There were a couple of bits of news about wages out of Little Rock this week. One was the Secretary of State's approval of a ballot initiative that would raise the Arkansas minimum wage from $6.25 per hour to $8.50 per hour over the course of the next three years. (The federal minimum wage is $7.25, so Arkansas's proposed increase isn't as generous as it appears.)
The other is that a group of McDonald's workers were arrested earlier today when they blocked traffic on Broadway as part of a protest in which they are seeking better working conditions and a $15 per hour minimum.
I was somewhat surprised to see comments from friends and others that were rather frightened by the prospect of fast food workers being paid $15 an hour, and more generally, by the prospect of a $15 per hour minimum wage. The reasons? That restaurants and other businesses that run on low-wage jobs would raise prices, that the workers haven't paid their dues through work and education enough to deserve $15 an hour, that they themselves don't make $15 an hour even though they have X degree or Y years of experience, and so on.
I approach this question from a different perspective. I don't really care where the minimum wage is set in absolute dollars. My principles are these: Everyone should have access to full-time employment. Every full-time job should pay enough to keep the worker out of poverty, taking into account family members who are unable to work. Whatever that requires, there is where your minimum wage should be set. It doesn't matter if it's $7.25 or $15 or $100 an hour.
Of course, if you disagree with those concepts, feel free, but let's not pretend it's an argument over where the minimum wage should be set. It's an argument over whether there should be any minimum wage at all.
If supply-and-demand with respect to labor services were perfectly price-elastic, the people who argue against the minimum wage would have a point. But it is a simple fact that in a civilization in which there is specialization of labor, the price-elasticity of supply of labor is close to zero. People have to work to eat and clothe and shelter themselves. In a rough economy, there is a race to the bottom, as workers are willing to take smaller and smaller wages, just to get work, because if they don't work, they don't eat. That tends to be a self-reinforcing situation, because less money in the hands of ordinary workers means less demand for goods and services.
The reality is that if McDonald's were forced, either by law or by collective action of its workers, to raise its minimum wage to $15 an hour, McDonald's would not raise prices even one penny as a result.
How is that? you ask.
Think for just a moment about how McDonald's sets its prices. Now, McDonald's knows to the fraction of a penny how much it costs to produce a Big Mac or a McRib--and I'll talk about McRib in a moment. And of course it wants to choose a price for Big Macs that will be profitable. But whether the Big Mac is profitable affects whether McDonald's sells it at all, not how much it charges.
Imagine a Big Mac that cost $10 to produce because of a Special Sauce shortage. Do you think McDonald's would say, "Hey, let's charge $12 for that Big Mac, because we have $10 in it"? Absolutely not, because few people would pay $12 for a Big Mac. They would just stop selling it. McDonald's charges an amount for the Big Mac that the public will pay, regardless of its costs. Not one penny more or less.
If you don't believe me, imagine that the cost of producing a Big Mac suddenly plunged from $3 to 10 cents. Do you think McDonald's would automatically cut the price to $1.10 from $4? Absolutely not. The market will bear a $4 Big Mac, so McDonald's charges $4--and they will take that $3.90 profit every time. (Of course, they might drop the price a little to encourage more people to buy a suddenly more profitable sandwich, but the drop won't be much at all.)
McRib is an interesting demonstration of this principle at work. Have you ever wondered why McDonald's only offers the McRib occasionally? It's really very simple. The major cost of a McRib is the pork that's used to make it. When pork prices fall, McRib becomes profitable, and McDonald's offers it. When pork prices rise again, McRib goes away, because it is no longer profitable. This is true even though the price of a McRib, adjusted for inflation, is essentially the same as it was when it was introduced.
We would all be a lot better off if the minimum wage were raised to $15, which is where it was (in today's dollars) 45 years ago. We've been conditioned to believe that holding the line on the minimum wage is helpful to the economy at large as well as individuals. But it's not. People who make minimum wage are among the poorest people in the country. If there is one universal economic truth, it is that people who are in the bottom 20% of incomes spend every dollar they can get their hands on. When they get a raise, they spend more, and that spending causes money to cycle through the economy more quickly. That means increased sales for consumer goods and services, which more than offset the cost of a minimum wage hike.
Australia has proven this to be the case. Australians are a lot like us in their approach to economic matters--they value individual freedom and free enterprise. But a few years ago, Australia moved its minimum wage up, and indexed it to inflation, to the point where the minimum wage in Australia is now $15.87 (US) per hour. Naysayers of the $15 minimum wage in the U.S. scream that it would crash our economy. But Australia's economy is booming. It hasn't had a recession in 21 years (we've had three). Its nominal per capita GDP is the fifth-highest in the world (22% higher than the ninth-place United States).
It's time for a raise.