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Ask An Economist: Will Raising Fast Workers' Wages Strengthen the Economy?

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Political arguments over the holidays are the best aren't they? Well actually -- they're awful. We've all been there when we've felt woefully unprepared for the latest holiday battle of the brains. I thought I was just going to a party to have a good time -- I didn't know I needed to brush up on my economics before I arrived. I hate that moment when your opponent hurls Fox News talking points at you, and all you can do is go eat some more hors d'oeuvres in the corner.

I was in this unfortunate position at a Christmas party this holiday season, and if there's one thing I hate, it's losing a policy argument. The topic was the nationwide strike of fast food employees, and the workers asking to be be paid a $15 an hour wage. In the Metro Detroit area where I live, a group called D15 held a massive protest on December 5, and their demands of a $15 an hour got people talking.

Even some of my fellow liberal party goers asserted that paying $15 an hour was "ridiculous. That would raise the prices of goods" they said, and "even good jobs don't pay $15 an hour." I stood there unable to articulate my support for raising the wage, and didn't really know how to respond to their concerns. Maybe my brain was just working slower while in party mode, but this incident sent me on a post holiday fact finding mission.

First I did some reading. The fast food workers of this country are paid poverty wages -- no one can deny this. Getting paid $7.25 an hour and working full time equates to $15,080 annually. In 2012, the poverty threshold for a single person was $11,945 a year, and for a family of four with two children it was $23,050. So if you are supporting a family on fast food worker's wages -- good luck getting out of poverty. Even if you are alone and making those wages -- you still aren't doing so well. It takes a McDonald's worker four months to earn what the CEO makes in an hour. There's something wrong when there is such a chasm between the top and the bottom income earners.

The next step in my investigation was to ask for an economist's take on the matter. Dr. Lisa D. Cook is an Associate Professor in the Department of Economics at Michigan State University. Dr. Cook also writes a column for the Detroit Free Press, and has been featured as an analyst on MSNBC. I emailed her some questions about fast food workers, and the overall effect raising wages would have on the economy:

Would it be beneficial to our country's economic health to raise fast food workers' wage to $15?

The best empirical research I have seen in economics journals and papers suggests that raising the minimum wage is associated with positive effects on workers' wages. Card and Krueger, Reich, et al., and Dube have done the research I know best.

A minimum-wage job pays roughly $15,000/year. In any state in the U.S., it would be challenging to live on $15,000 in a year. In my recent Detroit Free Press article, I applauded Moo Cluck Moo in Dearborn Heights, Michigan, for raising its starting hourly wage to $15/hour, which is more than double that of the state minimum wage of $7.40. To the extent I would recommend a specific increase in the federal minimum wage of $7.25, it would be based on adjustment for inflation, at least. If the minimum wage had kept pace with the rate of inflation since the late 1960's, researchers estimate that the minimum wage would be roughly $10.10/hour to $10.70/hour currently. This represents a nontrivial erosion in the real purchasing power of working people. Since consumer demand is the largest component of GDP and since the marginal propensity to consume is higher among the (working) poor, the economic implications of diminished real earnings are large and important. Equally importantly, if it assumed that there has been a corresponding increase in use of the welfare system, e.g., food stamps and Medicaid, by the working poor over this period, the extent to which taxpayers are subsidizing these jobs has also increased. I think the growing taxpayer subsidy to workers and to low- and minimum-wage firms for these jobs is under appreciated by taxpayers and the public, more generally.

I also think there are several misconceptions with respect to the workers earning these wages. These jobs are not starting jobs populated by teenagers working part time. The median age of these workers is 34. Over 40 percent have a college degree or some college education. Fifty-five percent are working full time, and many are breadwinners for their families.

The Economic Policy Institute estimates that an increase in the federal minimum wage to $10.10/hour would raise the wage of nearly 30 million workers, increase GDP by around $32 billion during the phase-in period, and create 140,000 net new jobs over that period.

Given the uneven way the recovery has proceeded and in light of growing inequality, a rise in the minimum wage above $10 could provide the economy with a much-needed albeit modest boost.

Would raising the wage to $15 hurt fast food corporations? Would they be forced to raise the prices of their goods?

No, not necessarily. The best economic research provides evidence that there is no statistical effect on jobs. The argument that typically is put forward that assumes that unemployment must follow when wages are raised. This is too simple and not based on empirical evidence. Firms typically have other costs besides wages/labor.

Is $15 too high of an hourly wage for fast food workers to be paid? If so what would be a more appropriate wage?

The federal minimum wage would be approximately between $17 and over $22, if adjusting for increases in worker productivity. Surveys show that 76 percent of Americans are in favor of raising the federal minimum wage. It is unclear what the level of support would be for specific amounts. No matter what the right number is, it would probably be desirable to allow time for firms to adjust to new, higher wages, as is suggested in the Harkin-Miller bill.

It is also worth noting that even though Congress has yet to raise the federal minimum wage, the minimum wage was raised in 13 states recently. While Michigan is not one of those states, the Democratic candidate for Governor, Mark Schauer, made a living wage a major part of his campaign platform.

So the talking points used as fodder at parties are not the best source of information. Who knew? Asking an expert was eye opening for me. While I wasn't prepared to argue economics this past holiday, hopefully we're all in stronger position for next year.