September 10, 2013
Dean Baker
The Exchange (Yahoo! Finance), September 9, 2013
See article on original website
The fast food industry has put its lobbyists into hyper-drive. Their concern is the growing public support for striking workers at the major chains who are demanding $15 an hour. The lobbying groups argue that this sort of pay hike would inevitably backfire, leading to job loss and higher unemployment.
I’ve taken a special interest in this argument since I have apparently become a prop in their efforts, being cited as an economist who agrees that there would be job loss from a sudden increase in wages in the industry to $15 an hour. Undoubtedly there would be somewhat fewer jobs in the industry if wages doubled for low-end workers, but to seriously assess the merits of the policy we need to do a bit more arithmetic.
First it is necessary to get some context. There is currently a debate in Congress over proposals to raise the minimum wage to $10.10 an hour. This is roughly the wage that would be needed to bring the purchasing power of the minimum wage back to the level of the late 1960s. In other words, if workers in the fast food industry got $10.10 an hour, they would be able to buy as much with this money as their parents did working for the minimum wage 45 years ago.
That would be a big improvement over today’s minimum wage of $7.25 an hour. However, at $10 an hour workers would be seeing none of the benefits of the nation’s economic growth over the last four and half decades. If the wage of minimum wage workers had kept pace with the economy’s productivity growth over this period, it would be almost $18 an hour today.
This means if everyone had shared equally in the gains from technology and increased education of the workforce, including the minimum wage workforce, workers at fast-food restaurants would be getting $18 an hour right now. In this context, $15 an hour hardly seems like an outlandish demand.
Costs will rise
Suppose that restaurants were to grant this demand and raise their wages to $15 an hour tomorrow. Astudy from 2011 found that raising wages at big box stores to $12 an hour would raise their labor costs by around 10 percent. Taking wages to $15 an hour would imply a larger increase in an industry with somewhat lower pay. Let’s say it would increase labor costs by one fourth, or 25 percent.
If labor costs are 30 percent of the total costs at fast food chains (the rest goes for the food, rent, utilities, and other costs), the pay hike to $15 an hour would mean raising costs by roughly 7.5 percent. This increase in costs would likely be met in part by some reduction in profits, which are currently at record highs, and presumably some cut in the pay of the CEOs and other top executives.
It is also likely to result in savings due to lower turnover. A recent study found that higher pay is associated with sharp reductions in turnover, which means lower costs for employers.
Given modest reductions in profits, pay for top executives, and savings on turnover, let’s say prices end up increasing by 5 percent. This means that a Big Mac that used to cost $4.00 will now cost $4.20. This will undoubtedly mean some reduction in sales.
Let’s assume sales fall by half this amount or 2.5 percent. If employment falls by the same amount, the low-wage workers in this story would face a world in which there are 2.5 percent fewer jobs in the fast-food sector, but their pay would be twice as high when they are working.
Cascading effects
There are two other important points that must be kept in mind. Workers are pushing for a $15 an hour wage as part of a collective bargaining agreement, not a minimum wage law. Some employers will be better situated to meet this demand than others. Presumably the ones that can more easily absorb this cost will be the ones who will actually agree to pay workers $15 an hour.
The other point is that a full-time worker who sees her pay go from $7.25 an hour to $15 an hour will have another $15,000 to spend each year. This money may go to hire childcare workers for her children, home health care workers for parents, or be spent in thousands of other ways. Higher pay in the fast-food industry might lead to an economy in which we have fewer people working in the fast-food industry but many more people working in other industries. On its face, that would not seem to be a problem.
