hard but are subject to the previous choices they have made make less money than others. That is just unfair, but we can fix that with a wave of our magic wand.

A public wage-control board in NY has just decided that fast-food workers in NYC will be earning $15 per hour in three years, with the same increase coming to the rest of the state's fast-food workers shortly thereafter. This will apply to franchised locations with at least 30 outlets. The current minimum wage is $8.75, scheduled to increase to $9 next year.

Here is how NY Governor Andrew Cuomo described his view of economics, according to today's Wall Street Journal article on this subject: "The fear would be, McDonald's says 'I'm closing my stores and I'm moving out of state.' Fine, and then we'll have more Burger Kings. They're not going to leave the hamburger market in New York alone; don't you worry about that."

The local McDonald's franchisees might not "move" their businesses, they might instead "close" their businesses. But according to Cuomo, so what if some local, franchised fast-food businesses close? Too bad for those owners and investors. Too bad for those workers.

Regulating non-safety issues in private businesses should be a red line that the government doesn't cross, but the popularity of higher minimum wages, if you believe the so-called surveys of the public gleefully reported in the press, make this a fight the Democrats think they can win. And of course, hurting the local fat-cat business owners is no skin off their nose. They can just move their business elsewhere, or so the Dems believe.

I'm not a McDonald's patron, but there is no denying the restaurant's popularity. What makes it popular is its low prices, speed of service, and consistent quality. When you make the restaurant pay artificially high wages, all three of these features could be impacted.

Cuomo guessed that Burger King would move in after his new regulation closes some McDonald's locations, but I don't think Burger King would be that stupid. Instead, we are likely to see "Joe's Burgers" come in, with much higher prices, and slower service. But nothing prevents "Joe's" from competing right now with McDonald's. There are lots of relatively new burger joints popping up, like Shake Shack and Five Guys. Once McDonald's is out of the picture, "Joe" can further increase his prices because of less competition. And instead of serving "billions and billions" as McDonald's claims, Joe's will serve dozens or hundreds. So this move results in less competition, worse service, and higher prices.

Another interesting point in the WSJ article was how workers voiced support for the wage increase. Several were quoted as saying how much they needed the raise, and how they could better afford to live in the City at $15 per hour. Don't any of them realize that Cuomo admitted that many of their jobs would likely be disappearing or at least moving out of state? How many of these workers are going to follow their minimum-wage jobs to New Jersey or Connecticut?

If a business doesn't move or close, it is likely to cut hours (to avoid other mandates) and to reduce total employment (to cut expenses, to pay the higher wages of the workers who don't get fired.) Raising prices would seriously undermine one of the competitive advantages of these businesses, so that is probably the last thing the business owners would want to do. But they must be so wealthy that the state can force them to transfer their wealth to their worker's paychecks, right?

The third point is that Cuomo argued that his state "effectively subsidized the wages of fast-food workers because their low earnings require them to seek public assistance."

This is simply a false argument. Workers are free to find higher-paying jobs and these workers certainly are motivated to do so. The fact that they can't means there aren't any for them. So whatever "subsidy" Cuomo thinks the state is paying is actually a savings from what the state would pay if these workers didn't have jobs. It also assumes that the state "owes" people money. Government assistance is not a right (at least not yet. I'm sure Obama and his ilk are working on updateing that definition as well.)

If McDonald's fires a worker and the worker becomes a financial ward of the state, is that also McDonald's fault? Perhaps Cuomo should pass a law that forces McDonald's to pay wages to people who used to work there, because otherwise the state is forced to provide for them. Or maybe Cuomo could justify paying wages to anyone for six months or a year after they are terminated, so the state doesn't have to pay for unemployment benefits. (Sorry, the state already requires companies to pay for unemployment benefits. I'm sure Cuomo doesn't think they are paying enough. Why limit a fired-workers income that forces a state subsidy? Let's jack up those payments right away!)

Under the Obamacare rules, many companies now limit how many hours workers can work to avoid triggering the requirement of paying for healthcare benefits for full-time workers. How much in health-care "subsidies" are states paying for part-time workers who would prefer full-time work but can't get it because of these government rules?

Next up will be watching how businesses deal with the new Obama rule that requires paying overtime to workers who earn under $50,000 a year and work more than 40 hours a week. Many of these fast-food managers make ends meet by putting in long hours and 'paying their dues.' That is likely going to stop, and companies will look even harder at labor-saving options.

Targeting the fast-food industry for higher minimum wages and benefits is the latest fad. There is another route that Democrats are attempting, and that is to reclassify local franchise employees as working for the franchisors, thus triggering mandatory benefits like health insurance because of the much larger workforce. So a local franchise owner could suddenly be forced to pay thousands of dollars per employee in healthcare benefits. Too bad for that owner and his investors. I guess they can just close their business and move elsewhere too.

As minimum wages increase and overtime becomes forbidden, we may find that being an assistant restaurant manager is not a very desirable stepping-stone to higher management. That may end up being the legacy of these various movements...the collapse of the franchise management system and the end of the American fast-food franchise success story. And that will do much more to damage low-skilled workers than anything.

NYC can be an expensive place to live. Earning $8.75 per hour and living in the City would be very tough. Perhaps these workers should be the ones to move where there are better jobs and a lower cost of living, rather than blaming companies that are providing employment and work experience to low-skilled workers?

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Comments

minimum wage

Run, run, chicken little, the sky is falling!

Hard to predict problems

I hear you. It is very hard to predict impending doom that never seems to come. Until it does come, I guess, and then what?

Minimum wage hikes aren't the best example. I'd say it's the federal deficit and the federal debt and the unfunded liabilities. I think we officially owe more than we own, certainly more than we earn. This type of federal spending should be producing inflation, eroding all of our savings as "easy money" raises interest rates. But the Fed has kept interest rates very low, and perhaps because the dollar is the world's dominant currency, or maybe for some other reasons, inflation remains in check.

Easy money makes stocks go way up, but I read recently that all of the gains have been from something like six stocks. If you remove those six companies, the market has been flat. Makes you think it is a big bubble waiting to burst...but no, that would be another Chicken Little statement.

I honestly am very puzzled. So perhaps you are right, we can raise minimum wages, and our poorest workers will get a big pay increase, burger prices won't go up, and owners of restaurants will just "eat" those extra costs and absorb their lower profit margins without affecting employment whatsoever.

In fact, everyone can make more money so that all of our standards of living can go way up, just by forcing companies to raise wages. I guess we should be demanding $50 hourly minimum wages because you really can't afford to live on less, not when you take into account all the things we need to buy these days, especially in this part of the country.

Allen Nitschelm has lived in Acton since 1998 and writes about fiscal issues at the
local and state level. He is a former member of the town's Finance Committee
and is an Associate Publisher of Acton Forum.

Imagine a new work force where every worker is named Tobor.

Why would a fast food work force have employees all named "Tobor"? I'm speculating on that name, guessing that spelling "Robot" backwards would be catchy and all the rage.

Faced with big jumps in wages, stores will jack up prices, go out of business... or use the model of stores today with self-serve checkout.

There are numerous suppliers of automatic hamburger machines that make better burgers, consistently, without need for wages or healthcare. These can connect to self-serve order terminals.

The net effect is less jobs, of course.

Indeed, minimum wage, and especially very high minimum wage, essentially knocks off the bottom rungs of the workforce ladder of opportunity. It makes it harder for new entrants to the work force. It benefits some existing workers - union workers whose wages are tied to the minimum wage. It puts out of work others, and decreases the number of entry level jobs.

Another problem with high minimum wages...

Great points. We will probably need to first see the effects of higher wages translate into higher prices, then businesses closing, then new businesses starting up with lower labor costs to undercut the higher-labor-cost legacy businesses.

Right now, there are plenty of minimum-wage jobs to be had. If you want to work, you can find a job. What do you think will happen to this surplus when minimum wages are set at $15 per hour?

The number of jobs will decrease. Managers will be looking for the best employees with the most experience at that pay rate.

Because many companies have minimum-wage job openings, workers can learn job skills and the work ethic they need to know, plus get experience. They can afford to make some mistakes on that learning curve. In the $15 minimum-wage universe of the future, that learning curve will be shortened or nonexistent.

If you don't already know how to flip burgers or use a cash register, you won't even get an interview. Why take a chance on someone with no experience when there are better candidates available? Imagine having 10 or 20 candidates to fill a minimum wage job. That would be sort of depressing...so many people willing to work and not enough jobs for them.

Here's an analogy. Imagine a world where they set a "minimum house price" of say $300,000 (using Acton housing prices here!). The fixer-uppers would never be sold and pretty soon the housing market itself would collapse because there wouldn't be as many first-time buyers coming in. First-timers buy the foreclosed, fixer-uppers, and starter homes. Over time, they can build equity and trade up. But if the government were to set an artificially high floor for housing prices, the long-term market would be in real trouble.

Allen Nitschelm has lived in Acton since 1998 and writes about fiscal issues at the
local and state level. He is a former member of the town's Finance Committee
and is an Associate Publisher of Acton Forum.

Why imagine this $300,000 minimum home price?

Look at the results of this concept where there is rent control.

Rent control is a price ceiling

Rent control is a price ceiling, not a floor.

But we could imagine "protecting" landlords by establishing a minimum rent of $1,000 per month for any apartment.

The larger apartments wouldn't be affected, but if young people could no longer rent a cheap studio or one-bedroom apartment, they would have to get several roommates for larger places. The number of studio apartments for rent (except in places like Boston or New York) would decline. It is likely that small apartments would by and large disappear.

This brings up one of the flaws in the NYC fast-food minimum wage price hike. Joe's Burgers will not be subject to the same minimum wage as McDonald's or Burger King. So will this end up helping Joe (by keeping his costs down) or hurting Joe (by moving the best workers to the chains)?

While I am against minimum wages in general and this large increase in particular, I think it is additionally problematic that they would try this vast social experiment singling out just a subset of one industry. At least an across-the-board wage increase has the advantage of putting all competitors, across industries, on an equal footing.

Allen Nitschelm has lived in Acton since 1998 and writes about fiscal issues at the
local and state level. He is a former member of the town's Finance Committee
and is an Associate Publisher of Acton Forum.

Depends on perspective...

Both rent control and minimum wage entail the government trying to change behavior in the market with fixing a "price" with unintended consequences.

With rent control, landlords want the "price" high, tenants want it low. (this is for the apartment stock renting at the "price")

With minimum wage, workers want the "price" high, the employers want it low. (this is for employment at the minimum "price" or wage)

Before these controls, the market determines the "price" which varies over time according to the market. After these controls, the government fixes the "price", and the market reacts often with bad consequences.

Minimums and maximums

They are two sides of a similar coin but not the same.

Let's say I made Coke. The government said the minimum I could sell Coke for was $1 per can. That was because they wanted to help my business and make sure that competitors didn't come in and drive the price down. The government does this with various products now, like milk. They can set minimum prices along the distribution cycle that guarantees that farmers can get so much money for milk, so they can continue to produce it locally at a profit. So consumers pay more for milk than they would otherwise if the market was free to set the price.

Then the government could also come in and put a price cap on my Coke, say at $1.25 per can. This might be so that I don't make windfall profits on my Coke that everyone wants to buy. They do this on apartments. This lowers the value of apartment buildings because who wants to pay $10 million to build an apartment building if the rentals are capped at $100 per month. You would never get back your investment. Likewise, you wouldn't pay a lot for an apartment building knowing the income was capped artificially low. And why would you want to invest in upkeep if that eliminates your profit?

A poor person might like the concept of rent control until they find out that there are no apartments for rent, because new apartments aren't being built to account for increased demand. And they might like the idea of minimum wages until they find out there are no jobs because employers aren't willing to overpay workers when they can "move out of state," as Gov. Cuomo predicts.

If landlords stop improving and repairing apartments because the rental income has been capped, apartments fall into disrepair. Tenants complain, and the government then passes laws forcing landlords to make repairs. Eventually this cycle leads to abandoned buildings and blight.

I think part of the problem therefore also lies in the government's solution which is often to absolve the tenant of blame for not paying rent. These "tenant protection" laws are like a form of rent control.

I think we can safely say that the law of unintended consequences comes into part in either scenario, price floor or price ceiling, often with disastrous results.

Allen Nitschelm has lived in Acton since 1998 and writes about fiscal issues at the
local and state level. He is a former member of the town's Finance Committee
and is an Associate Publisher of Acton Forum.