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If One Wants To Evaluate The Impact Of Raising The Minimum Wage...One Has To Determine If It Actually Raises Compensation

Jim Prevor’s Perishable Pundit, February 3, 2016

Having studies of all kinds pass over the Pundit desk throughout the years has clearly established one thing: The answer you get depends on the question you ask. So when Michael Lynn and Christopher Boone of the Cornell University School of Hotel Administration published a study — titled Have Minimum Wage Increases Hurt the Restaurant Industry? The Evidence Says No! — one is left looking at the rather interesting phrasing of the study question.

Normally the argument against minimum wage increases is expressed in the form that higher minimum wages price out many employees whose value does not meet or exceed the new wage. This does not necessarily translate into damage to any particular industry. So, if gas station attendants, once ubiquitous, are a rarity today and, if, this is because rising minimum wages led gas stations to switch to a self-service model as consumers did not value the attendants sufficiently to cover higher wages, then low-skill workers suffer as a result of having their job opportunities constrained by minimum wages that priced them out of the market. It is not obvious at all that gas station operators have to suffer from these higher minimum wages.

This study looks retrospectively at the results of past minimum wage hikes — but that leaves a lot of questions unanswered. Most notably the authors fail to distinguish between minimum wage hikes that are significant and those that are not. Minimum wages are not increased in some random way whereby we can easily study their effects. There are powerful forces that resist seeing minimum wages rise, and political interest swings between interest in job creation — say during depressions and deep recessions — and interest in enhancing living standards for the working — typically at moments when unemployment is low.

As a result, it is perfectly reasonable to think that minimum wage hikes tend to occur when they are likely to impact few people.

The Pew Research Center published a report in 2014, titled Who Makes Minimum Wage? It defined recipients this way:

Given the continuing campaigns by unions, workers, politicians and others to raise the federal minimum wage, it bears asking: Just who are minimum-wage workers, anyway?

Perhaps surprisingly, not very many people earn minimum wage, and they make up a smaller share of the workforce than they used to. According to the Bureau of Labor Statistics, last year 1.532 million hourly workers earned the federal minimum of $7.25 an hour; nearly 1.8 million more earned less than that because they fell under one of several exemptions (tipped employees, full-time students, certain disabled workers and others), for a total of 3.3 million hourly workers at or below the federal minimum.

That group represents 4.3% of the nation’s 75.9 million hourly-paid workers and 2.6% of all wage and salary workers.

So, studying past minimum wage hikes may just demonstrate that if you study the impact of laws impacting very few people, you will find it hard to identify very significant impacts.

There is always a problem with researching what is easy to research and, for the most part, there seems to be little effort to ascertain if minimum wage hikes have even resulted in higher wages at all.

Hourly employees such as those covered by the minimum wage get paid in six ways:

1) The legal wage.

2) Bonuses or Commissions

3) Official benefits – health insurance, paid vacation, etc.

4) Informal benefits – Can range from free food to how one is treated when one gets a serious illness.

5) Number of hours one is allowed to work.

6) How much, if any, overtime, an employee can put in and at what rate.

It is entirely possible that a legal requirement to increase minimum wages will  be completely countered by employer reactions that are just not being studied. An employer can increase health insurance co-pays or deductibles. At the Pundit office we have fresh fruit delivered twice a week; we could stop. Once we had an employee with cancer, and we kept paying the employee although the employee wasn’t working and we were under no obligation to do so.

In other words minimum wage laws can simply serve to shift compensation to the W-2 form from non W-2 forms of compensation. This may be good or may be bad but, in any case, if one is asking a question related to the impact of mandated increased wages, one needs to study whether the law actually led to increased wages at all!

We’ve discussed the minimum wage issue in pieces such as Krueger Appointment Does Not Bode Well For Industry’s Employment Concerns, and we would say that those who focus on claims that raising the minimum wage does not reduce employment rarely have confidence in the economics of their position. We say this for the simple reason that if they really believed this, they would argue for far higher increases in the minimum wage.

After all, if the principle is that higher wages can be mandated without job losses being experienced, shouldn’t we raise wages so everyone can have a vacation home?

Instead, advocates of raising the minimum wage count on the economic impact of raising minimums to get lost in the mist as the increase is small and impacts few people directly.

The other variable that seems to be missing from most studies of the impact of minimum wage hikes is time. Some impacts may come right away, but others may take years to filter through the system.

We just received word that the World’s Largest McDonald’s Shuts to Make Way for Even Larger McDonald’s:

The biggest McDonald’s in the world closed this week to make room for an even larger McDonald’s.

McDonald’s shut down the 12,000-square-foot location in Orlando, Fla. in order to open a 19,000-square-foot version of the fast-food restaurant next door in February, the Orlando Sentinel reports. The franchise opened in 1976 and has since become a popular tourist attraction, but McDonald’s decided it was time for a renovation.

The old restaurant was famously shaped like a box of French fries and didn’t just have a PlayPlace but also featured an arcade, animatronic robots, bowling and more.

Yet what we thought was most interesting in light of the ongoing minimum wage debates was this line:

McDonald’s hasn’t given word yet on what attractions the new location will offer, but there will be self-serve kiosks, allowing customers to order their own food.

Doubtless there were many motivations for introducing self-service kiosks such as higher order accuracy but, also, cost of labor may have played a part.

If minimum wages artificially raise the cost of labor — and if they don’t, they are just political theatre with little economic impact — then increases may lead to innovations such as self-serve kiosks. Such innovations take time though, sometimes years and years as mechanization techniques have to be researched and refined. Yet the research seeking to note the impact of minimum wages isn’t sustained for lengthy periods of time.

So minimum wage hikes may not hurt restaurants — perhaps because they are ineffectual or because restaurants automate and adapt to higher wages — but low-skilled workers can still lose out on the opportunity to begin climbing a ladder that can lead to prosperity. So focusing on the wrong thing can lead to bad results.

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