In a recent article in The American titled “A National Minimum Wage is a Bad Fit for Low-Cost Communities,” my AEI colleague Andrew Biggs and I argued that a one-size-fits-all minimum wage, without any adjustments for the significant differences in the cost of living across the country, will disproportionately affect low-skilled workers in low-cost areas.
In Saturday’s Wall Street Journal (“Why Subway Doesn’t Serve a $14 Reuben Sandwich”), my friend Michael Saltsman makes a slightly different, but related, argument that a one-size-fits-all minimum wage imposed on all businesses and industries is bad public policy. Reason? Without any adjustments for the significant differences in industries that employ low and unskilled workers, raising the minimum wage uniformly to $10.10 per hour for every industry and every business will disproportionately affect employers and workers in low-cost, low-wage, low profit-margin industries like fast-food restaurants such as McDonald’s, Domino’s and Subway.
For example, Michael first looks at Costco, whose CEO Craig Jelinek supports raising the minimum wage and pays his new employees $11.50 an hour. But one of the reasons that Costco has the luxury to pay an entry-level wage that is 58% above the current $7.25 per hour minimum is that the company typically charges customers more than $100 a year in membership fees. In total, that’s about $2 billion annually in membership fees that naturally gives Costco a natural advantage over Walmart, McDonald’s and Subway when it comes to paying entry-level wages. Further, Costco enjoys more than $10,000 in profits per employee, which is about five times the $2,000 in profits that a fast food chain generates per worker. No wonder that Costco can afford to pay new employees more per hour than a nearby McDonald’s or Subway. Realistically, a 40% hike in the minimum wage to $10.10 per hour would have no effect on a membership-based, high-profit-per-employee employer like Costco, but could have devastating effects on a low-profit-per-employee chain like McDonald’s or Subway.
Secondly, Michael compares high-end, high-priced, high-profit margin delicatessens like Ann Arbor-based Zingerman’s, where Obama recently dined and enjoyed one of the restaurants $14 Reuben sandwiches (and that’s the sandwich for the “small eater” – the full-size Zingerman’s Reuben is $16.50). Further, Labor Secretary Tom Perez recently visited a Shake Shack in Washington, D.C. to promote the restaurant’s above-minimum starting wage. But the restaurant’s cheapest double-cheese burger is $7.40, its shakes are $5, and the least-expensive fries are almost $3. At a nearby McDonald’s, you could probably order comparable items from the Dollar Menu that might cost only $5 instead of a $15 meal at Shake Shack. It’s no surprise that Shake Shack or Zingerman’s can afford higher entry-level wages than a nearby McDonald’s or Subway.
Here’s Michael’s conclusion:
If McDonald’s could raise burger prices by 40% without losing customers, it would have done so already without input from Messrs. Obama and Perez. But customers are price sensitive. The same dilemma exists at restaurants, grocery stores and countless other service businesses across the country. If higher prices aren’t an option for offsetting a wage hike, costs have to be reduced by eliminating jobs and other employment opportunities.
Bottom Line: Zingerman’s Deli and Shake Shack are in the high-end, high-priced, high-profit margin casual dining industry, and membership-based Costco is in the high-profit-per employee retail industry, and they can already afford to pay above-minimum starting wages. In contrast, fast-food chains like McDonald’s, Subway and Domino’s, and retailers like Walmart, are actually in a much different industries – the low-end, low-priced, low-profit-margin, no-membership end of the fast food and retail industries, and would suffer the most from a 40% uniform hike in the minimum wage to $10.10 per hour for every employer in America.
As Andrew Biggs and I pointed out, a uniform, one-size-fits-all minimum wage disproportionately and adversely affects entry-level workers in low-cost communities without impacting high-cost communities. Similarly, Michael points out that raising the minimum wage to $10.10 per hour would disproportionately and adversely affect low-priced, low profit-margin employers like McDonald’s, Subway and Domino’s, without affecting Zingerman’s, Shake Shack and Costco. And that’s another reason that a one-size-fits-all, uniform national minimum wage on every employer in the country is a flawed and deficient public policy – it’s not adjusted for the significant differences in industries that employ low skilled workers.