Wendy’s recently announced that self-serving kiosks would soon be made available in their restaurants across the country as minimum wage hikes and a tight labor market squeeze them. But let's be honest, those who oppose the minimum wage have been saying this was going to happen for a long time now. This move by Wendy’s will reinvigorate the minimum wage debate on the national level once again. The myth that the minimum wage is beneficial to workers and the economy has infected the minds of the average American, and it’s about time that changes. The goal of this article is to discuss the economics of the minimum wage in a simple manner. Let's jump right in.
Before tackling the policy itself, one must first understand how wages are determined. Wages are not arbitrary. To keep it simple, the productivity of a worker determines his wages. This causation only goes one way. The reason employer hires a worker is because that new worker adds value to the business.
Let's do a little thought experiment. Not including wages, the owner of Wendy’s franchise makes $.10 on ever burger produced and sold. Let us say that owner hires three workers of varying skill and pays them all $8 (this represents the natural market price absent a minimum wage). Al can produce 100 burgers per hour, and produces $2 profit per hour for the owner. Bob, the most skilled worker, can make 120 burgers per hour, which generates $4 of profit per hour. Carl, the least productive worker, produces 90 burgers generating a profit of $1 per hour. At this price of labor set by the market, all three of them can be employed, and the owner generates a total of $7 per hour profit. A scenario resulting in a win-win for both the workers and the owner.
I know what you’re thinking; these workers will be trapped at $8 an hour forever. This is simply untrue. Over time, Carl will better develop his skill, raising his output, and thus his value to his employer. Upon doing so, he can ask for a raise that better reflects this. Maybe, one day Carl will be able to produce 130 burgers per hour, generating a profit of $5 per hour. At that point, Carl has the leverage to ask for a raise that better reflects his greater output; he is not doomed to stay at $8 per hour. But let's assume upon increasing his skill, the owner is unwilling to give Carl a raise. Then Carl can simply go to work for a competitor that is willing to do so. This fact of completion employers incentivizes employers to pay the market price.
The government, trying to pull the workers wages up out of benevolence, creates a minimum wage of $9.50 per hour. How does this affect our three workers? In this new scenario with the minimum wage, everything changes. Al now produces $0.50 for his employer ($10-$9.50), Bob produces $2.50, and Carl produces a loss of $0.50. The more productive workers get a raise because they are still adding value to the business. Carl, on the other hand, results in a net loss. The employer, and thus the business as a whole, will be better off without Carl. Thus, the minimum wages doesn’t pit the workers versus their employer; rather it pits more productive workers against the less productive. Al and Bob get a raise while Carl is now out of a job. Proponents of the minimum wage assert that it helps people like Carl, however, it does the complete opposite.
The minimum wage is a price control, plain and simple. Whenever the government sets an artificial price above the market rate, a surplus -- in this case of workers -- will always develop. Artificially holding wages higher than the market rate is a confusion of rates and totals. By that I mean, an artificial increase in wages does not equal more pay for everyone. In fact, it prices people out of the market entirely. Those workers that already make wages above the price floor are unaffected. However, it is the lower paid, less skilled workers who are hurt the most. It acts as a barrier to entry, eliminating the necessary rungs in the later for young people to get ahead. If one wants to help people that receive little pay, the solution is not to price them out of a job.
