Thursday, December 5, 2013

Fast-Food Workers Playing Fast and Loose by Protesting for a $15 Minimum Wage

One-day labor walkouts were planned at fast-food restaurants in over a hundred cities today. Those who work at fast-food restaurants were protesting the low wages they receive. By increasing the minimum wage to $15 per hour, it would provide these workers with a "living wage" so they can make ends meet. At first glance, it seems hard to argue against it. You'd have to be heartless to ignore a plea for higher living standards. But is that really the case? Is increasing the minimum wage to $15 per hour a good idea, or is it merely a feel-good policy with unintended consequences?

I've tackled the issue of minimum wage before (see here and here), and truth be told, I am not a fan of minimum wage. The vast majority of economic literature shows that minimum wage causes a non-negligible increase in unemployment. Minimum wage also makes it more difficult for unskilled workers to acquire work experience so they can escape their current economic situation.

Let's look at how minimum wage affects those specifically in the fast food industry. Looking at elasticity of demand, which is the responsiveness of the customer to consume more or less based on shifts in prices, fast food has higher elasticity than food consumed at home or even at your average restaurant. This both makes intuitive sense and is backed up by the data (also see NIH study), which is something that even the Left-leaning Economic Policy Institute has to concede (EPI, p. 2). Let's combine that with the fact that an unskilled labor supply is going to be more elastic than skilled labor, which means that a wage hike such as the one suggested is going to cause an even larger surplus of labor, i.e., unemployment. With relatively high elasticity of demand and an elastic supply of labor, such a price increase will be unpropitious.

This all harkens back to a point of productivity of a fast-food worker. Under a competitive market system, wages would be determined by supply and demand of labor. In spite of government interventionism, supply and demand still play the primary role in determining wages, and not the ill-conceived notion that a "money-grubbing employer who wants to maximize profits" arbitrarily sets his own wages. All of that notwithstanding, it's safe to assume that the marginal value of labor for fast-food workers is not worth $15 per hour, especially in comparison to other jobs. This would mean that an employer that decides hire a fast-food worker at a wage of $15 per hour would be doing so at an economic loss.

If there is a minimum wage of $15 per hour, you better believe that employers are going to adjust their business practices accordingly. As already mentioned, laying off workers is one of many ways to adjust. Cutting hours and/or benefits is another way. One could theoretically cut the wages of middle and upper management, but not only does this go back to marginal value of labor, it also touches upon bargaining power, which makes sense. Unskilled labor would have less bargaining power because unskilled labor is, well, unskilled. Alternatively, the employer can decide to pass the cost on to the customer, but given the elasticity of fast food (see above), this will most likely result in decreased profits, which does nothing to help the fast-food worker because the customer will most likely respond by eating elsewhere, not to mention that increased costs would defeat the purpose of the low-cost business model upon which the fast food industry is built. Another form of adaptability is having production more automated. If you think having machines replaced by human labor sounds like science fiction, take a look at fast-food restaurants in Europe. Europeans have started to install machines that are capable of taking food orders and vending the food. Granted, there are certain tasks that only a human can perform, but increasing the cost of unskilled labor by more than double will translate into decisions that will adversely affect the fast-food worker.

Ultimately, the issue here is not wages, but bargaining power, costs on the employer, and the cost of living for unskilled labor. Bargaining power is an issue for unskilled labor because they do not possess the education or the skills to ask for more. The whole premise behind minimum wage jobs is to gain work experience that will allow for greater leeway in bargaining. Raising the price floor of minimum wage by twofold during economic hard times, which will only make it more difficult for unskilled labor to acquire skills, is not the way to go. Education reform is great topic to address with regards to bargaining power because let's face it: if a K-12 education in this country has a difficult time creating a skilled labor force, then we know something is wrong.

It's not only a matter of bargaining power. There are government policies that get in the way of employers being able to maximize productivity, whether that is in the form of high levels of taxation, premium costs mandated by Obamacare, costs that come with occupational licensing, zoning restrictions that prevent people from using their homes for commercial purposes, or other onerous regulations. Removing unnecessary regulations, which would be most regulations, is a good start. Even dealing with cost of living is important when discussing poverty issues because making goods and services cheaper will increase one's purchasing power. We should look at policies that distract from that very notion. Some examples are food stamps (see here and here), rent controls that create substandard housing, or zoning laws that separate residential areas from commercial areas, thereby increasing the cost of transportation. Minimum wage laws are like putting a bandage over a cold. Only by addressing root issues will we ultimately be able to help those currently trapped in poverty.


  1. "One could theoretically cut the wages of middle and upper management, but not only does this go back to marginal value of labor, it also touches upon bargaining power, which makes sense."
    So what you're saying is that there might be a way to reduce costs by targeting cuts at those with the greatest disposable income, but we can't do that, so instead let's blame the poor for trying to use their own bargaining power.

    As for automation, that just means that in a particular case a capital investment was cheaper than labor. Surely you'd not argue that automation is always a result of distorted labor prices, rather than the result of the natural human tendency to innovate.

    1. Andrew, for the first point, the operative word is "theoretically." Those who are middle or upper management typically have something to offer, hence why they are skilled labor. Who do you think is easier to replace: the unskilled labor with an elastic supply curve or skilled labor that has both experience and a specific skill set to offer?

      As for the second point, yes, the automation would be due to technological innovation. But as long as it's more expensive to automate than have human workers, then yes, a business would keep human labor. Technological advancement will bring prices down over time, which is to say that there will be a point that certain fast-food positions will become obsolete. Until that time comes, it remains relatively expensive to have automated machines do the work. However, if you raise the minimum wage to $15 and the employer realizes that it's more expensive to keep human labor around for a given task, the employer will opt for the automated machine instead. Technology has the potential to be a problem over time in many sectors, not just fast food because if the technology develops and the skill set development stays stagnant, we're going to have a major issue of unskilled labor in the foreseeable future.