Sacramento Chick-fil-A starts paying $18/hour

Today's WP reports that a Chick-fil-A franchise in Sacramento will bump up its starting hourly wage from $12-13 to $17-18.  The current minimum wage in California is $11, so this decision is clearly being made with the franchise's self interest in mind.  Quote from the owner Eric Mason:

As the owner, I'm looking at it big-picture and long-term.  What that does for the business is provide consistency, someone that has relationships with our guests, and it's going to be building a long-term culture.  

The business case for the raise is based on the franchise's ability to attract and retain qualified workers.  Mason certainly will have less difficulty filling open positions for the next few years.

Will other fast food franchisees follow suit?  The national unemployment rate is below 4 percent, labor force participation has not increased and immigration is being actively discouraged on multiple fronts.  So you might have to pay more the next time you crave some nuggets and waffle fries.  

Seattle hits some bumps on the path to a $15 minimum wage

Two years ago I blogged about the $15 minimum wage.  At that time the mainstream view among economists was that federal and state minimum wage laws had a modest, negative impact on employment.  The wave of $15 minimums passed recently by numerous cities is uncharted territory because (1) the increases are so large and at such variance from federal and state minimums and (2) many businesses -- especially those in service industries -- can easily relocate to avoid paying the higher wage.

We now are getting the first wave of economic research looking at the impact of the $15 minimum.  At the beginning of this year, companies with more than 500 employees in Seattle had to pay a minimum wage of $15 an hour.  The minimum is now $11 for most other employers and will increase to $15 for all by 2021.  So what has been the impact on firms and workers?

A new study of the Seattle labor market has found that incomes of low wage workers have fallen since the minimum was hiked.  This has happened because employers cut back on work schedules.   Wages increased by 3% but hours fell by 9%, resulting in an overall drop in income of over $100m per year for low-wage workers.  Overall employment did not change, but employers substituted more highly skilled workers for low-wage workers which made the latter group worse off.

The Seattle study will continue and researchers will be looking at other cities such as Los Angeles and San Francisco that have hit the $15 mark.  The sure winner from these minimum wage changes -- data-hungry labor economists.

Good news for labor economists: LA raises minimum wage to $15!

The LA city council recently decided to raise the minimum wage to $15, joining San Francisco and Seattle in the battle to help the working poor.  I was resisting further commentary on the minimum wage until I saw todays Robert Samuelson column in WP.

Each side on the minimum wage debate cherry picks the economics research to support their politics. Samuelson provides a good summary of mainstream findings: there is some job displacement but it has been modest.  However, this is based on historical evidence for the nation as a whole or for entire states.  What is unique about these cases is that (1) the increases are quite large (67%) compared to historical changes (10 to 15%) and (2) there is much more room for employers to move jobs across city boundaries as compared to state or national boundaries.   Samuelson speculates that restaurant employment will not be affected as much as hotels and manufacturing.  (Who wants to drive 10 miles in LA traffic to save 50 cents on a cheeseburger?)

One guaranteed winner from all this: labor economists who will have a lab experiment for evaluating the impact of the $15 minimum wage.

Do minimum wages translate into higher prices?

When the minimum wage increases, something has to give.  Companies have the option of cutting work hours, passing on the wage increase to customers, receiving smaller margins, or some combination of the above.

Most minimum wage research has focused on employment and hours worked.  Stanford economist Tom MaCurdy has a forthcoming study that represents the first careful look at prices.  MaCurdy finds that when the minimum wage was increased 21% in 1996, it induced a 2% increase in the price of food consumed away from home.  The prices of retail services, groceries and household personal services also went up.  Combining all of these effects, MaCurdy found that the overall price increase was greater for families in the bottom 20% of the distribution than for those in the top 20%.

What does this mean for low-income families?  MaCurdy shows that minimum wage earners are distributed evenly throughout the income distribution; one in five households has a member receiving the minimum wage.  In low income households minimum wage recipients are more likely to be primary earners, whereas they tend to be secondary earners (think teenagers) in high income households.  So if low income households receive the same boost in earnings but pay higher prices, they actually end up worse off.  MaCurdy concludes:

... more poor families were losers than winners from the 1996 hike in the minimum wage. Nearly one in five low-income families benefited, but all low-income families paid for the increase through higher prices.

Some triangle restaurants find minimum wage not enough

Yesterday's N&O ran an article about how some RTP restaurants have decided to start paying more than the minimum wage.  Is this the result of a sudden infusion of social consciousness?  Maybe in some establishments whose owners feel strongly about social justice.  But why now, as opposed to three or five years ago?

Any full explanation of these pay raises has to include the fundamental forces of supply and demand. The restaurants cited in the article are not greasy spoons; Pizzeria Toro and Monuts Donuts get rave reviews on Yelp, TripAdvisor and Urbanspoon.  And to maintain the quality that their customers expect, these eateries need workers with experience and strong customer skills.  Higher wages reduce turnover and attract top job candidates.

Some restaurants also are starting to pool tips, with the goal of getting more cooperation among the wait staff.  Such a move also alleviates the risk of getting stuck with a table of stingy tippers.

Assuming no action at the federal or state level on the minimum wage, I envision a situation where those just getting started find minimum wage jobs in chains and small generic establishments.  Those who like the work and are talented move up to higher paying positions.

Walmart boosts wages

Big news from Walmart, on top of falling prices we now have rising wages!  Today the nation's largest retailer announced that it was going to make sure that all of its US workers would earn at least $9 an hour by April.  According to NYT, this is likely to affect half a million employees.  It will certainly be a big boost to those earning the minimum wage.

Walmart's motivation is most likely competitive pressure.  The unemployment rate keeps dropping, which means employers are competing for fewer applicants.  Walmart's move is likely to put more pressure on firms such as Target and Home Depot to raise pay.

There also is a chance that the wage increase pay for itself.  As MBA 505 students know, a higher wage reduces turnover and thus reduces hiring and training costs.  A higher wage also should be associated with higher standards for individual productivity.

What we do not know about the minimum wage

We were discussing the minimum wage last week in my MBA 505 Global Economics for Managers class.  Bloomberg columnist Megan McArdle did a nice job in a recent column summarizing the economics research literature.  Did she read literally 100s of papers?  I kind of doubt it, but she reaches three main conclusions:
1) Most people have their own opinions about whether the minimum wage is a good or not so good idea and they naturally seek out and site research that supports their own opinions.  Psychologists call this confirmation bias.  As is always the case in economics, you do not have to search very hard to find a study that matches your views.  Some find big job losses, others find small job losses and one very famous study found no job losses.  Out of these 100s of papers, guess which study gets cited as hard evidence by minimum wage proponents!  (Overall, the literature seems to indicate small job losses, by the way.)
2) Historically most changes in the US minimum wage have been modest, e.g. an increase from $2.65 in 1978 to $3.35 in 1981.  Some states and cities are now contemplating much larger changes, from the current $7.25 to $15.  It is quite possible that research done on small hikes does not translate into larger ones.  For instance, automation opportunities that McDonalds would ignore at a $1 increase may be too tempting to pass up at the President's proposed $3 increase. 
3) None of the minimum wage studies have been able to deal with long term consequences, such as how many McDonalds might end up closing or and how many never open because of higher labor costs. 

Why some restaurants pay much more than the minimum wage

Some cities and states are raising the minimum wage to $10 an hour or more.  McDonalds workers in big cities are threatening to go on strike for $15/hour.  Judging only from the headlines, one would think the restaurant industry, especially fast food chains, is dominated by low wage jobs.

This recent NYT piece shows otherwise.  Chains such as Shake Shack and In-N-Out Burger pay over $10 an hour simply because their owners think that is the right business decision.  Higher wages allow managers to hire from a more talented applicant pool.  They also reduce turnover and encourage longer term investments in training.  In some cases the personal values of ownership also play a role in wage setting.

The tougher question is why does In-N-Out pay relatively well and other chains stick to near the minimum wage.  After all the core business at McDonald's and In-N-Out is the same and the prices are comparable.  One possible difference is that more skill or training may be needed at In-N-Out where everything is made fresh.

More on the minimum wage

Back from vacation and back to blogging.  While I was gone WSJ ran a piece by David Neumark who is in my view the leading expert on minimum wage economics.  Neumark's main point is that the minimum wage is a highly ineffective policy tool for poverty reduction.  A large share (34% by Neurmark's calculation) of minimum wage workers are secondary earners in a household that overall is well above the poverty line.  A bigger problem is that a higher minimum wage is not going to help people who are poor because they cannot find full-time jobs, even at $7.25 per hour.  Needless to say their quest becomes much more difficult if employers become obliged to pay them $10 to $15 per hour!

So why are lefty pols so interested in raising the minimum wage?  This gets us into the murkier discipline of minimum wage politics.  My take is that supporting a higher minimum wage (1) makes it look like the pols are doing something to help the poor and (2) requires no funds from any government budget, all costs are shifted to employers who in turn adjust by raising prices and reducing employment and hours per person.

How best to help low-wage workers

President Obama has made two proposals to help low-wage workers: an increase in the minimum wage and expansions in eligibility for overtime.  On the minimum wage front, he already has increased it for federal contractors and wants Congress to approve a $10.10 minimum wage for all.  Economists are fairly split on the merits of increasing the minimum wage; to get a good idea of how split see these two links from Greg Mankiw (hundreds are in favor, hundreds are opposed).

As for overtime, employers hire workers as long as the extra revenue they generate offsets the cost of the worker.  Employees with supervisory responsibilities are not eligible for overtime if they make more than $455 a week.  Obama has directed the Department of Labor to raise that threshold so that more become eligible for overtime.  Once again economists have a split opinion on the desirability of this policy.  A reasonable case can be made that this would have zero impact.  Employers could offset the increased overtime costs by slowing the growth of base pay and cutting employee benefits.  Those who lack the flexibility to cut pay and benefits will trim back on overtime hours and employment.  The federal government can set pay rules, but it cannot repeal the law of marginal cost equalling marginal revenue.

The Earned Income Tax Credit is another mechanism for helping low-wage workers, as Princeton economist Alan Blinder argues in this recent WSJ op-ed.  This policy receives nearly universal support from economists.  However it is not so popular in Washington because it forces the federal government to come up with the extra cash for low-wage workers instead of trying to stick employers with the bill.

Will your pilot soon be earning the minimum wage?

The labor market for airline pilots is going through some unexpected turbulence.  Recently WSJ reported that a combination of boomer retirements and new training requirements (1500 hours of flight experience compared to 250 originally) were causing some regional airlines to drop their least profitable flights.  Aspiring pilots can amass tens of thousands of dollars in debt to get the flight time needed to meet the training requirements.  So why do they do this, especially since regional airline pilots earn an average salary of $22,400 and some earn only about $15k?

The answer -- eventually the pilots hope to land a position with a major carrier that pays well into six figures.  That is why they are willing to accept positions that barely pay more than the current minimum wage (and would be below the aspirational minimum wage of the Obama administration).   My expectation: expect to see salaries for regional pilots increase as always happens when there is a shortage and markets are allowed to operate.

What would happen with a $10.10 minimum wage?

Yesterday the Congressional Budget Office issued a report on what would likely happen to American labor markets if the federal minimum wage were increased from its current value of $7.25 to $10.10 by 2016.  Two conclusions have received considerable attention in the press: (1) there would be 500k fewer jobs and (2) the number of persons living in poverty would fall by 900k.

It is easy to reconcile the two results.  Some workers would get raises and there are enough workers making between $7.25 and $10.10 who will keep their jobs to offset the income loss associated with those who lose their jobs.  Interestingly CBO notes that only 19% of the wage increases will go to persons who reside in households with a living standard below the poverty line.  In contrast 30% of the wage increases will go to persons who reside in households with income three times higher (or more) than the poverty level; these would be secondary earners in such households.

The CBO analysis appears to omit to other key elements of a minimum wage increase: reduced profits of business owners (some of whom are struggling) and higher prices charged to customers.

What will happen with a $15 minimum wage?

Seattle's SeaTac Airport is located in the town of SeaTac, a small blue collar suburb.  SeaTac voters appear to have approved a referendum that will set the minimum wage for hospitality and transportation workers at SeaTac Airport at $15.  Apparently other airports on the West coast also have such provisions; at LAX, the minimum wage is $15.67.  The SeaTac minimum wage is well above Washington state's minimum of $9.69, which in turn is the highest state minimum wage in the country.

Supporters of the higher minimum wage for airport workers point to full-time employees living below the poverty line.  Opponents argue that there will be fewer jobs and that airport customers will have to pay higher prices and receive degraded service.  The actual impact will depend on how price sensitive airport customers are to more expensive hot dogs and rental cars.  It also will hinge on how companies can substitute capital for labor; for a $5.31 increase in the minimum wage, we might soon see McDonalds customers inputting their orders and paying on iPads.  

Living wage - McDonald's isn't lovin' it

Last week fast food workers in a number of cities (including here in Raleigh) walked off their jobs in a symbolic strike in support of higher wages.  Some are pushing for adoption of a "living wage," up to $15/hour. 

Most of the recent publicity has gone to workers in the fast-food industry.  Thanks to a labor market that remains deep in recession, there are more adults working in the industry than ever before.  With many making within $1/hour of the minimum wage, they are having a hard time making ends meet. 

The economic questions to consider are (1) how big of a negative impact would a higher minimum wage have on unemployment, (2) would the gains of those who can still get jobs at a higher minimum wage be large enough to offset the costs to those who no longer will have jobs, and (3) even if the answer to #1 is "small to none" and the answer to #2 is "yes," are there other policies that would achieve the same or better results (in terms of helping those in poverty) with fewer adverse side effects on employment? 

As the results of this poll by Chicago Booth of the country's top economists show, there is a wide range of opinions on #1 (if the minimum only goes up to $9, not $15) and most think the answer to #2 is "yes."  Most studies have found relatively small dis-employment effects, so these two answers are consistent. 

However, in the past the minimum wage has never increased by 100%, which is what a jump from $7.25 to $15 would amount to.  Given the already high levels of unemployment we are facing, it is hard to see how the labor market could absorb such an increase without a massive loss in jobs.  That is why I think more emphasis needs to be placed on other approaches, such as the earned income tax credit and investments in education and training. 

DC considers living wage requirement

Earlier this month the city council of the District of Columbia passed the "Large Retailer Accountability Act," which would require retail corporations with annual sales of $1b or more that have stores with 75k or more square feet to pay $12.50 per hour.  The minimum wage in DC is $8.50, so this amounts to almost a 50% increase. 

This is carefully crafted legislation, the Economist notes.  There are very few big box stores in the District, and those that are present (Giant Foods, Safeway) are unionized.  The law does not apply to existing stores for four years.  "That leaves only Walmart, which had planned to open six new stores in the District."

Walmart's reaction: no surprise, plans for three stores have been trashed and the other three are on the ropes.  Whatever your opinion of Walmart, the net impact will be fewer jobs in DC and a chance for DC residents to take advantage of Walmart's lower prices without going to Maryland or Virginia.  Further proof that demand curves slope downward -- making labor more expensive means fewer jobs. 

Minimum wage in the news

President Obama has proposed that the federal minimum wage be increased from $7.25 to $9 and be indexed to automatically increase with inflation in the future.  The economic effects are straightforward: some low-skilled workers will be priced out of the market.  In cases where employers cannot find substitutes for labor, the result will be either higher prices or reduced profit margins. 

Christina Romer, Obama's chief economist in his first term, is not so sure that increasing the minimum wage is such a great idea.  Although intended to help the working poor, some of the beneficiaries are teenagers in well-to-do families.  She suggests that boosting the earned income tax credit would be a more effective approach.  

What? Another minimum wage increase in the works?

So says today's NYT.  Massachusetts legislators are pushing for $10/hour; pols in Conn., Ill., NJ, and NY are also promoting the idea.  Democrats in Congress have their fingers in the wind to see which way it is blowing. 

You do not need rocket-science economics to understand why this is happening: there is an election this fall and after years of wage stagnation, some voters will respond approvingly.  The question I always ask minimum wage proponents is this: why stop at $10/hour?  Why not make the minimum wage $25/hour or higher so that all workers could have a middle class standard of living?  Or at least those workers who still have jobs. 

Minimum wage hike as a stimulus

That's what some pols in NY and NJ are pushing for.  The minimum wage is currently $7.25 but Democrats and some Republicans in the NJ legislature are looking for an election year bump to $8.50.  Why?  They can claim they are helping the working person, plus it does not have any effect on the state budget. 

To provide some perspective, the federal minimum wage was increased in three steps from $5.15 at the beginning of 2007 to $7.25 by the end of 2009, right at the time the labor market was in its worst shape since the 1930s.  I have not seen any careful studies yet, but you can bet that the minimum wage increase made the unemployment rate higher than it would have been otherwise.  If the NJ increase goes through, it would amount to a 65% increase in just five years. 

Studies have shown that most recipients of the minimum wage are teens and young adults, few of whom are heading households and many of whom are working part-time.  One predictable consequence: their employment will fall.  Doubt the pols want to take any credit for that.