Fast-food workers of the world unite! is the latest rallying cry for the left. In protests around the country, union organizers argue that government should force the fast-food industry to pay workers at least $15 an hour. However well-intentioned, if successful, this movement spells disaster for low-income Americans.
First, some basic economics. Generally, if the price of a product increases, demand for it decreases. If you’re a normal person, what you buy depends on how much it costs. For example, most people are willing to pay $2 for a cup of coffee. But how about $4? What about $6? The higher the price, the less likely you are to purchase the product. Instead, you’ll seek an alternative.
The law of demand is blind — it applies to businesses and individuals, alike. A business owner faced with increasing costs in any area will explore ways to lessen the impact or find a substitute. For example, as the price of oil increases, the market for natural gas booms because companies are pursuing lower-cost alternatives.
This law holds true for labor too. When a government mandate increases the cost of labor, businesses inevitably seek ways to avoid the artificial cost increase. In response, businesses may examine whether they can supply their customers with the same or similar service with fewer employees. They may consider equipment and technology which might be able to replace employees. Or, in some industries, they may ship jobs overseas.
Those employed in the fast-food industry are perhaps the most vulnerable to layoffs from increased government mandates. This stems from a several industry factors.
First, the profit margin for fast-food restaurants is incredibly slim –less than three percent for the industry as a whole, by one estimate.
Second, the demand for fast food is incredibly elastic. Researchers for a 2010 article in the American Journal of Public Health estimated that for every percentage increase in the price of “food away from home,” there’s a corresponding decrease in consumption by 0.81 percent. A study published this year, found a decrease of 0.90 percent.
Third, new technology may provide adequate substitutes for many of the services currently provided by fast food workers. David Nicklaus, a business reporter for the Post-Dispatch, notes that many “restaurants already have self-service kiosks, and smartphone ordering isn’t far away.” And that’s just for workers at the front counter. There’s also at least one company, Momentum Machines, which advertises a machine that can produce a burger every second. Fast food workers are competing against these technologies. And, while a machine cannot substitute for a smiling or helpful human being, businesses faced with spiraling labor costs will inevitably turn to machines to cut costs.
Fourth, turnover in the fast food industry is among the highest of any sector of the economy. Though industry turnover is decreasing, it is still at least 60 percent and may be as high as 90 percent. This may be attributed to many factors. Obviously, as low-paying jobs, employees are more likely to take the first chance they get at a higher wage. At least 30 percent are teenagers. And many employees who fill these positions do not have the skills or desire necessary to stay employed.
According to the non-partisan Congressional Budget Office, an increase in the minimum wage to just $10.10 an hour would lead to job losses for up to 1 million Americans. And the impact would fall hardest on the least-skilled. According to the CBO, even a modest increase to $9 an hour would likely cause 200,000 lost jobs. Thus, the jump from $9 to $10.10 would hike unemployment. It logically follows then, that an increase to $15 would trigger even more devastating job losses.
The resulting unemployment would harm people well into the future. For the industrious, a minimum wage job is the first step on the ladder to economic viability. According to Ron Haskins of the liberal Brookings Institution, there are three simple rules that low-income teens should follow to avoid a life of poverty. The first is to finish high school. The second is to wait until they are 21 to marry and have children. And the third is to get a full-time job, any job. If they do this, there’s only a two percent chance that they will live in “poverty”oand there’s a 75 percent chance that they will join the middle class.
Despite the good intentions of liberals, government cannot suspend the basic laws of economics. There’s no magic wand that can turn the economic value of an hour of fast-food labor from $7.25 an hour to $15 an hour. Those who would lose access to a job due to artificial wages set by government fiat would become more dependent on government – in some cases starting, and in other cases, perpetuating a cycle of poverty. The answer to improving the lives of the poor is not for government to ignore basic economic facts, but instead, among other things, to improve access to health care, equal access to justice in our courts, and a quality education.