Policy

Raising the Wage: An overview

| September 2, 2015

September 2, 2015

Policy
Labor

When a state board appointed by Gov. Andrew Cuomo recommend raising the minimum wage for fast food workers in New York state to $15 an hour last month, it reinvigorated an ongoing national conversation about the wisdom of such an increase and its potential ramifications.

Supporters of the hike, including labor unions and fast food workers, were overjoyed by the board’s decision, which is widely expected to be approved – wholly or in part – by New York’s acting labor commissioner, Mario Musolino, before Sept. 14. If enacted, the increase would take full effect in New York City by 2018 and throughout the rest of the state by 2021.

But the plan’s narrow nature has a lot of people asking questions, not least of which – what about everyone else?

The fast food wage increase in New York would affect some 136,000 people. (New York’s minimum wage, currently $8.75 an hour, is set to increase to $9 an hour on Dec. 31.) But it will leave behind another 3.1 million workers making less than $15 an hour who don’t work in fast food, according to an analysis from the Fiscal Policy Institute. Their professions include retail, health and child care, social services, government, and those restaurants not included in the hike.

“I don’t like it,” said Harry Holzer, a professor of public policy at Georgetown University, who served as chief economist for the U.S. Department of Labor in the Clinton administration. “Most economists think that if you’re going to do these things, you’re going to want to do it more broadly. And so targeting a specific industry – I mean why would you do that? Why would you not want to include other restaurant workers and retail workers?”

Economists like Holzer worry about the distortions such narrowly focused policies create in the economy: Not only are some workers left behind, but outsized burdens are placed on businesses as well, which can lead to price hikes, layoffs and perhaps even fleeing of the market.

Placing the burden on business might not seem like such a bad thing if you’re talking about chipping away at the profits of a huge corporation like McDonald’s. But McDonald’s, along with 116 other fast food chains in New York that would fall under the wage board’s proposed criteria (a chain that operates in at least 30 locations nationwide), is a franchise, meaning the individual operators of its 760-plus locations around the state would be the first to take the hit. The Wall Street Journal has reported that McDonald’s, which has been experiencing a dramatic slump in sales, charges its franchisees as much as 16 percent of sales, far higher than the 6 to 10 percent industry average.

So how might franchisees, along with directly owned chains like Chipotle and Shake Shack, react to the extra costs incurred by the wage hike? They will surely raise their prices – but just how much is up for debate. They could also seek to streamline their staffing.

“The way employers deal with this may not be to cut back on unemployment in the short term, but they might raise their hiring standards a bit,” Holzer said. “So any workers who lose their employment because of this also share in the burden.”

Holzer pointed out that fast food chains typically employ a mix of three types of workers: parents struggling to support a household in part or in whole; second earners – people who have other, more primary responsibilities, who are looking to earn some extra income on the side working 10 to 20 hours a week; and young people in the 16-to-24 range – a group that already has a higher unemployment rate than the rest of the state, usually averaging over 20 percent.

In the longer term, there is an expectation that fast food chains will begin to adopt robotic ordering methods as well, further reducing the need for workers.

As for how high prices could rise, researchers have estimated anywhere from 4 percent – according to the findings of a recent Purdue study – to as high as 38 percent, if analysts at the Heritage Foundation are to be believed. (The Heritage Foundation’s James Sherk disputes the methodology used by the Purdue researchers.)

The pay raise will remain narrowly focused for now. But what are the odds of seeing wage increases in other industries – retail for example – seeking to remain competitive?

“It is possible that could happen, especially if the labor market continues to tighten,” Holzer said. “But, given the narrowness of the industry, I’m not sure how many businesses would feel that pressure – maybe other restaurants, rather than all of hospitality/leisure or retail.”