WASHINGTON, September 4, 2014 — Fast food workers in Washington DC, New York City, Detroit and nearly 100 other cities staged a one day walk out on Thursday. Their gripe is that they are being paid the minimum wage of $7.25 per hour. They believe their pay should be $15 per hour. They cite a number of reasons for the increase.
Would a pay raise really help them?
The workers claim that the higher wages are not only beneficial to the workers but will be beneficial to the entire economy. By doubling the minimum wage from the current $15,000 per year to a whopping $30,000 per year, the entire economy would benefit, since the workers will now have more to spend. This will increase consumption and add to economic growth, they claim.
The reality is much different.
They never address the question regarding where the money will come from to pay the workers more. The higher wages will result in higher prices for consumers. This would lead to the dollar menu becoming the $1.25 menu.
The result is that the increase in purchasing power from fast food workers having higher wages will exactly be offset by the decrease in purchasing power from the higher prices paid by customers. The net effect is zero and may even be negative if the higher food prices reduce overall demand.
Then there is the argument that raising fast food workers’ wages will result in a reduction in public assistance payments made to them. But again, if we reduce those payments because of higher wages, the net effect is that taxpayers may pay less for public assistance programs but will pay more to purchase the food. Again the result is simply transferring public assistance payments from all taxpayers to consumers of fast food. There is no actual savings.
Then the workers argue that they “need” more money to simply survive. And that may be true. The problem is that the argument is not valid in a capitalistic economy.
There are basically two ways to set up an economy. One way is to pay people according to their need. In this system it is roughly assumed that all people have the same needs. As such each worker is paid the same as any other worker, regardless of the contribution.
This philosophy is the basis for communism which simply does not work in the long term because workers have no incentive to produce any more than anyone else. We just have to look at countries like Cuba and North Korea who follow communism to see that the vast majority of the population lives in poverty conditions.
The other way to set up an economic system is to pay workers according to their contribution to the economy. In this capitalistic system, workers are encouraged to produce as much as they desire. The wage they are paid generally equals the value of the contribution. In this system the economy grows and the standard of living increases for almost all workers, except for those who, for whatever reason, do not increase their contribution.
Some fast food workers say that they were hired five to ten years ago at the minimum wage of $7.25 and are now earning only $9.25 per hour. In other words, in ten years of working they have not figured out how to contribute more. But if we pay people more than the value of their output, it causes distortions in the system which result in others being paid less than they are worth. This tends to slow economic growth, which is something the US economy cannot afford, especially at this time.
The other problem with doubling the minimum wage is the negative rippling effect. Suppose there is a worker who has been employed for a number of years and who has consistently increased their contribution. While they started at the $7.25 minimum, they now earn say $14.50 per hour, likely moving into a supervisory role. If the minimum wage is raised to $15 per hour, these individuals will say that they are worth twice the minimum. So should they now be paid $30 per hour?
If the minimum wage is raised to $15, the result will be higher prices for consumers and far fewer jobs available as entry level positions. Order takers will be replaced by touch screens. Hamburger flippers will be replaced by an automated cooking system and young people will have far fewer opportunities. Already teenage unemployment exceeds 20% nationwide and for some teenage minorities in large cities, the unemployment rate exceeds 40%.
If the fast food workers want to be paid more, they must figure out a way to contribute more. Isn’t that how you and I did it?