Question

Economic Concept: There are substitutes for Everything...even Labor! Economic Concept: Unintended Consequences! Seattle Aims at McDonald’s, Hits Workers A $15 minimum wage changes the basic labor-market bargain between the fast-food industry and its workers.

A $15 minimum wage changes the basic labor-market bargain between the fast-food industry and its workers.

By Holman W. Jenkins, Jr.

June 30, 2017 3:42 p.m. ET

By now you have read 15 articles on the Seattle minimum-wage fiasco. Since the city boosted its local minimum from $9.47 in 2014 to $13 last year (on its way to $15), a detailed investigation by University of Washington economists finds that beneficiaries actually saw their incomes fall by a net $125 a month because employers cut their hours.

When the price of something goes up, buyers demand less of it. This law of economics, like any law, some will always find inconvenient. But here’s the rest of the story.

The impetus came from people who don’t actually earn the minimum wage—labor-union leaders and think-tankers and activist organizations. The Service Employees International Union, as it has been happy to tell anyone, including a writer for the Atlantic Monthly two years ago, was already plowing $30 million into the “fight for $15” even though virtually all the hoped-for benefits would go to nonmembers.

There was even pushback from various union locals. Was this really a good use of our dues when most members already earn well above the minimum and have other priorities?

As the union also was not shy about noting, the real target was a very specific company, McDonald’s (Links to an external site.)Links to an external site. , which SEIU dreams of organizing despite the historically unwelcoming nature of franchise-based industries.

How a $15 minimum leads toward this halcyon day was never exactly spelled out, but here’s the answer: $15 would be used to change the basic labor-market bargain implied between the fast-food industry and its workers. Fifteen dollars an hour amounts to $31,200 a year and hardly a princely living. But you start adding mandated benefits and think about two-income households, and now you’re talking about a job that will sustain a different kind of life strategy than a Golden Arches job will today.

Organizers look fondly to Denmark, where a McDonald’s line worker receives $41,000 a year and five weeks of paid vacation. As the Atlantic put it two years ago, “Unionizing workers at McDonald’s and other fast-food chains might be a long shot, but if it succeeds, it might help lift a million or more workers into the middle class (or at least into the lower middle class) and create a model for low-wage workers in other industries.”

This sounds pretty but is misleading in a fundamental way. The workers a McDonald’s franchise would hire at $15 an hour are different from those it would hire at $8.29, the average earned by a fast-food worker today.

Costs would go up. The industry would likely shrink, it would likely replace workers with automation, but it would still create jobs at $15 an hour for people whose productivity can justify $15 an hour. The people who work at McDonald’s today, typically, would already be earning $15 an hour somewhere else if their productivity could justify $15 an hour.

Everybody needs to start somewhere, including the unskilled and those who lack a work history. Some need a job that doesn’t demand much of them. They have other obligations. They accept less pay to maximize flexibility and freedom from responsibility. They don’t plan to make a career of it. The fast-food industry in America is built on such people.

Proponents like to argue that employers, especially in the fast-food business, actually benefit from an increased minimum. It enables them to attract a more dedicated, productive employee. But why shouldn’t employers be left to make this trade-off themselves? And what about the people who won’t get hired at $15 and lose the benefit of a fast-food opportunity that is one of the easiest, quickest jobs to land in America?

When President Obama joined the fight in 2015, he argued that a full-time job should be able to support a family. This sounded pretty too, but was a way of saying that jobs that won’t support a family shouldn’t exist, and people whose productivity won’t support a family shouldn’t have jobs.

This is curious. Many countries that set a minimum wage, including the U.S., also set subminimum wages for teenagers, trainees, probationary hires, certain categories of disabled persons, etc. Having both a minimum and subminimum is hard to reconcile logically: Low-paying jobs shouldn’t exist, except some people need low-paying jobs, so they should exist. This concession to reality, in fact, shows not all minimum-wage advocates are economic scofflaws.

SEIU signed off on the “fight for $15” as part of a convoluted scheme to bring unionization to McDonald’s. As all would admit privately, the idea was always pie in the sky. But union leaders have to spend their members’ dues on something, or members might get the idea they don’t need to keep paying dues.

Now SEIU’s spending priorities have been changing again. Lately the leadership has arguably rediscovered its first love, electoral politics, not organizing. The union has let it be known that the “fight for $15” will be scaled back to free up funds to fight the 2018 congressional elections and 2020 presidential race. No doubt the Seattle study and all the attention it’s getting in the media make the decision even easier.

Appeared in the July 1, 2017, print edition.

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Answer 1

Minimum wages have been defined as “the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract” by the ILO.

This particular article makes the following conclusion:

• The increase in the minimum wage rate made low-income workers worse off, not better, because it forced employers to cut back on hiring and hours to afford paying higher wages.

This article has gone on to show how the increased minimum wage is creating this negative effect and the conclusions are in life with the conventional counter arguments that are provided against an increase in minimum wage.

However, these points can easily be countered by noting the arguments for an increased minimum wage.

• First, workers who can cover the cost of living have better morale. They are more productive if they have a decent standard of living.
• Second, it reduces income inequality while providing an incentive to work. The incentive makes it better for society than welfare or a universal basic income.
• Third, a minimum wage spurs economic growth. It gives workers more money to spend. This increases demand and business revenue.
• Fourth, workers who have more time and money can then invest in their education. This further increases their productivity. It improves the attractiveness of the country's labor pool. A more educated workforce increases innovation and the number of small businesses.
• Fifth, minimum wage laws benefit individual businesses. Workers are less likely to leave to find a higher-paying job. This reduces turnover and expensive retraining costs.

So,

1. When McDonalds hires workers with a productivity matching the $15 and not the $8.29, it might seem that these workers will lose their jobs but the fourth point may be used to show how they will eventually increase their skills leading to an overall positive effect in the economy.

Again, studies done by the likes of Arindrajit Dube of the University of Massachusetts have found that

"On average, minimum-wage increases eliminated jobs paying below the new minimum, but added jobs paying at or above the new minimum. The two changes effectively cancel each other out."

Thus the employment opportunities for these workers will actually increase if we follow this study. They will be working the same job, while earning more, which is the entire point of this increase in minimum wage.

2. Second, this article implies that the cost of the increase surpasses the benefit. However, the fifth point works as an easy counter argument.

The presence of minimum and subminimum wage rates does not negate the requirement of the minimum wage rate as the author has indicated. It goes on to use the same arguments provided against the hike to justify the hike.

For teenagers and first time workers, now they can essentially earn more.

In conclusion we can say that there are always arguments for and against a hike in the minimum wage rate. Some research shows that a minimum wage can increase the number of jobs in an economy. Businesses find other ways to offset higher labor costs. They raise prices or reduce the number of hours worked. Worker morale, productivity, and consumer spending all increase.

But the pros only outweigh the cons if the minimum wage isn’t too high. Wages cannot be so high that they reduce a company's ability to keep labor costs low during a downswing. In setting a minimum wage, the government has to find the optimal rate between protecting workers and giving businesses the flexibility they need to remain competitive.