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No, don’t worry, I haven’t lost my mind, I’m not about to claim that labour is not subject to the normal rules of economics. But it is almost certainly true that Andrew Cuomo’s new $15 minimum wage for the fast food industry in New York State is going to increase the number of jobs in food preparation in that state. Not at all for any of the reasons normally given and most certainly not because of any of the confused rhetoric that Cuomo has been offering about it. Rather, it’s as a result of the basic error (at least as I see it) that that original Card and Krueger paper made about the impact of the minimum wage on the fast food industry. The underlying point being that there’s at least two fast food industries. There’s the capital intensive one largely owned by the national chains and their franchisees and there’s the labour intensive one largely owned by the Mom and Pops entrepreneurs.
And a labour minimum that only applies to one of those two groups will have different effects on those two groups: obviously. And my prediction is that a doubling of labour costs (which is about what this is) only in the capital intensive sector will lead to a distinct competitive advantage for the labour intensive sector. So much so that I am comfortable predicting that there will be job losses in the fast food chains but there will be more jobs than those lost created in the second sector.
Please do note that I don’t for a moment think this is a good idea. For it isn’t generally thought of as a good idea that we start to do things with more human labour and less capital: that’s they way for us to all get poorer. But as a result of the cack-handed manner of the imposition of this new $15 minimum wage in New York that is what I expect to happen.
To go back to Card and Krueger for a moment, that relevatory paper that first posited the idea that a rise in the minimum wage could in fact raise the level of employment. As I described what I take to be the basic flaw in that paper:
It isn’t actually correct to regard the fast food chains (which is what Card and Krueger studied) as the fast food industry. There are two very different groups that make up that industry as a whole.
Firstly there are the chains, yes. The Burger Kings, Arby’s and the like which were studied. Then there’s the other part, the independents. The delis, Mom and Pop stores, meatball and subs places, these make up the second part of the fast food industry.
Now, something that might not be obvious from the outside but is very much so from those who have worked in the industry (yes, that would be me) is that the independent sector is much more labour intensive than the chain sector. The chains are better equipped, differently supplied (things as seemingly trivial as buns for hamburgers arriving pre-cut instead of having to be sliced open in store) and labour as a portion of turnover is much lower (and capital correspondingly higher) than in that independent sector.
So, if the price of labour rises, we would traditionally say that the amount of labour used in the entire sector, independents and chains, would decline. However, we would expect the use of labour to decline more in the independent, the more labour intensive, sector than in the chain, the capital intensive sector. In fact, we can construct entirely believable models which show employment rising, falling or staying stable in the chain sector while labour employed in fast food as a whole declines from the rise in the cost of labour.
Card and Krueger only looked at that capital intensive part of the industry. And given that a change in the price of labour is going to have different effects on the capital and labour intensive parts of it, they ended up studying only the effects on the capital intensive part.
So, what is it that has actually been decided in New York?
I move that we recommend that the scope of covered employees and employees be
determined according to the following definitions:
“Fast Food Employee” shall mean any person employed or permitted to work at or for a
Fast Food Establishment by any employer where such person’s job duties include at least
one of the following: customer service, cooking, food or drink preparation, delivery,
security, stocking supplies or equipment, cleaning, or routine maintenance.
“Fast Food Establishment” shall mean any establishment in the state of New York
serving food or drink items: (a) where patrons order or select items and pay before eating
and such items may be consumed on the premises, taken out, or delivered to the
customer’s location; (b) which offers limited service; (c) which is part of a chain; and (d)
which is one of thirty (30) or more establishments nationally, including: (i) an integrated
enterprise which owns or operates thirty (30) or more such establishments in the
aggregate nationally; or (ii) an establishment operated pursuant to a Franchise where the
Franchisor and the Franchisee(s) of such Franchisor owns or operate thirty (30) or more
such establishments in the aggregate nationally.
“Chain” shall mean a set of establishments which share a common brand, or which are
characterized by standardized options for décor, marketing, packaging, products, and
The actual wage rates are as follows for upstate:
• $9.75 on Dec. 31, 2015
• $10.75 on Dec. 31, 2016
• $11.75 on Dec. 31, 2017
• $12.75 on Dec. 31, 2018
• $13.75 on Dec. 31, 2019
• $14.50 on Dec. 31, 2020
• $15 on July 1, 2021
Implementation is rather faster in NYC.
So, what do we think will be the effect of this? We can work this out using some very rough indeed numbers. These are not accurate, they’re just to try and get a sense of scale.
Wages are around 20% or so of a fast food budget. And this is roughly a doubling of the wage that must be paid. So, that gives the people not subject to this minimum wage rise a 10% price advantage over the national chains. We would therefore expect to see some consumption moving over from the national chains to the smaller chains and single outlets. A move perhaps from the McDonald’s MCD -0.5% to the corner deli. How much will depend upon what the price elasticity of fast food is but a 10% price difference is going to drive some change in behaviour among consumers.
The effect of that is going to be to move demand away from that capital intensive chain fast food sector and over into the labour intensive Mom and Pop fast food sector: the sub shops, meatball joints and hot dog stands. And increasing demand in the labour intensive sector will mean more people being employed than if the demand had stayed in that capital intensive sector.
So, yes, raising the minimum wage to $15 for fast food chains and fast food chains only will increase employment in fast food generally in New York State. Not the outcome most will think likely but that is how I think it will play out.
At which point we’ve got to ponder on whether this is all actually a good idea. From Andrew Cuomo’s viewpoint it’s a startlingly good one. He’s just blocked off any possible challenges from the Progressive PGR -0.2% side of New York State politics for the next few years. He’s really sticking it to the Corporate Man and economically illiterate hipsters will be just delighted: so, job done on that front.
But what about the larger economic picture? Well, note what we’ve just done. We’ve moved jobs from the capital intensive sector to the labour intensive one. In the process we’ve created more low paying jobs: by definition they’re going to be low paying because they’re over there in that less productive, because more labour intensive and less capital intensive, sector. This is of course something that makes us all poorer. If increasing the labour intensive sector of the economy made us all richer then we’d be ditching tractors and going back to harvesting wheat by hand: not what anyone is advocating as good public policy.
This will lower average productivity in the economy and as Paul Krugman has been known to point out, average wages are determined by average productivity. This thus lowers the average wage precisely because it increases the number of people in fast food preparation. So it’s still not a good idea.
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