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Don’t Supersize the Minimum Wage

eye on the news

Don’t Supersize the Minimum Wage

Boosting New York’s fast-food hourly wage to $15 will kill jobs and raise prices. July 13, 2015
Photo by Roxiller/ThinkStock | Illustration by Natalie Nakamura

New York governor Andrew Cuomo’s Wage Board meets today to consider raising the minimum wage for fast-food workers to $15 an hour. It’s a bad idea, and one that will prove especially harmful to New York’s young people, who will have a harder time finding summer or part-time jobs.

Wages are already on an upward path in New York State. In March 2013, Cuomo signed a bill that raised the minimum wage to $8 in 2014, $8.75 in 2015, and $9 by the end of 2015. He recently proposed raising the minimum wage further—to $11.50 in New York City and $10.50 in the rest of the state—but Albany legislators balked. If they didn’t think that $11.50 was a good idea, it’s not clear why they would like $15 any better.

An increase in the fast-food minimum wage to $15 an hour would represent an increase of 66 percent. Labor costs consume slightly more than one-third of revenue of food and drinking establishments, according to the Bureau of Economic Analysis. It’s economic naiveté to assume that restaurants won’t increase their prices when faced with a 66 percent hike in labor costs. Assuming that fast-food establishments can’t avoid employing low-skill workers through automation or other innovations, consumer prices by some estimates would go up by about 22 percent. Even if they can find a substitute for direct labor, prices could go up by about 15 percent.

The higher prices would force people to pay more for fast food while driving away other consumers entirely. Small, local establishments are more likely to close if the minimum wage is increased, and more low-skill Americans would be thrown out of work. For all these reasons, raising the fast-food minimum wage is not cost-free to New York. Supersizing a wage is not as simple as supersizing a hamburger.

Kevin Ryan, vice chairman of the Partnership for New York City and the Wage Board’s business representative, understands these issues. Ryan is also chairman and founder of the online shopping site Gilt, whose lower-paying warehouse jobs are in Kentucky, not in New York. Gilt outsources the labor-intensive portion of its business to a state where the minimum wage is the federal minimum of $7.25, not the current New York State minimum of $8.75.

The higher minimum wage under discussion is only for fast-food workers—such establishments could, as Ryan has done with Gilt, contract out other elements of their business. For example, rather than having employees sweep floors and clean, or prepare hamburger patties and chopped salads, a fast-food restaurant could contract out these jobs to employees from another company. The result would be fewer hours and jobs for young workers.

Fast-food restaurants are a common entry point into the labor force, offering openings and upward mobility. Many managers of these franchises began by flipping hamburgers. Those in fast-food and other industries start at the bottom and work up. Doug McMillon, now CEO of Walmart, spent two summers unloading trucks for the company when he was a teenager.

But with a higher minimum wage, such opportunities are likely to be fewer.

In 2014, the average unemployment rate for teens in the 27 states with a minimum wage of $7.25 an hour was 18 percent. The rate for teens in the 14 states and Washington, D.C., with minimum-wage levels above $8 an hour was 20 percent, or 11 percent higher.

Half of minimum-wage workers are under 25; more than 20 percent are teens. These groups’ unemployment rates are already far higher than the 4.5 percent average rate for those 25 and over. The teen unemployment rate stands at 18 percent, and the African-American teen unemployment rate at 30 percent. The unemployment rate for those between 20 and 24 is 10.1 percent. It will only go higher if the fast-food hourly minimum wage rises to $15.

Why the focus on fast-food workers, anyway? Other occupations make substantially less than $15 an hour. Food-preparation and serving workers make an average of $9 an hour, as do manicurists, laundry and dry-cleaning workers, and gaming dealers, according to the Bureau of Labor Statistics. Maids, taxi drivers, and floral designers all earn below $15 an hour. Yet New York’s labor commissioner, Mario Musolino, believes that fast-food workers are particularly in need of a minimum-wage boost. “My opinion is based on data and studies in my possession that show that 60% of such fast food workers in New York are in families enrolled in at least one public assistance program,” he notes. “Nationally, fast food workers are twice as likely as all other workers to be in families that receive public assistance.”

Yet the public-assistance programs that Musolino refers to, such as the Earned Income Tax Credit, Food Stamps, and Medicaid, are set up precisely to enable low-skill workers to gain employment. If the minimum wage jumps to $15 an hour, some of these workers could find themselves unemployed and wind up even more dependent on Food Stamps and Medicaid—and they would not qualify for the EITC.

If the Wage Board endorses the $15 minimum wage for fast-food workers, consumers will face fewer restaurant options and higher prices. Some workers will lose their jobs. Countless other potential workers, especially teens, who might have had jobs at those restaurants, will have no alternative except sitting at home or hanging out on the streets.

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