Writing for the Wall Street Journal, Michael Saltsman pokes a few holes in the minimum wage balloon:
In a visit this month to the University of Michigan, for instance, the president stopped at the local deli Zingerman’s. He raved about its Reuben sandwich as well as the generous wages that the business offers. Like [Costco CEO] Mr. Jelinek, Zingerman’s co-founder Paul Saginaw supports hiking the minimum wage. He posted a minimum-wage manifesto on a company website last September.
As Mr. Obama relished the perfect sandwich prepared by well-paid employees, he neglected to mention how much he paid for the happy experience: Zingerman’s Reuben costs $14. That’s about three times as much as a Subway foot-long. When I was an undergraduate student at Michigan, I rarely dined at Zingerman’s because it was so expensive.
If every deli could charge $14 a sandwich, then perhaps an $11 or $12 minimum wage would be feasible. But your local sandwich shop cannot match the price points of a shop serving a parent-subsidized clientele in a college town. Expecting restaurants everywhere to do so is a recipe for business failure.
Actually, the prices at Subway have gone up a fair amount in recent days and you can only get a $5 footlong when they have a sale going. But Saltsman is correct concerning the prices at Zingerman’s. But it looks like they throw in a pickle, so that’s something. But if you want chips and a drink, you’re looking at about $20 a head. So a family of four wanting a quick lunch? $80, maybe more. I suppose some families can swing that, but I’d imagine that most people can’t. I certainly can’t, at least not very often.
And Saltsman makes an equally good point about pricing:
The president seems oblivious to pricing pressures that exist outside of high-end restaurant concepts in tony metropolitan areas. Labor Secretary Tom Perez’s March visit to a Shake Shack in Washington, D.C.—again, to promote the company’s above-minimum starting wage—was typical. While praising the restaurant’s wage structure, Mr. Perez did not mention that the least-expensive double cheeseburger on the menu sells for $6.90, or more than 40% more than a Double Quarter Pounder at the McDonald’s nearby.
If McDonald’s could raise burger prices by 40% without losing customers, it would have done so already without input from Messrs. Obama and Perez. But customers are price sensitive. The same dilemma exists at restaurants, grocery stores and countless other service businesses across the country. If higher prices aren’t an option for offsetting a wage hike, costs have to be reduced by eliminating jobs and other employment opportunities.
Emphasis mine. The Shake Shack’s prices are closer to what you might see at a Champps or Red Robin, but if you’re looking for a quick, inexpensive lunch, you’re not going to be going to either of those places. And if you are looking at over $50 for lunch for four people every time you go out to eat, even at a McDonald’s, you’re not going to see as many people eating out, and those that do will decrease their frequency of doing so. So yes, some people will make more money, but if business is down you’ll have less people working. Maybe that will work out well for everyone, but I kinda doubt it.
This post was written by Mark Heuring and originally published on Mr. Dilettante’s Neighborhood.
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You’re correct, Mark.
But I object to everyone’s harping on the service industry as a bell weather for low wage employment.
More important is the effect it has on manual labor involved in the remaining manufacturing sectors.
There is a reason we can buy a 4G computer for $400 today, its a little think called automation. Automation has earned me a very nice living…by providing it. Not so much the people my machines replace.
Most workers building consumer electronics make more than the minimum wage, but the discussion is pertinent to them for the same reason it is to union bosses. When you raise the minimum everyone will expect to maintain their position above it.
As you point out, that’s all well and good if we’re willing to spend $2000 for the same computer we’re paying $400 for today, but as you and I know, that’s not the case.
I haven’t had any inquiries into automated burger flippers, or sandwich machines, but I see an emerging market for them.
The workers displaced
By your automation, or by its companion, globalization, won’t be buying either computer. So while your short term gains might be wonderful, it comes at the price of killing the golden goose. But hey you won’t be around when the “chickens come home to roost” as it were, right?
Automated burger flippers …
It’s been done, Mr. Swift
Burger Kings uses an appliance called a chain broiler to cook their beef patties. The patties are fed into the top, and a chain conveyor moves the patties across a gas fired flame to cook them.
And this has been the case since at least the early seventies when I was a grad student and BK had a place in Dinkytown.
And yet BK still employs lots of humans.
Around the U of MN, you can get a great lunch for about…
…8 bucks or less including tax, at several places – at Little Szechuan or Korea near Oak and Washington, or at Pagoda or Shuang Cheng in Dinkytown. There are others, too. These are just the places I tend to patronize.
That deli selling $14 sandwiches and $20 lunches could not be successful in this environment. It would have to somehow find and feast on the trapped customer (or relatively trapped customer) – as in having your shop in the ground floor of one of those hotels that feed on the U’s location.
But are very many in the U community going to walk past a great $8 lunch so they can pay $14 for a sandwich, even a great sandwich ? These students are not dumb.
However, it is not necessary to sell goods at twice the prevailing price in order to pay more than the minimum wage.
Perhaps the market for the $14 sandwhich isn’t students
The 30,000 under grads may not be able to afford it but the 25,000 person faculty and graduate students may be dining there daily.
As usual
The article overlooks (or ignores) the effects of increased wages on demand. I doubt that many people earning minimum wages frequently eat out -anyplace- it’s always cheaper to eat at home (assuming that you have one).
Increasing wages at the low end of the scale means that more people can afford to eat out, increasing the demand for labor in the food industry.
Why is minimum wage the culprit?
Raising the minimum wage isn’t going to cause major price increases. Studies already prove that. The idea that McDonalds can’t absorb a wage increase is a favorite of conservative thought – but McDonalds is more concerned about the price of beef, fish and chicken than they are about paying workers. These are billion dollar profit companies – sure they have a lot of workers, but labor costs are not their biggest factor in price points. I thought that conservatives had more confidence in the capitalistic competition system. Guess they are more concerned about suppressing labor gains and keeping the poor in check.
Conservatives do have more confidence
in the “capitalistic competition system” as you call it, which is why we don’t want government mucking it up all the time with their mandates on costs. Some will survive the mandates, others won’t. And they’ll fail, not because of competition with another enterprise but because of what the government has done.
That is hogwash Mr. Tester
Unless the whole industry disappears the good business people will figure it out. If you can’t figure out how to do compete your just not very good at business.
They will replace labor with machines. Have you looked at the number of people it takes to farm 1000 acres lately or get a product to market? Super equipment and computers have certainly reduced the need for labor and local brokers.
Or they will differentiate labor. One might say that union carpenters priced them selves out of the residential construction market but there are still houses being built. It is because the jobs have been further differentiated. A framer use to be a carpenter now they are framers and paid accordingly. The same think happened in medicine with the expansion of Nurse Practitioners and Physician’s assistants replacing some functions of doctors.
That only works if
“Increasing wages at the low end of the scale means that more people can afford to eat out, increasing the demand for labor in the food industry.”
This argument is true provided that you assume the price for eating out does not change even though the cost of labor increases. That will not be the case – as pointed out in the article – as any market that can pass along the increased costs of labor will do so in the form of price increases. Making it still difficult to afford for the minimum wage worker.
Those businesses that can’t increase their prices to pass along the increases in labor costs will find other ways to manage it – through automation or other labor reducing efficiencies. Lower skill manufacturing jobs are going to suffer.
What really has not been discussed at all is the wind fall that the increase in minimum wages will provide to:
The Federal Gov’t – in the form of much higher collections for Social Security and Medicare. Both from the employee and the employer.
Unions – in the form of increase dues as they receive the same percentage from a much higher wage.
The economics trade offs behind this change has been ignored – which seems to be a common political occurrence when you can legislate something that you make others pay for.
Wages
A higher minimum wage may mean an incremental increase in product prices, but not that much as labor isn’t the main factor in the production of most goods and services. Which isn’t to say that all companies are so blessed, but the vast majority will only see an incremental change. For example, iPhones if they were produced in the United States in stead of China would be all of $60 more expensive even despite our higher labor costs, OSHA, and environmental regulations.
Government tax collects will indeed go up somewhat from the increased wages, but it will hardly be a windfall. Most of these people will go from making next to nothing per year to a slightly higher wage and it won’t be more than a bump in their tax outlay.
The union argument is pretty much a non-starter as far as minimum wages go as they have contracts that set their wages.
Far from being ignored, the economic impact of the wage increase has been thoroughly debated in Congress, our legislature, and the press.
The Bubble
The WSJ has little to say the applies to the lives of ordinary Americans – by which I mean those in, say, the lower 2/3 of the income spectrum, and despite some efforts made along those lines early in his first term, Mr. Obama appears to have largely given up on conscious efforts to get out of “the bubble” of Washington, D.C. The nation’s capital has almost nothing in common with the rest of the country except language. Big money, as generations of CEOs and revolving-door politicians would testify if they were honest, is pretty seductive.
Mr. Swift may be correct about the “emerging market,” though I suspect he wrote that with tongue firmly in cheek, but I’m more inclined to agree, at least in part, with Messrs. Titterud, Brandon and Mindeman. That $400 computer he mentions is priced as it is not just because of automation, though that certainly plays a prominent role, but equally prominent is the role played by a 3rd-World labor force being paid a tiny fraction of what’s required to maintain some semblance of civilized life in this society. My very modest lifestyle is princely when compared to that of the Chinese worker on an assembly line.
As a certified old person on a fixed income, my lunches are generally prepared in my own kitchen, not someone else’s. People tend to harp on fast food and other segments of the service industry because that’s the area of the economy that, now and historically, pays the lowest wages. Even in the days before big money shipped the jobs overseas, cleaning ladies, food servers and their colleagues in the labor market were not being paid well. They still aren’t. If the minimum wage is raised, it’s the people in that area of the economy who are most likely to be affected.
Like so many other things – housing, transportation, clothing – that are “upscale,” the purveyor of $14 sandwiches is hoping to (maybe counting on) capture the business of people with more money than brains. As a (very) rare treat, I might enjoy that sandwich myself, but for the day-in, day-out business lunch, I’ll bring it from home. Not only will lunch almost surely be less expensive, it’ll often be healthier, as well.
The CBO
claims that raising the minimum wage to $10.10 an hour, as Democrats want, would result in 500,000 less workers by the second half of 2016 but raise 900,000 families out of poverty.
Seems to me that the CBO ignores the fact that the price of goods and services will rise to meet the new minimum wage. And do we really want to put another half million out of jobs they probably just landed?
The benefit more people on welfare provides to the left aside, are Democrats so blinded they cannot see cause and effect so often put in evidence?
The CBO analysis did not ignore a rise in the price of goods.
See http://www.cbo.gov/sites/default/files/cbofiles/attachments/44995-MinimumWage.pdf
…but you gotta read the report, Mr. Swift, as it goes into excruciating detail on a number of matters that interact, one with another. There is no set of black and white conclusions here – rather, competing values.
Do you suppose that maybe the costs would go up, too?
DM suggests,
The idea that McDonalds can’t absorb a wage increase is a favorite of conservative thought – but McDonalds is more concerned about the price of beef, fish and chicken than they are about paying workers.
Of course, but the purveyors of these ingredients will also have their labor costs go up as well. Might they pass along the costs, too?
No one takes one for the team. We aren’t able to vote ourselves rich; if we could, we’d have done it long ago.
PB suggests,
Increasing wages at the low end of the scale means that more people can afford to eat out, increasing the demand for labor in the food industry.
Maybe, maybe not. We’ll find out. It’s possible, if the minimum wage workers are earning the second or third income for the household. If they are the primary breadwinner, they probably won’t be.
Faulty asssumptions
are easier to come by than facts.
I ate lunch today at a well known NE Minnepolis restaurant, where a Reuben sandwhich is currently $11. Labor typically accounts for 1/3 of the cost of restaurant dishes. A 30% increase in labor costs (from $7.25 to $9.50 per hour) should result in a 1/9 (11.1%) increase in the cost of a meal. In other words, that $11 sandwhich can be expected to cost $12.21, before taxes.
Of course, this assumes that the employees at this establishment are currently earning the $7.25 an hour. Let’s hope not, at these prices.
Re: Faulty Assumptions
Jim’s post is a great example of the simplistic view that was used to pass this bill while ignoring the very complexed nature of changes in the minimum wage pointed out by Steve and his link to the CBO report. (And Jim – please don’t be offended as I don’t mean this personally).
Jim is correct in that restaurants typically have ⅓ of their costs in labor. But by just focusing on the change in pay rates, Jim’s analysis ignores the following:
1 – The labor increase effect on the 40% of restaurant’s cost associated with food and beverage. These suppliers too employ minimum wage workers who will see their labor costs rise. This will be passed along as higher prices for the food and beverages used to provide the meals that the customer buys.
2 – The labor increases for the employees not making minimum wage. Because the $10 hour supervisor seeing their staff getting $2.25 per hour more to $9.50, are not going to be happy workers making 50¢ an hour more. Most businesses will have to respond by adjusting the entire wage scale (I’m guessing up to $20+ an hour) to properly compensate all employees based on the differences in their skill level and job responsibilities.
3 – The increase in employer paid social security and medicare on the higher wages. This amount is (9.50-7.25) x (6.20% SSN = 1.45% medicare) per hour.
4 – The increase in business Worker’s Compensation and Unemployment Insurance which are expenses based on total payroll
When you sum up all this – That $11 sandwich is going up a lot more than $12.21.
If a business can, they will pass along all these additional costs that are directly associated with the change in minimum wages. If they can’t, they will have to find other efficiencies which in many cases reduce the need for labor – especially lower skilled labor associated with the minimum wage. The CBO report does a very good job discussing these issues and effects – and the conclusion that its not so simple.
I don’t expect the general public to be familiar with all the issues contained in the CBO. But I do expect our legislators to have and discuss this information. And the utter lack of rational debate on the issue – especially by the DFL majority pushing the issue – is frustrating. Especially their use of simplistic examples (such as Jim’s) which in my opinion are deceitful.
5 years from now, we will see the effect, just as Oregon and Washington are seeing now. Very high costs for just about everything and very few minimum wage jobs added to handle the growing population. Not sure that is really the solution to the problem.
Labor Costs
Not to quibble, Mr. Miller, but the labor costs of the supervisor (and dishwasher, bus boy, hostess, etc.) are already factored into the sandwich cost as the 30% doesn’t include just the wage of the server. You may see a bump in some of the employee’s wages, but it’s not likely to be a huge amount. You’re looking at a buck or two an hour spread out over hundreds of sandwiches and other meals. The SSN figures you provided amount to 11¢ per hour per employee. On a slow day that might mean an extra penny or two per meal.
Really?
How can someone suggest that if the cost of doing business goes up then the cost of the service that the business provides will also go up? How can that be?
Explain this….
Here is an item from a recent UCLA study…
“A study completed last fall by researchers at the University of California-Berkeley concluded that front-line fast-food workers earn so little that 52 percent of them are enrolled in one or more public assistance programs. The cost to the taxpayers – nearly $7 billion a year.”
In other words, the taxpayers are subsidizing billion dollar companies so that they can keep wages low. How does a “conservative” justify that?
What will be the cost
to the taxpayers when those low-wage workers are laid off because their labor isn’t worth $10 an hour to the enterprise?
Conservatives would say that it’s better to partially subsidize working people who were ill-prepared by the government school system than to pay for their entire cost of living.
Whoever said a fast food job should pay a living wage?
Historically these have been a teenager’s first “real job”. They never paid a living wage, and nobody minded. Teenagers were not expected to support a family on the money they received. They were not even expected to keep the jobs for terribly long. The low wages and low skills required are definitely part of the reason fast food is cheap.
Are we now saying that because older citizens with no particular marketable skills but greater financial needs are taking these jobs away from teenagers that the whole fast food financial model has to change to accomodate them?
Why? The job is what it is. It’s not surprising that someone can’t make it financially on that alone. It was never meant to be possible.
Minimum Wage Jobs
You’re correct that minimum wage jobs have traditionally been as an entry point into the market for the younger set. Unfortunately that is no long the case and we have to deal with reality as it is, not as we would like it to be. Not only are older people forced back into the job market, but younger folks in the 30s and 40s are also trying to make a go of it too. Many of them have to string together two or three part time jobs in order to earn enough money to pay rent and feed and clothe their families. It would be much nicer if everyone can have a high skilled high paying job, but the name of the game these days is to scramble any way you can.
Even for those with skills it can be a real problem. I have friends in highly skilled IT and accounting fields whose jobs have been outsourced to third party companies–often off-shore based. Those companies drive their costs down by hiring people only on a contract basis here and there. That means temporary employment and short term employment. When the contract is up, maybe they can get a new one right away, but often that means a period of unemployment while they scramble to make ends meet and hang on to their houses. Often the way to hang on by their fingernails entails getting a minimum wage job at the local fast food joint or warehouse.
In order to more thoroughly understand what it means to be poor in America, I would suggest reading the book “Nickle & Dimed” by Barbara Ehrenreich. It’s a quick and easy read and won’t take much time out of your day while at the same time giving you a good understanding about the challenges of being poor and employed in today’s society.
These aren’t “first jobs” anymore..
Maybe it makes you feel better to think that teenagers get these low wage jobs, but the facts indicate that more of these jobs are breadwinner jobs for more people than we care to admit. Yes, teenagers need entry level and a lot of minimum wage laws account for that with a 2 tier system. But if “conservatives” want to explain the government subsidy of low wages with that argument alone, then the argument is lost.
Subsidy Source
I think we all agree that it is important that capable American adults who work at least 40 hrs/wk should be able to afford basic food, clothing, shelter, healthcare, etc. Any disagreements?
That said we can increase incomes for these people by 2 different methods.
1. Raise the minimum wages. Therefore every American pays for the subsidy via higher prices and/or fewer simple jobs. (ie automation, off shoring, fewer exports, etc)
2. Subsidize their wages via the Earned Income Tax Credit, Food Stamps, Medicaid, etc. These programs are paid for almost exclusively by the middle and upper income citizens.
Choices, choices…
Compare
We may agree that full time workers should be able to afford basic food, clothing, shelter, etc. What we may disagree is what constitutes basic. Is a single family home basic or living in one bedroom apartment with a roommate basic?
Also, supporters of minimum wage, please explain how come Washington State and Oregon have much higher minimum wage than Minnesota and yet have higher poverty level. I asked this question all the time and no one answers.
I think the question is
How much do you pay to eat everyday? I know people who actually don’t know. I know people who pay well over $50 per meal on average. I also know people who live on or rather try live on a dollar or less for a day per meal.
Washington State and Oregon have a much higher standard of living meaning a higher minimum wage doesn’t buy as much as it does in a state with a lower standard of living and a lower minimum wage.
Do we really want to live in a Nation that’s the richest in world where a family of 4 is living by necessity in a one bedroom apartment? In a Geopolitical sense it makes us look insanely uneven and greedy.
Fairness
Mr. Lord’s explanation of Washington/Oregon vs. Minnesota situation makes sense to certain degree. It also proves the point that higher minimum wages lead to higher prices thus negating the effect of the higher minimum wages for low wage earners. Therefore, raising minimum wage is not reasonable which I have been saying all along.
As for a family of 4 living in a one bedroom apartment, there is no constitutional right to have a bedroom per person. If one insists that it is not good, does it mean that we have to give a BMW (or at least a new Chevy) to everyone who drives a 25 year old clunker?
Low wage subsidy
So the writer thinks his cheap sandwich should be subsidized by low wage workers. That’s what anti-minimum wage arguments generally amount to: I want my stuff cheap, so let others pay the cost through being paid too little. If the minimum was the feared $11 or $12, a lot more people could afford the $14 sandwich.
The argument about McDonald’s being unable to raise prices is likewise silly. Many of its customers have little to spend, so if they were paid more, they could afford higher prices at McDonald’s. Besides, McDonald’s isn’t known for food quality, but for being cheap and fast. Sustaining this one corporation’s business model is not a valid reason for making workers receive too little in wages to survive on.
A Different Argument
Eric,
Here is a better argument that people seem unwilling to bite on. We can increase incomes for these people by 2 different methods.
1. Raise the minimum wages. Therefore every American pays for the subsidy via higher prices and/or fewer simple jobs. (ie automation, off shoring, fewer exports, etc)
2. Subsidize their wages via the Earned Income Tax Credit, Food Stamps, Medicaid, etc. These programs are paid for almost exclusively by the middle and upper income citizens.
You are supporting increasing the costs for those who can least afford it. While putting pressure on businesses to automate and off shore. It is an interesting irony.
Ilya
doesn’t it prove the point that higher prices means the need for a higher minimum wage? What we should do instead is freeze prices then and let the standard of living catch back up to the 1970’s standards.
Of course, there is no constitutional right for anyone to have a place to live, or to be able to eat. None at all. Does that mean we should feel good about that? Is that what we should find acceptable? Like in Russia? Should we be like them? With whole families living in single dwelling squalor? What’s the difference then? There are billionaires and millionaires in Russia too! Although some have moved here to America for some reason. What about Putin? Is he the new champion of the regressive conditions you say are bad? Or is he simply leading Russia into the new capitalism which you say is better than the old Russia was? Is it that it’s easier for the rich to become richer in America without the yolk of the common folk hanging around one’s neck? Is that what you feel is good?
Come on Ilya. Cars? How about the ability to feed one’s family first. Shouldn’t that be a right first? The kind of right that doesn’t make the wealthy look like Scrooge all over again. The right of the heart and not the heavily padded pocket books of the wealthy. You are arguing for the heartless when you argue that the minimum wage shouldn’t be raised. At least to the standards of the 1970’s.
Jon,
I give to charities and you give to charities; I pay taxes and you pay taxes. So those who can’t afford to feed the family do get money to do just that. And if they choose to buy drugs, alcohol, and cigarettes with that money, I do not think we should give them more.
The wealthy pay the lion’s share of taxes and give a lot to charities so let’s stop blaming them for everything. It is not good to count money in someone else’s pockets. Communist revolution in Russia was supported by the idea of expropriating the expropriators – it didn’t end well, as you know.
And I am not arguing for the “heartless” when I argue for not raising minimum wage – I argue for economic science. Again, how come higher minimum wages did not help Washington State and Oregon to lower poverty? Your own explanation proves that raising minimum wage does not help minimum wage earners.
As for freezing prices, I think Chavez did it in Venezuela; now they do not have enough toilet paper…
And of course Mr. Ferguson missed the entire debate and was fighting the straw man he came up with…