Co-authored by Mike Cauvel, Ph.D. Candidate in Economics at American University
Last week the New York State Fast Food Wage Board approved a measure that will increase the minimum wage for fast food workers to $15 per hour by 2021. Many proponents, such as Governor Andrew Cuomo, have supported this policy by invoking notions of economic justice. Although this is certainly a step towards a more just economy, which is reason enough to enact such a policy, focusing only on this aspect of the reform actually undersells the benefits to workers and businesses of increasing wages.
Research shows that raising the minimum wage has a number of economic benefits. It puts more money in the pockets of those who will actually spend it, leading to higher sales, and increases efficiency by reducing worker turnover and incentivizing employees to be more productive, lowering business costs.
The benefits could be stronger if the minimum wage hike was applied statewide, and not just for those at large franchises in one industry -- firms that are large and profitable enough to absorb the increased costs without engaging in layoffs. Even without state- and industry-wide legislation, many low-wage workers will see substantial benefits from this policy, as a higher minimum wage for fast food workers will likely have ripple effects that increase wages for a large number of workers in lower income brackets.
Though some advocates have noted economic arguments in favor of raising the minimum wage, most have focused on questions of fairness. This is evident, for example, in Governor Cuomo's rhetoric about lifting these workers and their families out of poverty, and his argument that full-time workers should not have to rely upon public assistance. While these arguments are certainly compelling, this strategy has led to a distorted view of this policy, with debate seemingly focused on a nonexistent tradeoff between the wellbeing of a small subset of struggling workers and the health of the economy.
The media has shaped this misperception by essentially ignoring any discussion of the policy's positive economic implications. Instead, it has almost exclusively discussed the possible, but unlikely, downsides, relaying the views of CEOs and business owners, who have reacted unsurprisingly by claiming that it will ultimately hurt workers.
The CEO of Dunkin' Donuts, Nigel Travis, grabbed headlines by calling the $15 an hour minimum wage "outrageous," even though he will still make about as much in a single day as a full-time worker would earn in a year at this wage rate. Although he stopped short of threatening to fire employees, perhaps learning from the missteps of CEOs who made similar remarks regarding the Affordable Care Act, he did claim that his firm would likely hire fewer workers and that the rise in wages would lead to job losses. Mr. Travis, and the media, simply ignore the ways that companies like Dunkin' Donuts would benefit in the long run, offsetting most of the higher labor costs.
This is hardly an isolated incident. CEOs and business owners often respond to even the slightest hint that policies may lead to increased benefits for workers, such as the election of a Democratic president, by threatening to punish employees -- a malicious, childish, and borderline criminal approach. Though these threats have often backfired or never materialized, they are still a nearly automatic response for business leaders.
So why have discussions of the policy's economic consequences in the media been so one-sided? Ironically, it is because journalists don't want to appear biased and engage in "shape-of-planet-differ" reporting, giving equal weight to both sides of the issue and limiting discussion of the benefits, even though there is no evidence that increases in the minimum wage lead to net job losses.
Although small businesses, which operate with thinner profit margins, might adjust to a higher minimum wage by engaging in layoffs or hours reductions, there are a number of policy options that could reduce the burden on these businesses. Furthermore, other, larger, firms -- like those in the fast food industry -- could hire more workers due to the positive effects on sales, productivity, and turnover. Thus, at the firm level there might be instances of job losses in some sectors and job gains in others. But at the state-wide macro level, there would be no negative net effect or a small positive net effect on employment.
The reason labor can violate the law of demand is that businesses can offset higher labor costs in several ways that don't involve layoffs. The first is price increases. But estimates suggest that a minimum wage of $15 per hour would only lead to a 4 percent hike in prices, raising the cost of a cup of coffee at Dunkin' Donuts from around $2 to $2.08.
Higher labor costs could also be covered by decreases in profits or dividend payouts for fast food corporations, which is likely why they are so vehemently opposed to this policy. In fact, supporters of a higher minimum wage have frequently cited the massive profits of fast food corporations, and this is probably the reason that the new wages would only affect franchises with more than 30 locations nationwide. However, the effects on prices and profits are likely to be minor because increased costs will be offset by increased productivity due to greater effort, lower turnover (which can save employers $4,700 per employee), and higher sales. Furthermore, the wage hikes will be spread out over the course of several years to prevent large shocks to firms.
If corporations could save money by employing fewer workers, they would have cut payrolls long ago. Of course, raising wages does affect the calculus of hiring workers, hours, benefits, and buying machines, and some have argued that it will lead to greater automation in affected industries. However, automation began prior to any increases in the minimum wage, and it will ultimately be up to consumers to decide whether automated kiosks are adequate substitutes for human customer service employees.
In an economy where corporate profits are at record highs while average wages have stagnated for decades, we don't have to choose between economic justice and common economic sense. It is possible to improve living standards for full-time, low-income workers without bringing business to its knees. The media shouldn't pretend otherwise.