Minimum Wage Laws Make for Great Politics, but Fewer Jobs

March 29, 2024   |   Tags: , , ,
Commercial kitchen in a fast food restaurant, clean and empty as if untouched. | Fedor Kondratenko |

Once again, for those who didn't pay attention during Econ 101, if you artificially hike the price of labor, you reduce demand for workers. In California, this is playing out in terms of lost jobs, increased automation, and other consequences that result when politicians signal a unicorns-and-rainbows vision of the marketplace to their allies and leave the public to deal with the resulting mess.

Higher Pay, but Fewer Jobs

"A California state law is set to raise fast-food workers' wages in April to $20 an hour. Some restaurants there are already laying off staff and reducing hours for workers as they try to cut costs," Heather Haddon reported for The Wall Street Journal. "California restaurants, particularly pizza joints, have outlined plans to cut hundreds of jobs in the months leading up to the April 1 wage mandate, according to state records. Other operators said they have halted hiring or are scaling back workers' hours."

This comes after California Pizza Hut franchisees laid off over 1,200 delivery drivers in anticipation of the minimum wage hike. It comes in the wake of McDonald's and Chipotle Mexican Grill announcing higher menu prices to accommodate labor costs; those higher prices can be expected to drive away some customers, resulting in less need for workers to service lower demand.

"California had 726,600 people working in fast-food and other limited-service eateries in January, down 1.3% from last September, when the state backed a deal for the increased wages," Haddon added. "Total private employment in the state declined 0.2% over that period, according to state figures."

Of course, less customer traffic isn't the only way to reduce staffing needs; you can also replace people with technology. Chipotle announced plans to use robots to assemble burrito bowls. El Pollo Loco is doing the same for making salsa. Other restaurants are adopting automated fryers and burger-flippers to reduce the costs of employees.

"In a state where the minimum wage for fast food workers will soon be $20 an hour, having less people to pay can be a bonus for businesses," Joy Benedict and Kerry Breen noted in January for CBS News.

That point should have been clear to everybody when California Gov. Gavin Newsom signed the minimum wage hike into law last September, but he insisted the intention of the legislation was to put money into worker's pockets, not to force them out on the street.

"California is home to more than 500,000 fast-food workers who – for decades – have been fighting for higher wages and better working conditions," Newsom said at the time. "Today, we take one step closer to fairer wages, safer and healthier working conditions, and better training by giving hardworking fast-food workers a stronger voice and seat at the table."

Which table did the governor mean? A table at a soup kitchen? Because no matter what wages are required by law, nobody gets paid if they're unemployed. And unemployment was a completely foreseeable outcome when the state used the force of law to raise the minimum price of offering work to people in an industry known for entry-level and low-skilled positions.

Virtue Signaling in the Absence of Virtue

"It's increasingly hard to escape the conclusion that the continued push for minimum wage increases despite their predictably bad consequences is a triumph of in-group signaling over a concern for the material welfare of the poor," Chris Freiman, a professor at the John Chambers College of Business and Economics at West Virginia University, commented in response to developments in California. It wasn't the first time he addressed the issue.

"Imagine that you stop at a red light and see a man with a cardboard sign that reads: 'Jobless and hungry. Please help,'" Freiman posed in a 2017 thought experiment. He pointed out that you could legally offer the man a $5 handout or not as you please, but it would be illegal for the driver behind you to pay him $5 an hour to mow her lawn, because that's below the minimum wage.

"If you are within your legal rights to offer him nothing, why isn't the driver behind you within her legal rights to offer him something that's better than nothing?" Freiman asked.

But too many people get nothing instead of a paycheck because politicians seek popular approval by raising the mandated price of some people's labor—particularly those struggling to acquire skills and build resumés—above its value to employers. That in-group signaling referenced by Freiman was on full display recently when California U.S. Senate hopeful Barbara Lee raised the ante on what she saw as California's inadequate contribution to the ongoing debate over minimum wage laws. Pitching herself as the most progressive candidate in the race, she said she would consider mandating $50 per hour.

Go big or go home, right? But even in a state eager to deny workers the right to set their own prices, Californians seem to understand that at $50 per hour, you don't get 17-year-old burger-flippers taking home six figures each year. Instead, you get higher prices and fewer jobs. Lee finished in fourth place in the Senate primary on March 5.

After all, if making people more prosperous is just a function of requiring that they be paid more for their labor, why stop at $50 per hour? Mandatory million-dollar salaries, maybe with condos overlooking the Pacific, would be sweet deals for kids assembling burritos. But nobody really expects the result to be rich fast-food workers. Instead, you'll get fewer people employed and automation stretched to its limit.

What Are Robots Paid per Hour?

"Up to 82% of restaurant positions could, to some extent, be replaced with robots," global restaurant consultant Aaron Allen & Associates reported in 2022. That includes 57 percent of fast-food and counter workers, courtesy of a large array of ordering, vending, delivery, and food-preparation technologies, with more on the way. "Some estimates indicate robotics can save between 30% and 70% on labor cost for restaurants," the firm added.

Hiking the minimum wage doesn't guarantee more money in the pockets of workers. Instead, it makes robot replacements more attractive—and necessary for businesses that try to control costs and to keep the prices they charge acceptable to their customers.

None of this means that politicians like Gavin Newsom aren't aware of costs. When they mandate higher minimum wages, they're betting that the value of virtue signaling to their supporters is greater than the economic damage done in terms of lost jobs and destroyed opportunities. It's a cruel calculation, but one that they're more than willing to inflict on the public.

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