The Other Side of $15 Part 3

Beware of strangers bearing gifts

The following is part 3 of an on-going series. The first part dealt with the immediate impact on business costs and barrier to entry; part 2 looked into the result of $15 per hour in the New York restaurant business. This section will cover big box retailers pushing for higher minimum wage in 2019. You can read part 1 here and part 2 here.

If you recall from part 1, the sudden spike in labor cost creates an immediate burden on lower paying employers. In the case of my fictional restaurant (and later shown in real life results in part 2), hours are cut, prices increase, and in some cases layoffs occur. Considering all of this, I was (at first) surprised to see big box retailers like Walmart calling for a $15 minimum wage.

This past summer, Walmart CEO Doug McMillon called out the federal government for the minimum wage being “too low:”

“The federal minimum wage is lagging behind,” Doug McMillon said at Walmart’s annual shareholder meeting in Bentonville, Arkansas on Wednesday. 
Congress has not raised the minimum wage since 2009, but McMillon’s surprise comments may give lawmakers an incentive to act. McMillon’s call may also ease pressure on Walmart. Senator and presidential candidate Bernie Sanders, along with workers’ rights groups, have called on Walmart to raise its wages above the company’s current $11-an-hour minimum.

As of 2010, Walmart employs 1.4 million Americans – 1% of the country’s working population. Certainly not all of them are wage employees, but the number of wage earners is large enough that Walmart will absolutely feel the increase (again, these are 2010 numbers, so the number of employees could even be greater). Even if 1 million of the 1.4 million are wage earners, a few-dollar increase per hour quickly translates to millions of dollars per hour in labor costs. That’s huge! So why publicly push for $15 at such a great company expense? (It’s also worth noting here that when Walmart bumped hourly wages up to $11 per hour last year, they also closed numerous Sam’s Club stores at the same time.)

A reactionary thought is that it’s good PR. Just like politicians calling for a “living wage” of $15 per hour for the good of the people, Walmart leading the charge for $15 per hour gives a boost to public perception: Walmart cares about its employees. Walmart is listening to the people. You can make a living working at Walmart. Walmart and Amazon have become targets of the $15 per hour camp as of late. By embracing the higher minimum wage, it relieves public pressure and image tarnishing.

A second potential reason for hiking wages could be inter-company competition. Amazon and Costco have both recently upped their hourly wage to $15. Amazon claims they are not caving to pressure from Senator Bernie Sanders but doing it for the good of their employees. Their increase will impact 350,000 full-time, part-time, and seasonal workers. Costco raised their wage to $15 this past March. Perhaps it’s about staying competitive with other big box retailers. I can see how no one wants to be caught as the lesser-paying and risk losing employees to the other.

But there’s something else at work here. If it really were about public relations, saving face, and remaining competitive among large retailers, why would these companies champion a national minimum wage hike to $15? If anything, being able to pay $15 when smaller competitors cannot or aren’t willing gives Walmart and Amazon an advantage in the labor pool. In the quote above, Walmart CEO Doug McMillon is pushing for a $15 per hour federal minimum wage. Jay Carney, senior vice president of Amazon’s global corporate affairs, declares that Amazon “will be working to gain congressional support for an increase in the federal minimum wage” and to “advocate for a minimum wage increase that will have a profound impact on the lives of tens of millions of people and families across this country.” In March 2019, McDonald’s ended their lobbying against a $15 per hour national minimum wage.

These companies are free to pay their workers $15 per hour and set an example for others, so why do they want to push it on the entire country? There’s really only one reason.

To crush their competitors.

Walmart and Amazon can afford to absorb the cost of $15 per hour. They can also afford to invest in automation or to cut hours from large store rosters. If need be, they can even close a store or two — as Walmart did in 2018 when they raised their wage to $11. Small businesses cannot afford to do these things.

Imagine Bob’s Discount Bunker is a small chain of discount retail stores. Maybe their prices are competitive to Walmart, or they have stores where Walmart doesn’t. One of the ways they can price their products lower than Walmart is lower labor costs. If these costs are raised on par with Walmart’s, that means Bob’s can no longer afford to charge lower prices. Or they go out of business altogether after a death spiral, like our fictional restaurant. Either way, the higher wage is severely disruptive to smaller competitors; it saddles them with more expensive labor.

Why else would these large corporations be willing to absorb such huge labor cost increases? By flipping the script and embracing the higher minimum wage, politicians and labor advocates are doing big companies a favor.

After the field of competitors is wiped out, big box retailers can then either raise their prices, induce layoffs, or replace workers with automation to bring their labor costs back down. As a CNN article entitled “Why Big Business is Giving Up Its Fight Against a Higher Minimum Wage” puts it:

Although the wage premium for working at a large company has decreased over time, big businesses still achieve economies of scale through centralized HR and benefits departments. They also have the upfront capital needed to invest in automation, such as the purchasing kiosks now in place at McDonalds, that will make businesses less subject to labor costs in the future.

When it’s all said and done, Bob’s Discount Bunker employees will likely be looking for jobs at Walmart or Amazon.

In the case of McDonald’s, it’s not the company that feels the increase of $15 per hour, it’s the franchise owner that the employees work for. As of 2016, 85% of the company’s restaurants were franchisee-run locations. This means they’re not owned by McDonald’s, but by a private business owner who pays McDonald’s a monthly franchise fee to use the name, logo, menu, etc. and purchases their stock directly from the company. It’s up to the franchisee to hire and pay employees. This makes the argument for McDonald’s being able to afford to pay their employees more somewhat disjointed: advocates look at McDonald’s annual company profits when it’s likely not McDonald’s paying their wages. McDonald’s, after all, is really a real estate company. Their primary income and tax breaks revolve around property. So a $15 minimum wage would still impact their competitors, but the franchisees are left footing the bill for the labor.

In the end, the government is just making large companies stronger by raising the wage to $15 per hour. It becomes a win-win-win scenario for Walmart, Amazon, or McDonald’s. It’s a win with the power of the federal government making the decision, coercing all employers in the country to abide by the increased national minimum wage — whether they can afford it or not. It’s a win because it’s good PR, allowing these companies to look like advocates for the common worker. And it’s a win because it wipes out competition and potential future threats.

The Other Side of $15 Part 2

“Don’t go around saying the world owes you a living. The world owes you nothing — it was here first.”

Mark Twain

This is the second part to an on-going series. If you haven’t read Part 1 yet, you can do so here.

I never intended to continue on the topic of $15 per hour, but after publishing Part 1 a few weeks ago, I continue to see it come up everywhere. I also found some additional points worth mentioning. Part 1 didn’t really give a conclusion, but the results of the thought experiment showed that there is no economic basis for $15 per hour minimum wage and that there are unintended consequences as part of it.

New York City continues to be a battleground for $15, with some economic reports stating that the increase of minimum wage to $15 this year making the case that it has caused restaurants to thrive, while others — including the government’s own Bureau of Labor Statistics (BLS) — to show a negative impact.

So which is it?

The New School and National Employment Law Project (NELP) wrote a joint report this month claiming they found a “thriving industry” despite the recent forced increase of minimum wage: “The New York City restaurant industry has maintained substantially faster job growth than the private sector overall in the years since the State minimum wage rose in phases from $7.25 an hour at the end of 2013 to $15.00 at the end of 2018.” However, in reading the report I found this statement on the same page of the executive summary: “This report does not suggest that New York City’s sharp minimum wage increase caused restaurant employment to soar—the more rapid restaurant employment gains likely are due to the city’s faster private job growth.”

So it didn’t hurt employment, but $15 per hour is not the catalyst for the industry to be “thriving” as Business Insider would lend you to believe (citing the same joint report as above). It appears some publications jumped on the report as “proof” a $15 minimum wage is good for business. I’m sure Bernie Sanders would agree with them.

Other reports aren’t so rosy about $15 in the Big Apple. According to the Foundation for Economic Education, New York City has lost 4,000 jobs in the restaurant sector this past year. The article included this Bureau of Labor Statistics chart showing a negative percent change in NYC restaurant employment:

In addition, according to an NYC Hospitality Alliance survey taken only a month after the $15 per hour bill took effect in New York, restaurants immediately started cutting employee hours afterward. All overtime work was halted also. The survey queried 574 establishments in New York City and found:

76.50% of full service restaurant respondents reduced employee hours, and 36.30% eliminated jobs in 2018, in response to mandated wage increases.* 75% of limited service restaurant respondents report that they will reduce employee hours, and 53.10% will eliminate jobs in 2019 as a result of mandated wage increases that took effect on December 31, 2018.

*In 2018, NYC also raised the minimum wage to $13 per hour from $11.

In addition, 87.3% of respondents report they will increase menu prices in 2019 as a result of the wage increases; 60.8% reported their food and beverage menu will be “reworked” in response to the increases; and 34.4% of respondents told surveyors that their repeat customers were dining at the restaurant less frequently than before the mandatory increase.

Graph showing 2019 impact on Full Service Restaurants from the same Hospitality Alliance survey
Graph showing 2019 impact on Limited Service Restaurants from the same Hospitality Alliance survey

Remember what happened to my fictional restaurant in Part 1 of this series? Once my payroll costs were increased 106%, it became a struggle to maintain employment and retail the cost of my hamburgers. Working hours had to be cut, which impacted operations, and the only other choice was to raise the cost of the hamburgers (by more than double), which threatened repeat customers. The findings by the Alliance show that my thought experiment was essentially correct, with real life results matching my fictional ones. The result is the same: increased menu costs and cut hours eventually lead to eliminating jobs.

There’s plenty of other recent articles criticizing the negative impact of the $15 wage increase from the New York Post, Business Insider, National Interest, and the Wall Street Journal. According to the Seattle Times an “upscale” restaurant chain in the city is blaming increased wage hikes for their bankruptcy filing, showing an increase of $10.4 million in additional labor costs.

Overall, the results haven’t been promising. If it is hurting high cost of living cities like Seattle and New York City, I imagine it would be devastating to cities like Buffalo, New York or Omaha, Nebraska — two cities with the lowest cost of living in the U.S. I can’t even imagine the struggle restaurants would have keeping up here in Pittsburgh.

One of the biggest problem with a national $15 per hour minimum wage is that its national. Cost of living fluctuates wildly throughout the 50 states, as evidenced from this U.S. Bureau of Economic Analysis data. An article from USA Today broke it down in easier to read terms (ever tried to read a government economic report?). In Mississippi, a dollar’s worth is actually the highest — equivalent to $1.16. That means that $1 will buy $1.16 worth of goods and services there. The lowest worth (predictably) is Hawaii, where $1 will only purchase $0.84 worth of goods and services. California and New York, two of the biggest advocates for $15 minimum wage, each buy only $0.87 worth. By comparison, your dollar bill is 25% more valuable somewhere like Mississippi or Ohio ($1.12).

So while $15 minimum wage is less disruptive when the dollar buys less, imagine the economic impact in a low-rent city. Prices absolutely must spike to accommodate such a (relative) large increase in labor cost. Cost of living will be forcibly dragged upward, disrupting the entire local economy as locals cannot afford to eat out or do the things they used to do. I can’t imagine that small, rural economies can support a $15 minimum wage either. I suspect it’s the rural areas and lower cost of living cities that have kept the federal minimum wage down, as they cannot cope with a higher one.

For example, in Pittsburgh we have a restaurant chain called Eat’n Park. There are quite a few of them, serving breakfast, lunch, and dinner. Some of them are also open 24 hours. Most dishes are in the $8-$12 range. According to Glass Door, almost all employees in the restaurant have wages that range from $4 per hour (server) to $10 per hour (dishwasher, cook). The store manager, on average, earns a $43,000 per year salary. If $15 per hour were implemented, that’s a 4x increase in server’s pay alone. Everyone in the restaurant (save the manager) gets a significant pay increase. If menu costs are increased to offset the huge wage changes, I guarantee you business will go down. Eat’N Park is very popular with the senior citizen crowd, most of whom are on fixed incomes (which is why they eat at Eat’N Park). Fixed income senior citizens are not going to be willing (or able) to pay the increased costs.

$15 per hour minimum wage is in no way a one-size-fits-all solution.

So why are big box retailers like Walmart advocating for $15 per hour minimum wage? Wouldn’t that hurt them having tens of thousands of employees? I’ll go into detail in the third and final part of this series. Stay tuned!

The Other Side of $15 Per Hour

Over the past weekend I was traveling when two separate incidents caught my eye and made me start to think about the current push for $15 per hour federal minimum wage. The first was a visit to McDonald’s (my first in 20 years!) I visited a McDonald’s in Columbus, OH and found only a handful of employees working along side a phalanx of automated order machines. The other was an article showing that Bernie Sanders own campaign staffers were making less than $15 per hour, even though a large part of his campaign platform is $15 per hour minimum wage for all. I usually don’t wade into the political forefront, but I thought this would be an interesting thought exercise.

There has been a lot of noise about the Fight For $15 recently since multiple presidential candidates have taken up the banner. The movement stems from November 29, 2012 when over 100 fast food workers walked out of their respective restaurants in New York City to protest, creating the largest strike in the history of fast food. On July 29th of the following year, over 2,200 fast food workers went on strike. Since, the movement has expanded out of just the fast food industry to a national call of the federal minimum wage being raised to $15 (it currently sits at $7.25 per hour).

But is $15 per hour feasible? Is it even responsible? After all, we’re talking an increase of over 100%. According to presidential candidate Bernie Sanders’ campaign website feelthebern.org, he believes increasing the minimum wage actually benefits small businesses and will raise the standard of living. If raising the minimum wage is good for all, why not do it?

I own a business. I have several employees and contractors, and I determine their rate based on what my company is paid for a given job or contract. I also have to make sure my compensation is competitive for their skillset, or else I risk losing an employee to another business. I also have to take into account business expenses incurred to run the business and my own compensation as owner. These three factors play into what the employee is ultimately compensated. I pay too much, I risk the business and my own income; I pay too little, I risk losing the employee to better compensation.

But for this post, let’s assume I own a restaurant and pay five employees minimum wage. $7.25 per hour x 40 hours x 5 employees costs my company $1,450 per week in labor. The labor cost is factored into the cost of my business, which also includes the lease, utilities, insurance, ingredients, appliances and equipment, etc. My restaurant specializes in hamburgers which cost $1/ea. I take home a salary of $40,000 per year, which isn’t much but it makes running the business worth it to me and allows me to cover my own personal expenses. If minimum wage goes to $15, it would be a 106% increase in my labor costs or $2,987 per week. That’s a $1,537 increase per week, $6,148 a month, or $73,776 a year increase to my business. So now, I have to decide how this new increase can be afforded. I can’t cut back on equipment costs, because I need the equipment to make the hamburgers. I can’t cut back on ingredients, otherwise I won’t have hamburgers to sell. I could cut my own salary, but the increase is more than I even make and if I take a pay cut, I can’t afford to work there either. The lease and utilities must be paid or the restaurant closes down. I could increase the cost per hamburger to make up for the shortfall, risking a downturn in sales or losing customers to competitors (or home cooking) at which point I’m going out of business or cutting employees altogether. The only other alternative is to cut hours or go to automation (just like those kiosks in the Columbus McDonald’s)

This is exactly what business in cities with $15 per hour minimum wage have been doing. In Seattle, employers began cutting hours when the minimum wage hit $13 per hour. When his staffers complained of making under $13 per hour over the weekend, the Sanders campaign promptly cut hours to make the math equal $15 per hour.

Another unintended consequence of raising the minimum wage in Seattle was workers began requesting less hours because their yearly income increased to the point where they were at risk of losing welfare or various assistance programs. But wasn’t the intended effect? Wasn’t one of the speaking points of higher minimum wage to boost people off of welfare?

Another unintended consequence of high minimum wage is that it creates a barrier of entry to unskilled and young workers. If you’re 16 years old looking for your first job, you have no skills or experience. If an employer is required to pay over $30,000 per year for a full-time employee, the chances are they’ll never hire an unskilled teenager. I know I wouldn’t. If I had to pay that much for an employee’s salary, I want the best qualified person — this means skills, experience, and maybe a college degree. It makes it harder for teens to land that first job and begin acquiring skills and experience. From governing.com:

A long line of studies about the minimum wage has revealed that it can drive down employment at the low end of the wage scale, but those losses are made up for by increases in higher-paying jobs. The University of Washington findings, however, suggest that there’s some merit to the usual complaint that gets lodged against minimum-wage hikes — that they’re not only expensive for employers, but threaten to cut the first rung on the career ladder out from under teenagers or others just getting their start in the labor market. “The evidence that we’re picking up is consistent,” says Jacob Vigdor, an economist at the University of Washington. “We’re pricing out low-skill workers.”

“In Seattle, Minimum Wage Hike Comes at a Cost to Some Workers” Governing.com January 2019

This began happening in Seattle after the minimum wage began its journey to $15 per hour. In the linked article above from reason.com, “entry-level job growth stalled”:

Job growth continued in the rest of Washington state but not in Seattle.

“It’s presented by minimum wage advocates as a win-win…no negatives,” complains a skeptical Erin Shannon of the Washington Policy Center in my latest video.

Shannon points out the negatives. For example, stores that once hired inexperienced kids and trained them, giving them valuable starter experience, stopped doing so once Seattle raised its minimum wage.

If it’s not working so great (or, at least, as intended) in Seattle, why are presidential candidates pushing for it on a national level? First, it makes for great political rhetoric. It sounds appealing to low income workers while making the candidate appear as a fighter for the “little guy.” But there is also another reason for the government’s push for $15 per hour that no one is talking about.

It increases taxes.

If you’ve read any of my other posts about Robert Kiyosaki’s The Cashflow Quadrant, you know that employees get taxed the highest rates. A $15 minimum wage means increased payroll taxes from millions of American works. Workers will suddenly find themselves bumped up into higher tax brackets due to annual income increases. A 106% pay raise means a lot more in federal, state, and local income tax. But it’s not just income taxes — Social Security and Medicare taxes are also taken out of paychecks and based on a percentage of the paycheck. So with an increased minimum wage, the government gets a windfall of additional Social Security and Medicare income. According to IRS.gov, the 2019 withholding rates are 6.2% for each employee and employer for social security and 1.45% for Medicare. If you were making $7.25 per hour, your wages would be $290 for the week, $580 for the pay period and you’d pay $35.96 in Social Security and $8.41 for Medicare. Under a $15 per hour rate, you’d make $1,200 in the same pay period, paying $74.40 in Social Security and $17.40 in Medicare taxes. In case you missed it, the employee is only responsible for HALF of their Social Security and Medicare withholding (6.2% is half the 12.4% that is Social Security tax, 1.45% half the 2.9% Medicare tax) Under payroll taxes, the employer is responsible for the other half. So the employee pays $74.40 and the employer must ALSO pay $74.40 and $17.40 to the government.

So all governments — federal, state, and local — increase their take with a $15 per hour minimum wage. Maybe the government hopes that the higher wage relieves some of the the looming Social Security trust fund shortage. According to the 2019 annual report by the trustees of Social Security and Medicare, the program is already paying out less than it’s taking in and it will run out by 2035. A $15 minimum wage could help shore up that fund. In theory. But payroll taxes also incentivize employers to keep hours down to reduce their 50% share of the Social Security/Medicare tax cost.

Back to my little restaurant: If I cut back hours to compensate for the increase in wages, I suddenly don’t have enough coverage. I was paying $7.25/hr for 40 hours, but with a $15/hr wage, I’d have to cut it to 20 hours to get labor back to where it was in order to keep my hamburger price consistent. Now I have a shortage of 100 hours (5 employees x 20 less hours). What can I do now? I can either make up the 100 hours as the owner (working 140+ hours per week is equal to working almost every single hour of every day) or I cut back the restaurant’s hours. This means less hamburgers sold. Which means less revenue. Which means it becomes difficult to pay my 5 employees and myself. If I fight to keep the restaurant open, the next step is to cut an employee (I can’t raise hours because I can’t afford it and I can’t stay open longer because I can’t physically do it myself). Now I have 4 employees, and I’m forced to cover even more myself.

Do you see the death spiral here? Eventually, I’ll close either by insolvency or it not being worth it to me anymore. If I’m working 100 hours per week, it’s not definitely not worth it plus I’ll never have the time to expand my business or open a second location. And I’ll never be able to find someone to take over, because no one wants to work 100 hours in a struggling business. Eventually, I’ll shutter the restaurant and all of us will be unemployed.

The other alternative to cutting hours is to raise the price of my hamburgers to sustain the increased cost. Imagine being a customer of my restaurant: years of $1 hamburgers when suddenly you come in one day for lunch and find it costs twice (or more) to eat there. You’ll likely not come back or tell your friends. The human consumer is quite perceptive to price changes. Raising the cost of my hamburgers will expedite driving customers away…and less money coming in from sales. Which causes me to cut another worker…which causes me to reduce the hours the restaurant is open…which reduces sales…

The other question I began to think about is “Why do we have a minimum wage?” I mean this in the purest of thought experiments. Where did the minimum wage come from? Essentially, it’s a social safety net, ensuring American (or other national) employees make a certain amount of money. The first minimum wage appeared in the United States in 1912 in Massachusetts. Eventually, the federal government established a national minimum wage in 1938 under the Fair Labor Standards Act (FLSA), set at $0.25 per hour (adjusting for inflation, about $4.45 today). It was basically a protection for American workers during the Great Depression. The argument for raising it is that the current $7.25/hr isn’t a “livable wage.” Or, in other words, it doesn’t cover the cost of living.

Essentially what the government is doing is setting price controls — they dictate the absolute lowest an employee can be paid, regardless of skill or experience. So where did they get $15 from? Who chose this number? The only origin story I could find comes from SeaTac, Washington in 2013. It was the first city to have a $15 minimum wage and was a byproduct of an attempt by union organizer David Rolf to unionize workers at Sea-Tac airport. The $15 per hour rate was part of a bluff to get the airport to allow unionization. From the same Marketplace article:

There’s the $15 number itself, nice and round, easy to fit on a bumper sticker. The figure first came to people’s attention in a series of strikes by fast-food workers that started in 2012. The workers didn’t achieve their goal of unionization, but $15 stuck.

“The Accidental Origin of the $15 Minimum-Wage Movement” Ben Bergman, Marketplace Jan 30, 2015

So $15 was arbitrary: a randomly chosen number used by a union organizer to play hardball with an airport in Washington state. Eventually it caught on. To some, $15 isn’t enough. Just this past week Representative Rashida Tlaib (D-Mich) began calls to make the federal minimum wage $20 per hour. Jeff Spross of The Week published an article this week called “Is There a Case for a $20 Minimum Wage?” where he mentions that by some productivity measures, the minimum wage should be $22.49 per hour by 2024. If we’re chasing arbitrary numbers, why stop at $22.49? Wouldn’t $50 or $100 per hour cure all poverty? Wouldn’t we all be rich?

Part of the problem is such a high minimum wage disrupts a larger portion of the workforce. If you’re a McDonald’s worker making $20 per hour, that’s $40,000 per year over a full-time schedule. According to Glassdoor.com, the average McDonald’s Store Manager annual salary is $46,354. Someone taking orders or flipping burgers at McDonald’s makes almost as much as the Store Manager! The inevitability is that the Store Manager will now seek an increase as well. He has a lot more responsibilities, a higher skill set, and is in charge of several other employees, but his compensation now lags compared to those that work under him. To maintain the previous ratio, his salary would need to double to match the workers’ increase. Worse, it could lead to disillusionment or de-incentivizing to move up or learn new skills.

This is what happened in Venezuela after sharp raises in the country’s minimum wage in 2018:

“We all earn the same. I earn the same as the girl who presses a button to open the door,” said Arcaya, who has worked at the university for 19 years. “I studied and I worked hard. And now it turns out none of that was worth it.” 

Workers at hospitals, the Oil Ministry and insurance companies all said the pay hierarchy had been distorted following Maduro’s shock measure.

“‘We All Earn the Same’: Venezuela Minimum Wage Hike Angers Skilled Workers” Corina Pons, Reuters September 26, 2018

The other part of the problem has to do with economics, as countries like Venezuela and Greece can attest to. Let’s say that the minimum wage does go to $15 per hour and no jobs are lost. Let’s say every business can afford it and all low-wage labor gets a bump. (We can do this because it’s a thought experiment) This means that the amount of spending by millions of workers has now increased. More bills are paid. More loaves of bread and gallons of milk are purchased because they can be easily afforded. There’s a lot more money going out and spending is up. Prices will respond in kind. This “excess liquidity” will be mopped by up prices of goods and services. You have more money chasing the same amount of goods and services, the result inevitably being price inflation. In addition, companies will raise prices to maintain the higher hourly wage. This is called Wage Push Inflation. Soon, the $15 wages don’t buy as much as they used to and we’re back where we started. Why are politicians and workers complaining that the current $7.25/hr isn’t enough?

Because it doesn’t buy what it used to.

In effect, raising the minimum wage is a result of currency inflation. Because the value of the dollar decreases, it requires the minimum wage to be raised or else things become unaffordable. If things become unaffordable, they don’t sell. The choice is to lower the price so they do sell, or that item is replaced by one that does sell. Raising the minimum wage will ensure that goods becoming unaffordable remain purchasable. Investopedia gives an example of Wage Push Inflation: “If a state raises the minimum $5 to $20, that company must compensate by increasing the prices of its products on the market. But because the goods become more expensive, that raise isn’t enough to propel a consumer’s purchasing power, and the wage must be raised again, therefore causing an inflationary spiral. “

So what’s the takeaway from this thought experiment? My fictional little restaurant didn’t do so well. There’s no economic or logical choice for a $15 per hour minimum wage; I couldn’t find any economic studies that could show why that specific number is valid as a target. It seems to be chosen only because of the PR value and catchiness of “Fight for 15.” The other question is, will $15 per hour minimum wage really solve anything? The consequences could outnumber the (temporary) gains, and Wage Push Inflation and price inflation could quickly negate the sought after results.

I don’t deny the catchiness of “Fight for $15” or the hero status it gives political candidates. It sounds good to many people. But the math behind it just doesn’t seem to work. When it comes to government setting prices we must remember The Laws of Unintended Consequences: The actions of people, and especially government, always have effects that are unanticipated or unplanned for. On July 18, 2019 the House of Representatives passed a bill to raise the minimum wage to $15. The Congressional Budget Office reviewed the bill and admitted that the bill would produce a financial boost to nearly 30 million workers…but that “it would also result in 1.3 million jobs lost by 2025.”

Update Edit: Just after originally publishing this post, I came across the story of Emeryville, California’s minimum wage hike. Emeryville (home to Pixar animation) has the highest minimum wage in the country at $16.30 per hour (as of July 1, 2019). According to a Wall Street Journal article, Emeryville is the scene of a standoff between restaurant workers and their employees over the high minimum wage:

The economy is booming in the Bay Area, but at Patatas Neighborhood Kitchen, located in this small city just north of Oakland, owner Marcos Quezada recently eliminated the dinner shift and laid off six of his 10 workers.

He struggled with the decision but felt he had no choice after Emeryville increased its hourly minimum wage in July from $15 to $16.30, the highest in the U.S. “I just didn’t see how I was going to survive it,” said Mr. Quezada, who opened the eatery in 2017.

Remember what happened to my fictional restaurant? In several other cases mentioned in the WSJ article, the menu prices sharply increased to offset the new cost — in the case of Emeryville cafe Rudy’s, the price of their Crunchy Asian Salad went from $10 to $15.50, a more than 50% increase. From the same WSJ article:

“There is a tipping point,” said Erik Hansen, the owner of Moomie’s, who is deciding whether to raise sandwich prices by as much as $1.50 or lay off one of his three employees. “We may have the highest minimum wage, but I don’t think the people in Emeryville will feel like paying the highest prices in the country.”

Things have gotten even more complicated recently. In June 2019 Emeryville instituted a ‘pause’ in the wage hike for “small, independent restaurants.” The city council voted to halt increases for select restaurants meeting various criteria. So now the new minimum wage rate is only applicable to a certain size restaurant or above (according to July 26 update to the HR watchdog article, this ruling is now “in flux and may not be valid.”)

This article has been expanded into several parts. You can continue reading Part 2 here.