Economy, Elections

McCarty: Raising the minimum wage never pays off

When I had just turned 16 and my family moved to Boulder I was hired for my first job. It was at a fairly new restaurant in Boulder that my Dad said he had “read about in the Wall Street Journal” called McDonald’s Hamburgers. He told me that this McDonald’s Hamburgers place, even thought he had never actually eaten there, looked like a good place to start a job in life because it appeared to him to be a “well run organization where I’d learn good work skills.”

I did and these skills were helpful the rest of my life. Ten years later I started my own restaurant and have been a restaurant owner of half a dozen popular restaurants in the Denver and Northern Colorado area over the last 40 years.

My minimum-wage pay was $1.15/hour According to a Pew Research study, 50.4% of minimum wage jobs are 16-24 year olds and 64% are part time workers. Are young people going to be able to continue to build these good work skills early in life by having access to these “starter job” opportunities and are people looking for part time work going be able to continue to benefit from these minimum wage jobs? A big part of the answer lies in whether or not the $12/hour minimum wage that is proposed in Amendment 70 and is all the rage right now in Progressive politics becomes law.

The Progressive’s goal is for the lowest paid workers in society to be paid more for the work they perform. The question becomes is the $12 minimum wage a good way to accomplish this? Following are the alternatives facing a person who owns and operates restaurants (the industry where a significant number of these sub-$12/ hour jobs exist) and produces these jobs.

The money to pay the extra wages has to, of course, come from somewhere. It’s a frequent misconception that businesses “absorb” certain costs. They don’t. In fact, when a customer buys a steak dinner at my restaurant, in addition to paying basic costs like food, labor, utilities and insurance that most people understand, she is also paying my Workers Comp taxes, unemployment taxes, personal property taxes, real estate taxes, Social Security taxes, Medicaid taxes, government licenses and fees and so on that isn’t as easily understood. Essentially my restaurant (and all other businesses) becomes a vehicle for massive taxation on consumers that is largely hidden.

I can see several alternatives available to me to cover these increased costs.

The first alternative is to decrease the size of my staff that I have to pay. If I lay off kitchen employees the meals will take longer (significantly longer in peak hours) to produce. Or if I lay off wait staff and give each server more tables the result will be slower and poorer service. Either way staff members are going lose jobs and customers are going to be upset. If they’re upset in great enough numbers my restaurant will fail and everyone will lose their job.

The second alternative, since the proposed law increases the minimum amount paid for tipped employees by a staggering 70%, I could elect to simply get out of the full-service restaurant business and enter the fast-casual segment of the business (Chipotle Panera etc.). Not having to pay a waitstaff is one of the benefits for owners of the rapidly expanding fast-casual segment but a downside for workers is that all tipped employees lose their jobs.

The third alternative would be to install technology such as ordering kiosks or even robotic cooks to reduce payroll expenses. Companies like McDonald’s are currently experimenting with this alternative and job losses will be massive when it is implemented.

The final alternative is to raise my prices enough to cover a 44% increase in the minimum wage for non-tipped employees and a 70% increase for tipped employees. One basic economic principle that any beginning student learns in Econ class is that whenever there is an increase in price for a product there will be a decrease in demand to buy it. Based on this economic reality, some decrease in the number of customers frequenting my business will occur if I raise prices. If I’m one of the restaurants where this number is large enough (say 10%) my restaurant will fail and everyone will lose their job. If I’m not, someone else’s restaurant will fail and his/her employees will lose their jobs.

The most likely restaurants to fail are probably going to be in the poorest neighborhoods. The poor always have the hardest time with higher prices.

Mike McCarty, on left, has owned several restaurants along the front range
Mike McCarty, on left, has owned several restaurants along the front range

Restaurants tend to hire people that live in their physical proximity. They also tend to attract customers that live in their physical proximity. Therefore when a restaurant raises its prices to pay for increase labor costs those price increases will be paid largely by customers who live in that vicinity. Either way the poor lose. If the restaurant in the poor neighborhood fails, all the employees lose their jobs. If it manages to stay in business, there is still no net advantage to the poor, just the transfer of money from one poor person to another.

This makes no sense. If a redistribution of wealth is to occur to provide a social safety net it should be going from the rich to the poor. Increasing the minimum wage is not the solution. A much better solution would be a free market social safety net system called a Universal Partial Basic Income.

To implement a UPBI the entire failed (if measured by the fact that neither poverty or homelessness were significantly reduced in spite of spending—and wasting— trillions of dollars) welfare system that began in 1965 would have to be abandoned and replaced with a system whereby every over-21 adult in America would set up a bank account and have $10,000/year transferred by the government into the account in monthly increments. Studies show that there is enough money in the 100 or so (we stared with one in 1965!) means-tested income transfer (welfare) bureaucracies to fund this. Higher income individuals would have the money taxed back out of their account via a surtax leaving plenty of funds available for the lower income individuals. The money would accrue each individual recipient with no strings attached except a requirement to purchase health insurance.

Some people argue that $10,000/year isn’t enough money to allow someone to live above the poverty line. That’s the idea. Getting a job would still be necessary in order to attain that distinction. Even one minimum wage job would allow any individual family of four to escape poverty. If Mom and Dad with two kids each receive $10,000/ year, so $20,000 total, and either Mom or Dad gets a job as a minimum wage fry cook at McDonalds working 40 hours/wk for 50 weeks a year (40*50*7.25=$14,500 /year) the family would have a yearly income of $34,500. Not only would this raise them above the poverty line but would actually catapult them to the middle class. Every family in the country! The effective wage rate would be $34,500/2000 or $17.25/ hour. No loss of minimum wage “starter” jobs. And none of the problems associated with the welfare system. No fuss with bureaucrats, no feelings of condescension, no incentives to shun marriage, no lack of health insurance… just a very effective social safety net.

This is a much better solution than raising the minimum wage.

Mike McCarty owns two restaurants in the Northern Colorado, and is a trustee on the board of the Independence Institute, a free-market think tank in Denver. CompleteColorado.com is a project of the Independence Institute.

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