John Cochrane from The Grumpy Economist has written a must read article on the effects of raising the minimum wage. Cochrane goes through the benefits experienced by a McDonald’s worker and the costs experienced by a McDonald’s worker. This is something we all have to understand if we want to turn around this economy.
Here is the benefit for the average McDonald’s worker:
Let us not deny the benefit. For the few people who work at minimum wage, but have worked their way up the ladder enough that they will keep their hours; who are actually trying to support themselves and a few children on these meager wages, it will mean a modest rise in income. The rise may be more modest once you account for taxes and reductions in transfers. There weren’t any such people at my McDonalds, but NPR and the New York Times seem able to find them.
Here is the cost to workers or people looking for jobs at a place like McDonald’s:
The cost is just as easy to forecast. McDonalds cuts hours, and uses its most experienced and efficient workers more, and fewer people like my hapless server. And they don’t get the oh-so-needed on-the-job training. The biggest impact of minimum wages is not so much on existing workers, but on new workers entering the labor force. (See a nice new NBER working paper by Jonathan Meer and Jeremy West.)
The effects fall heaviest on low-skill teenagers, especially minorities.
Here is the cost to the consumer. I really think Cochrane’s point about the price increase for a consumer who only makes $10 an hour is important to remember. Just as the worker making minimum wage is struggling to make ends meet, there are a lot of consumers making $10-$15 an hour who are also struggling to make ends meet.
I read estimates that a big mac might go up from about $3.00 to about $3.50, and dismissed those price increases as a small burden to bear. Looking around my McDonalds, I found this argument less persuasive. Because, of course, the kind of people who work at McDonalds are also the same kind of people who eat at McDonalds. If you’re working at minimum wage in the middle of Oklahoma, you don’t go out to a nice Greenwich Village restaurant to sample organic free range locally grown non-GMO gluten-free artisanal nuts and berries. McDonalds is a treat. And a pretty nice one at that. It’s clean, healthy — yes, some offerings are full of sugar and fat, but not of e coli, and you can get the grilled chicken if you want — and reasonably tasty. Raising prices from $3.00 to $3.50 is not a small matter if you earn under $10 per hour and you’re feeding a few kids too.
While I would certainly like to see incomes rise in this country, we have to remember that raising the minimum wage will cause some people to lose a job or lose hours. We need to create more jobs, not enact legislation that will eliminate jobs. Another important point here is that the lowest skilled workers will be the first to lose their jobs.