The view at Wendy’s: High minimum wage still a jobs killer

Wendy's will replace 5,000 workers with computerized kiosks. Critics seem to think that decision has nothing to do with wages. Those critics must own tech stocks.

"You want fries with that?" (Image via Wikipedia entry on Robots, CC 2.0 license)

WASHINGTON, February 28, 2017 — The “Fight for 15” group is still pushing for a $15 per hour minimum wage, even as the predictably negative effects of that fight are already beginning to appear.

Wendy’s (trading symbol:WEN), a fast-food restaurant chain that employs many unskilled, minimum wage workers, has decided to drive down rising labor costs by replacing some of its order takers with machines. Following the example of many convenience stores, Wendy’s plans to install self-ordering kiosks at about 1,000 of its locations by the end of 2017.

With an expected cost of $15,000 for three units per store, the kiosks are expected to pay for themselves in two years. They will eliminate up to 5,000 minimum wage jobs.

Wendy’s chief information officer, David Trimm, said that the kiosks are intended to appeal to younger customers and to reduce labor costs. They will allow Wendy’s customers to order with shorter lines during peak periods while “increasing kitchen production.”

Raising the minimum wage is supposed to help unskilled workers, according to those who routinely support them. But the reality is that increases in the minimum wage only just the people they are supposed to help.

The reason is simple: An ever-higher government-required minimum wage makes unskilled workers unemployable.

Business owners and operators who need workers to accomplish certain tasks increasingly are able to turn to other more cost-effective options for how to get the job done. They may be able to choose between skilled and unskilled workers.

Alternatively, they may now be able to choose between labor and initially capital-intensive but more cost-effective approaches, such as hiring more workers at higher wages or buying a machine to do the work at a lower fixed cost and without benefits.

The average businessperson won’t stay in business without keeping costs down. American non-financial industries have average net profits of just 5.1 percent and are sensitive to wage scales. They can’t afford to ignore the effect of mandated wage hikes vs. profitability in their attempts to keep costs down.

In weighing the advantages and disadvantages of hiring unskilled workers, skilled workers, or machines to get the work done, the rational businessperson asks, “What will be my average annual costs for hiring and retaining workers over the expected lifetime costs of the machine?” The numbers ultimately make the decision: Hire fewer skilled workers; hire more unskilled workers; or buy the machine.

A full-time worker paid the national minimum wage of $7.25 per hour will cost about $15,080 per year in wages. Health insurance, payroll taxes, regulatory costs (e.g., OSHA), workers comp and other labor-related costs will drive up that cost considerably. But if hiring workers at that wage will get the job done for less outlay than a robot, computers, or other equipment, those workers will be hired.

Raise the minimum wage to the point where the machine is cheaper, however, and those minimum wage workers will be gone.

Even if wages don’t rise, the price of technology tends to fall. Styrofoam and plastic cups and utensils eliminated dishwashers at fast-food restaurants. Computerized cash registers have reduced the number of cashiers hired. Tablets and touch screens have reduced the numbers of servers. Kiosks are further reducing the number of cashiers, and kitchen automation is replacing cooks.

Raise the minimum wage to $15, and a few people—the most skilled and reliable—will see their wage rise to $15. The rest will also see a wage change—to zero. In addition, the machines that replace them will never be rude to customers, call in sick, sexually harass another employee, or threaten to sue the business.

Some states and municipalities have set their local minimum wage above the current Federal minimum, hiking those wages as high as that magic, arbitrary $15 number those groups of demonstrators and politicians are demanding. In markets with already strong and growing economies like Seattle, the impact has been small thus far. But there is solid evidence that there has been a reduction in worker hours as well as fewer jobs available for the least skilled workers.

In San Francisco, the local minimum wage is currently $13 per hour. It will gradually rise to $15 in six years. Because of high labor costs, companies companies like Café X are already starting to replace their unskilled labor with technological alternatives.

To purchase coffee from Café X, customers place their orders using a Café X mobile app. When the customer arrives at the store, a white robotic arm, like those used in car manufacturing facilities, moves a paper cup, adds appropriate syrup levels and then brews the hot cup of coffee. The robotic arm then hands the coffee to the customer.

A cup of coffee costs $2.95 at Café X. A similar cup of coffee is $3.75 at the labor-intensive Starbucks. Better yet, the robot doesn’t glare at you if you don’t tip or try to engage you in a dialogue about race.

Those pushing for the higher minimum wage argue from emotion in an appeal to compassion. But policy that springs from emotion rather than dispassionate analysis will fail to deliver the results compassion hopes for. Americans in favor of hiking minimum wage seem to see business owners like the villains in a Captain Planet cartoon, people who embrace meanness and evil because capitalism itself is evil, or so this emotional “reasoning” goes. After all, what capitalist doesn’t want to eat an endangered fish, pour oil in its water to kill the survivors, and enslave workers just because?

But will unemployed unskilled workers thank us for the right to be paid $15/hour for work they can’t get? If a nation’s economy can’t create opportunity and prosperity for its citizens who want to work, it is failing both those citizens as well as the nation itself. Allegedly progressive attempts to feel good by punishing businesses in the hope that work will magically materialize actually isn’t compassionate. It is stupid, illogical and counter-productive.

Is the “Fight for 15” really a good idea? If you don’t care about the poor and unskilled, it’s a brilliant idea. For the people who sell machines.

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