Saturday, December 7, 2013

Skinny fries, the new normal...

According to economist Ed Lazear, it takes 120,000 new jobs each month to keep pace with U.S. population growth. At 200,000---an 80,000 surplus---we'll be back to "normal conditions" in 7 years. Ugh!

So, what do "we" do about it?

Before I respond to my own question, let me tell you about Ashley, my now 18 year-old, college freshman, eager to acquire new skills, daughter. Her first official job---one where she received a paycheck with all the requisite withholdings (delivering that first paycheck shock)---was with a small mom-n-pop burger joint, we'll call it Mom-n-Pop's Burger Joint, Mom-n-Pop's for short. Her hourly pay was the California (a state where restaurants do not enjoy a lower mandated wage) minimum wage of $8. As you may know, Mom-n-Pop's owners, we'll call them Mom and Pop, are about to see an increase in their cost of labor---California's minimum wage is rising to $10/hour between now and January 1, 2016. I've done a little figuring as to what the hit to overhead would amount to (all things [number of employees] remaining) when the full increase takes effect: Based on what I'm guessing to be Mom-n-Pop's number of minimum wage-earners on site during its hours of operation, I estimate (conservatively) that Mom and Pop are going to have to generate another $2,200 per month to maintain present profitability. Which happens to be the equivalent of the monthly pay of about 3---20 hour/week---Ashleys.

I listened to a bright young analyst engaged in a minimum wage debate last Wednesday (the day a noteworthy number of fast food workers publicly demanded $15/hour) on CNBC. He voiced his frustration with the whole argument: In condescending fashion, he chastised the likes of yours truly for reverting to Econ 101 (never took it, by the way) textbooks to justify our concerns for the pernicious effects of raising the minimum wage. He says that the studies are, in fact, mixed (some say it helps employment, some say it hurts). That there's essentially no strong evidence that raising the minimum wage hurts or helps the overall employment picture. I say hmm?

All those studies notwithstanding, I find the mere notion that raising the minimum wage would help overall employment to be entirely implausible. I mean, how can raising the price of something, even especially low-skilled labor, not ultimately reduce the demand for that something? That's, forgive me, basic economics, isn't it?

Oh, I do understand the argument---it goes like this: Raising the minimum wage will put more money in the pockets of workers. Workers, having a higher marginal propensity to consume (they spend a greater portion of their income) than do employers, will circulate that money throughout the economy, increase business and, therefore, increase the demand for labor. Mom-n-Pop's will experience a pick up in burger sales (it'll have to be several hundred sandwiches a month just to break even btw) that will not only cover its overhead, it'll be so great that Mom and Pop will need to hire additional workers to meet all that new demand. Plausible? Well, no! Not even remotely. For one, Mom and Pop, and the vast majority of other employers of low-skilled workers, won't buy that argument for a second. They'll adjust immediately just to stay in business: which means fewer Ashleys with jobs and, therefore, no net increase in income for that population of spenders with which to buy burgers.

Maybe next time we'll delve into additional measures Mom and Pop might deploy (say they determine that they can't cut 3 Ashleys and serve their customers), such as changing the thermostat's setting (making conditions less comfortable for those higher-earning employees---not to mention the customers who we'll assume will be willing to bear a less hospitable environment), raising prices, opting for lower-quality beef, serving fewer, and skinnier, french fries, changing the oil in the fryer less often, charging employees full price to eat their own cooking during their lunch break, making them purchase their own uniforms, etc, etc, etc.

So back to my question, what to do about our unusually slow rate of job creation? Well, I have a few ideas, each of which involves reducing government's reach into the private sector. For today, however, let's keep it simple and just go with what not to do, which would be to engage in any act that would make matters worse, such as raising the minimum wage...


  1. It is important to consider how much people earning the minimum wage actually make. At present, a minimum wage earner working 40 hours a week without ever taking a vacation will make $15,080 a year. Obama’s proposed increase would mean an additional $3,640. Most minimum wage workers are adults, not teens, and most work for large corporations, not mom-and-pop stores. This means there are hard-working parents who are employed full-time at places that make billions in profits and often receive considerable tax breaks. And yet these parents still don’t earn enough to live above the poverty line.

  2. Suppose the new minimum wage had no effect on employment within the firms that are forced to pay it. (I.e. the demand for workers, and the products they produce, is perfectly inelastic.) It will therefore take more money to pay those workers. Where does that purchasing power come from? Clearly, it has to come from money that would have been spent on something else. With less demand for "something else" we need fewer workers to produce that "something else".