Question

Read, analyze, and comments: 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.

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.

Answer 1

The article is a fascinating study in the basic concept of economics- supply and demand. We all know from our economics 101 that a market effectively works on supply and demand- there is a supply in the market- lets say of product or service or labor, and so is there demand of the same. The market is in equilibrium when supply meets demand- at a price where just enough people are willing to buy the product or service (in our case, McDonald's wants to buy the labor) and just enough people are supplying the labor (in our case, the workers). At this equilibrium point, market is working in its natural form- it has driven out labor that wanted more wage, but also companies that wouldnt pay as much.

Often times government, with an aim of helping the common people, think that this equilibrium wage is too low to live a comfortable life. They want to take some of the surplus that a company is earning (McDonald's here) and transfer it to the people. While from a purely economic point of view this process of transferring surplus is always inefficient and there is a surplus loss- its not that it should never be done or has no benefits. Indeed, a minimum wage is good idea in some cases.

But what is happening in our case is that this idea is being taken too far. There are 2 main problems here-

1. One with the assumption that no matter what the minimum wage- the company would need the same amount of labor.
2. On a whole the labor would always be happier at a higher minimum wage- that there is no labor which wouldve been happier and well-off at a lower minimum wage.

Lets tackle these one by one. The first assumption is more obviously flawed. A company will always look for alternatives when the minimum wage is pushed too far up. It will try automation and cut back hours, it will look for more efficient processes or it might just shift out of the state altogether. The company is aiming to maximize profit, and will do so whichever way it can. It will invest in automation or moving out of state- as long as the cost of these projects is lesser than giving the new minimum wage. This will leave a lot of labor with actually lower overall earnings than they wouldve had earlier.

The second point is a little less obvious. Not all labor is equal. Some are more efficient and some are less. Some actually want to work hard and some dont. Some want to work for longer hours and some dont. Should all of these get paid the same minimum wage? If I am just a student and looking for a 4 hours a day job for 2 months where all I want is to have just enough money to get a new car when the school reopens, do I want a market where the company is looking to hire only efficient full time workers? Probably not.

In summary, we can say that there is always a cost of tampering with natural market equilibrium. Still, if done in measure and with well thought out plan, it can be beneficial to a specific segment of society. But if tampered too much, it might result in unintended consequences which might not help everyone and even worse, might be detrimental.