The Fight for $15 won another victory on Wednesday, after New York State’s wage board recommended that the state set a $15 minimum wage for fast food workers at chains with more than 30 locations.
The order is expected to be approved by New York State’s acting commissioner of labor, after which the minimum wage for fast food workers will rise so that it is $15 per hour by 2018 for workers in the city and at that same level for upstate workers by 2021. According to the New York Times, fast food restaurants are defined as those where, “fast food as food and drinks served at counters where customers pay before eating and can take their food with them if they choose.”
The move was another in a long series of local and state government actions to raise the minimum wage, with places like Los Angeles and Seattle enacting city-wide minimum wage hikes that will go down as among the largest minimum wage increases in U.S. history. Surely, the success of these movements is a testament to the pent-up demand for political action on the left, in the face of a gridlocked Congress, but what exactly will the economic effects be?
1. There may be job losses: Standard economic theory says that when you raise the price of something, you will get less of it. Logically this should hold for employment, too. Few economists would argue that we could raise the minimum wage to $100 per hour without seeing job losses. But there is serious disagreement over just what magnitude of a minimum wage increase would lead to serious job loss.
A recent Congressional Budget Office study estimated that raising the federal minimum wage to $10.10 from the current level of $7.25 would reduce employment by 0.3%. The minimum wage hike for fast food workers New York enacted, however, is more extreme than what the CBO looked at. Economist Jared Bernstein has argued for the raising of the federal minimum wage because the benefits would greatly outweigh the costs. According to David Neumark, Director of the Center for Economics & Public Policy and UC Irvine, however, “We know that minimum wages reduce employment more the higher the minimum wage is relative [to the average prevailing wage]”
That means that big minimum wage hikes like we’re seeing in Seattle and L.A. are likely to lead to greater job losses than more measured increases. It also means that there will likely be larger job losses in places outside New York City, as a result of New York State’s recent action, than we should expect to see in the city itself.
2. Some workers will undoubtedly benefit: For those workers who remain employed, the benefits will be enormous. According to the New York State Department of Labor, the median pay of a fast food worker is $9.03. A full-time fast food worker could potentially see $12,000 more income per year, assuming his hours aren’t cut.
3. Higher prices for consumers: Diana Furchtgott-Roth, and economist with the Manhattan Institute estimates that a $15 minimum wage would lead to 22% higher costs for food at fast food chains. Instead of a $10 meal at McDonalds (MCD), expect to pay $12.20. Of course, none of these effects happen in a vacuum. Employers will likely try to defray these price increases by cutting back on staff, and relying on more machines. (Economist John Cochrane points to the anecdotal evidence that in France, some McDonalds chains already rely on computers to take your order).
Just how employers handle these price increases will ultimately determine how much of the cost of this higher minimum wage is borne by consumers, owners, or workers, who might have their hours cut or get fired altogether.
4. Spillover effects: What is unique about the move to raise wages in New York, compared with places like Seattle and Los Angeles, is that it is focused solely on fast food workers. Advocates of the new minimum wage argue that the effects will trickle down to other low-wage workers like retail associates, who will demand higher wages once they have the option of working at a fast food place instead. Neumark cautions that there isn’t any empirical evidence to believe this, at least yet. In fact, there’s reason to believe the opposite effect might happen. If the higher wage causes big job losses in fast food work, that might cause more workers to apply for jobs in other low-skill sectors, depressing wages there.
Furthermore, since this law only applies to chains with more than 30 stores, it will give a big cost advantage restaurants with fewer stores, or restaurants that are inexpensive but don’t qualify as fast food. Given this reality, we may just see consumers shift their patronage from businesses that must abide by the new minimum to those that don’t.