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$20 Minimum Wage: Good or Bad? (Vol. 150)

The fast food industry in California will tell us a lot.


Of course, a higher minimum wage is great!  Not so fast. Let’s look at many of the implications, then assess the findings.


The market sets the prices for everything, including wages, if it is allowed to operate freely. The primary factor is the supply and demand for employees with different skills. In general, there are less employees with higher skills and the demand for them bids up the price, wage, for them. The more skilled and knowledgeable the employee is, the more value they contribute, the higher wages are justified. But when the value added by an employee is less than the wage, the business will not hire them or will cut back on hiring. So setting a government mandated high wage minimum, will result in less hiring or forced inflation, probably both.


Remember the pandemic, when restaurant servers were paid to stay home, so they did. This created a shortage of servers and their wages were bid up in order to find people to fill the positions. That is when the minimum wage became irrelevant as the market wage, at that time, rose higher than the minimum wage. In that case the business needed the servers to function and the supply was low, so the wages got bid up and the cost was either absorbed or passed along in the form of higher prices. This is supply and demand illustrated clearly.  


Also remember the true minimum wage is $0. If you do not have a job, that is what you earn.  


When a government, in its infinite wisdom, arbitrarily sets a minimum wage (like the $20/hour set in California for fast food workers in large chain operations only), what happens in the real world? In many cases the value contribution is less than the wage minimum and employers cannot afford to just absorb that, so they will cut jobs, cut hours, automate jobs, raise prices, etc. so that the enterprise can still profit. If it doesn't, and it loses money, it will go out of business - then there are no jobs at that enterprise. Some businesses, which may be marginal, may just decide to close. All of this reduces the opportunity to work for many and others may face reduced pay or no pay, if they lose their job and get the true minimum of $0.  


Some workers may benefit from this, while others suffer, and the opportunity for less skilled and entry level workers is gone for many.  


In most cases they will have to raise prices as well as cut labor costs. Since all fast food restaurants covered by this dictate have the same wage minimum and cannot cut all labor and still operate successfully, raising prices is likely. That will result in reduced demand for the products in these larger chains, and more businesses will likely fail, further reducing job opportunities for lower skilled workers. This also reduces supply and puts further upward pressure on prices. In addition, it puts large chains at a competitive disadvantage compared to small chains and local restaurants which are not covered by the higher minimum wage. (By the way, even if a business is part of a large chain brand, many are franchises, smaller individual companies not owned by the large corporations.)


In Facts, No Spin #12, Raising the Minimum Wage, we show through a supply and demand graph what really happens when the minimum wage is set above the market wage. It clearly shows that while some benefit, many are simply SOL (s**t out of luck) and get the true minimum wage of $0. (If the minimum wage is set below the market rate, as actually occurred during the pandemic described above, it is irrelevant.)


If you want further analysis, an article from Foundation for Economic Education (link) explains it well and its impact on California, which already has an above average unemployment rate, which will continue to rise.  


BOTTOM LINE


Economic analysis is not always straightforward, but understanding the basics often will help in moving to good policy. The market works well if left alone. Unfortunately, many politicians favor doing things that ‘sound good but feel bad’ and are, more often than not, hurting the ones they are trying to help. And this California law is a selective approach to minimum wage which applies only to fast food workers in large chains. This will cause further dislocations, since a cook in a large fast food restaurant chain will earn more than one at a corner burger restaurant or small chain.  


Artificial minimum wages may help some, but many others will bear the brunt of bad policy. Many entry level workers will be denied an opportunity to work and to get started in the workforce, gaining experience while learning and growing. And it is often cutting total income for others as hours are reduced offsetting the higher hourly rate.  


And it is inflationary for everyone as forced higher costs lead to higher prices, with negative consequences for the entire population. Since lower income folks use fast food restaurants more frequently, it hurts them even more.  


So, is a $20 minimum wage for fast food workers a good idea? I think not. Let the market work its magic, it will give the best answer.  


LEARN ECONOMICS, THEN VOTE SMART

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