The solution to a problem should not make the problem worse.
But apparently California policymakers missed that memo.
The 1st of April, the state instituted a $20 minimum wage for fast food workers, the highest in the United States. Given the absurdly high cost of living in California, this policy appears to make life more manageable for low-income residents. Unfortunately, as the saying goes, “If it sounds too good to be true, it probably is.” California's new minimum wage is poised to hurt the same fast food workers it aims to help.
The economic problem of the minimum wage
The counter-productivity of a minimum wage is demonstrated by a simple analysis of the labor market. Businesses “purchase” labor from workers through wages. The more value a worker adds to a company, the more they will be paid. If employers are allowed to set wages freely and the labor market is competitive, workers can expect to be paid close to their value added to the company.
A minimum wage hijacks this process. If a worker is worth $15 an hour to an employer, but a $20 minimum wage is introduced, the company will no longer hire the worker and both parties will be harmed. A $20 wage floor means workers must add at least that much value to the company. For many workers, this means saying goodbye to their industry and hello to unemployment.
The effects of the California minimum wage
The ripple effects of California's $20 minimum wage proved these dire predictions just as true. Several channels, including Pizza Hut and Starbucks, laid off workers in response to rising wages. Michaela Mendelsohn, CEO of El Pollo Loco, said the company should reduce employee hours due to the increase in labor costs. McDonald's employees also see their hours significantly reduced. In the tight margins of the fast food industry, where even a slight increase in the price of labor can destabilize a production line, the effects of rising wages have been exacerbated.
Fast food workers are particularly likely to be laid off due to the rise of automation within the industry. Automation creates a simple alternative for businesses struggling to meet salary requirements. Many fast food restaurants have already implemented mobile ordering stations, and if labor costs continue to rise, the incentive for more automation will increase. Restaurants around the world have already introduced machines to replace waiters, cashiers and cooks.
Higher pay also increases the risk of hiring new, untested workers. In service industries, like fast food, it can be difficult to distinguish the productivity of each worker. Finding the weak link causing a site to be unproductive can take some time, and the delay equates to lost revenue. Even though an untested candidate can potentially increase productivity, a higher minimum wage increases the risk of giving that worker a chance.
Supporters of the new minimum wage say food chains will absorb the wage increase by raising prices. Some companies, like Chipotle and Jack in the Box, have already have increased their prices in California in response to the new policy. However, this is not a concrete solution. Any increase in prices will necessarily decrease consumer demand, which could further hurt profits. One step too far and the already dire situation for workers will be exacerbated.
If California's economic and political situation continues to deteriorate, many franchises may simply leave the state. Although California has a huge potential market, if labor costs become prohibitive, chains could simply focus their resources on more economically friendly states. Leading the way are MOD Pizza And Starbuckswhich closed five and seven of their California locations, respectively, in April.
The minimum wage: a remedy that exacerbates the problem
The philosophy of the minimum wage is to support the poor and reduce wealth inequality. Social class inequality is not a trivial problem, as a lack of generational wealth limits opportunities for millions of Americans. Children of parents without a university degree are more likely do not obtain a degree themselves, and the least educated workers are on average less productive than their educated counterparts. However, the minimum wage increases inequality by excluding anyone who falls below a mandatory productivity threshold. This means completely excluding a large proportion of disadvantaged people from the workforce, which will cause families already hampered by societal constraints to see their opportunities shrink even further. It’s as if a hospital diverted its care from its sickest patients to pamper those who were healthy.
Interventionist policies generally look good. Politicians love to swoon about how their measures will reduce inequality and portray their opponents as crooks who don't care about helping the poor. The cold reality is that when the government implements large-scale economic reform, there will always be unintended consequences. In the case of the minimum wage, the “cure” makes the problem worse.
Call 1-888-GOLD-160 and speak with a precious metals specialist today!