This article was published by The McAlvany Intelligence Advisor on Monday, February 20, 2017:
The promise is that by requiring businesses to pay their employees $15 an hour, the net result is that everyone will live better. The low-paid people will have more money to spend, the upward “ripple” effect on other higher-paid people in the organization will also have more money to spend, the economy will grow, there will be more jobs hiring people who will then have more money to spend, and so on into the woodwork.
This was the claim by that “poverty” expert, former Senator Teddy Kennedy whose family’s wealth extended backwards for generations, who said that an increase in the minimum wage is “one of the best anti-poverty programs we have.” This was repeated by Joe Biden’s economic “advisor” Jared Bernstein, who said that a hike in the minimum wage “raises the pay of low-wage workers without hurting their job prospects.”
And unions like SEIU have seen the opportunity and have jumped on board, funding the “fight for 15” in the hopes that workers will be more inclined to join them in appreciation for the “victory” they won over greedy businessmen. In exchange for union dues, of course.
The basic problem is that certain economic laws cannot be repealed. One of those laws is that the money has to come from somewhere. The unions and their supporters think the increased wages will be squeezed out of the pocketbooks of the rich business owners, thus fulfilling the promise of spreading the wealth from them to their workers.
But the real world doesn’t work that way, according to Ed Rensi, a 30-year veteran of McDonald’s who spent the last decade of his career as its CEO:
In truth, nearly 90% of McDonald’s locations are independently-owned by franchisees who aren’t making “millions” in profit. Rather, they keep roughly six cents of each sales dollar after paying for food, staff costs, rent, and other expenses.
Let’s do the math: a typical franchisee sells about $2.6 million worth of burgers, fries, shakes and Happy Meals each year, leaving them with $156,000 in profit.
If that franchisee has 15 part-time employees on staff earning minimum wage, a $15 hourly pay requirement eats up three quarters of [the owner’s] profitability … for some locations a $15 minimum wage wipes out their entire profit.
What that means is that the business owner will have to raise his prices to cover the increased wage costs. Studies from various economics departments over the years have suggested that those price increases will be very modest: to cover a 10 percent hike in wages, food prices will only have to increase a few percent, nothing to worry about.
Along comes James Sherk, a Bradley Fellow at The Heritage Foundation, who looked at these studies and noticed a fatal flaw: as prices increase, sales decrease. That means that profits decrease while rent and other overhead costs remain the same. So prices will have to be hiked further, which result in still fewer sales. Eventually, according to Sherk, equilibrium is found where the supply/demand curve intersects – at a 38 percent price increase.
Translation: A 10-piece Chicken McNuggets, currently priced at $4.49, would jump to $6.20. A Starbucks Grande Mocha Frappuccino would increase from $4.56 to $6.29 while a 6-inch turkey sub at Subway would cost $5.87, up from $4.25. A Whopper Meal from Burger King would jump to $8.96 from $6.49.
A CrunchWrap Supreme, Crunchy Taco, and Large Drink from Taco Bell would cost $8.27, up from $5.99; a Wendy’s Son of Baconator Combo, currently $6.69 would cost $9.23; a Chick-fil-A Chicken Sandwich Combo, priced at $5.95, would cost $8.21; and a Pizza Hut Medium Hand-Tossed Cheese Pizza, on today’s menu at $11.95, would jump to $16.55.
As far as that “redistributionist” fallacy is concerned, Sherk said that “minimum wage increases do little to redistribute wealth. Some low-income families benefit from higher wages [those who keep their jobs], but many more low-income families are hurt by higher prices. This, he says, “complicates many minimum-wage advocates’ Robin Hood narrative. They often argue that raising starting wages redistributes income from wealthy business owners to poorer workers. But higher minimum wages actually transfer wealth from customers to workers. Many of those customers have low incomes … the poor obviously do not benefit [from a $15 minimum wage].”
The other side of the coin is a reduction in the number of employees that a franchisee or small service company owner can afford to hire. Sherk’s analysis, assuming the $15 minimum wage is mandated all across the country, concludes that “fast-food employment [would be reduced] by 36 percent.
That translates into a million low-paid fast-food jobs that would disappear, thanks to the faulty economics of people like Kennedy and Bernstein and political chicanery from unions like the SEIU.
Last May, Rensi said:
I guarantee you if a $15 minimum wage [law is passed], you’re going to see a job loss like you can’t believe. It’s cheaper [for a franchisee] to buy a $35,000 robot than it is to hire an employee who’s inefficient making $15 an hour bagging French fries.
In November, McDonald’s made it official: every one of its 14,000 stores nationwide will be replacing cashiers with automated touch-screen kiosks, and they naturally are starting in places where minimum wage laws are already in place: Florida, New York, San Francisco, Boston, Chicago, Washington, D.C., and Seattle.
There’s another aspect of the foolishness that few have discussed. The Employment Policies Institute found that high-school seniors with part-time work experience in places like McDonald’s, Burger King, and Chick-fil-A earn 20 percent more per year on average, six to nine years after graduating, compared to their fellow students who didn’t have that experience. What that means is that, instead of improving everyone’s standard of living, allegedly at the expense of the “rich” business owners, minimum wage legislation will be condemning young people to lower-paid and less-successful futures.
Much as liberal economists like Bernstein (whose college degree, by the way, is in music) and the SEIU would like to have people believe that raising the minimum wage is good for everybody, there are certain laws of economic reality that can’t be repealed.
Heritage.org: $15 Minimum Wages Will Substantially Raise Prices
The New American: McDonald’s Response to $15 Minimum Wage: Automation in Every Store