by Mitch Kokai
Senior Political Analyst, John Locke Foundation
A basic economic premise holds that when the price of something rises, people seek to economize on its use. They seek substitutes for that which has risen in price. Recent years have seen proposals for an increase in the federal minimum wage to $15 an hour. Some states and localities, such as Seattle, have already legislated a minimum wage of $15 an hour.
Nobody should be surprised that fast-food companies such as Wendy’s, Panera Bread, McDonald’s and others are seeking substitutes for employees who are becoming costlier. One substitute that has emerged for cashiers is automated kiosks where, instead of having a person take your order, you select your meal and pay for it using a machine. Robots are also seen as an alternative to a $15-an-hour minimum wage. In fact, employee costs are much higher than an hourly wage suggests. For every employee paid $15 an hour, a company spends an additional $10 an hour on non-wage benefits, such as medical insurance, Social Security, workers’ compensation and other taxes. That means the minimum hourly cost of hiring such an employee is close to $25.
The vision that higher mandated wages (that exceed productivity) produce no employment effects is what economists call a zero-elasticity view of the world — one in which there is no response to price changes. It assumes that customers are insensitive to higher product prices and investors are insensitive to a company’s profits. There is little evidence that people are insensitive to price changes, whether they be changes in taxes, gas prices, food prices, labor prices or any other price. The issue is not whether people change their behavior when relative prices rise or fall; it is always how soon and how great the change will be. Thus, with minimum wage increases, it is not an issue of whether firms will economize on labor but an issue of how much they will economize and who will bear the burden of that economizing.