Political Hustle by Fast Food Workers

Within the past week or so, the employees of fast food restaurants in several major U.S. cities went “on strike” for a day to demand a so-called living wage of $15 per hour, more than twice the current federal minimum hourly wage of $7.25.

I will not rehearse the economic analysis of the minimum wage, which should be familiar to every college sophomore who has taken a class in the principles of microeconomics, unless, of course, his or her reasoning abilities have been undermined thoroughly the next semester in principles of macroeconomics – a field I often refer to as “science fiction”. Suffice to say that such policies benefit the low-wage workers who keep their jobs and do not see their hours of work reduced. That will happen only if they add more than $15 per hour in value. But, others, especially those who have few skills or little work experience, are harmed. Is it not better to be employed at an hourly wage of $7.25 than to be out of work at $15 per hour?

There is some controversy in the economics profession about the empirical magnitude of the employment losses – the body counts, as it were – that follow increases in the minimum wage. But there is no controversy about the prediction that hours of work will be cut or that the negative effects of the minimum wage fall most heavily on the young, the unskilled and the members of minority groups.

But I want to emphasize a more subtle effect of the minimum wage, namely that employers can adjust to a requirement that they pay higher cash wages by reducing their employees’ non-wage benefits. It is total hourly compensation, not just money wages, which influence hiring decisions. Suppose that at the current federal minimum wage of $7.25 that an employer also offers $1.75 per hour in “fringe benefits”. Those benefits could be in the form of the employer’s contribution to a healthcare or pension plan, help in paying for tools or uniforms required on the job, on-the-job training, or allowing the employee to eat at the restaurant’s cost rather than at retail price.

If the minimum wage were to be increased to $9.00 an hour, the employer would have a strong incentive to cut out all of the “fringes” unless the $1.75 could be saved in some other cost-effective way, by, for example, firing some current employees or shifting some or all of them to part-time status. (Part-timers usually are not eligible for healthcare or pension benefits, explaining why so many workers nowadays are employed part time and why the Obama administration is pushing to have a 30-hour workweek defined as a full-time job.)

The laws of economics are harsh and inexorable. If the price of one thing goes up, all else equal, the quantity demanded of that thing falls. Labor markets are no exception. Fast food workers may think that they cannot afford to live on $7.25 per hour, but if they succeed in lobbying for a $15 wage, many will find that they will have to live on nothing.