Price Fixing Don't Work - CA Minimum Wage Edition
What else did anyone think would happen?
The rational among us would not tend to look to California Democrats for economic rationality. As the latest little example shows us. And, in a very interesting way, this is actually the reverse of that Card and Krueger study on minimum wages.
Hmm, OK, interesting in the way that economic nerds like us find interesting (OK, like me, like I find interesting). Normies are going to be most bored by it - which is one of those little problems with politics defining the economy, normies don’t get the interesting bits.
So, California decided that big fast food chains were really rich. Look, look, stock markets and profits! So, they can pay proper wages to their workers! Right!
OK, well, this fails at a couple of stages. One is that the big fast food companies aren’t, in fact, running the restaurants, franchisees are. Who may well not be big quoted stock market companies making vast profits.
So, you know, the effect might be a little different:
Last September, California Governor Gavin Newsom (D) signed a bill mandating a $20 minimum wage for fast food workers. The new wage is among the highest in the county, surpassing even Washington, D.C.'s $17.50 minimum wage. While supporters touted the wage increase as a way to help struggling Californians, detractors warned that restaurant owners would respond by laying off workers, cutting their hours, or speeding up the already starting shift to automation.
Well, if there aren’t big profits being made by those who actually employ the workers - profits that could decline to pay the workers - then those three are the only way the higher wages can be paid. Consumers pay more, fewer workers get paid or workers get paid for fewer hours. Well, there’s one more, savings could be made on the ingredients - but anyone actually want to contemplate the average fast food burger being made from even cheaper meat? If such even exists?
Cheng used to have nearly a dozen employees on the afternoon shift at his Fountain Valley location in Orange County. Now he only schedules seven for each shift as he scrambles to absorb a dramatic jump in labor costs after a new California law boosted the hourly wage for fast food workers on April 1 from $16 to $20 an hour.
“We kind of just cut where we can,” he said. “I schedule one less person, and then I come in for that time that I didn’t schedule and I work that hour.”
Oh well, that’s what happens when we allow the economic illiterates to make the laws.
But as we’ve said before, and before, there’s more to this than just this current rise.
For think back to that New Jersey minimum wage study, Card and Krueger. That showed that acshully, employment in fast food joints rose when the minimum wage went up. Now, I’ve been saying for a long time now that I think there’s a fallacy of composition there.
“Fast food” isn’t “fast food”. There are - at least - two sectors here. There’re those big national chains, lots of advertising, franchisees, MaccyD’s and the like. Then there’s a vast hinterland of Mom and Pop places. The financial structures are entirely different. The chains are capital intensive. I think I’ve seen that buns for burgers come in pre-cut. Salad definitely arrives in bags, already shredded. There’s no prep - not even prep areas in those kitchens. Mom and Pop run differently. One reason I know is because I’ve owned and run one. There’s an awful lot of labour that goes into turning blocks of stuff into those sandwiches. Stuff is sliced, diced, soups are cooked on site, from identifiable ingredients, bread is sliced and on and on.
No, this isn’t to try and riff off The Bear. But there is a difference in economic structure between those who are large corporates vending fast food and not-large corporates vending fast food.
And I think - think, me, I do - that the problem with the Card and Krueger study was that it didn’t account for this. A change in the general labour rate might push people to the capital intensive end of this market. Certainly could do, it would be possible to model it that way. Which means that using only the data from the fast food chains, as C&K did, would pick up only part, perhaps half, of the reaction. The Mom and Pops shed labour, the capital intensive chains modestly pick it up, the nett effect is - well , the nett effect could be anywhere actually.
Which is what makes this CA minimum wage change so interesting. Because the $20 an hour applies only to those working for the big national chains - or their franchisees.
Mom and Pop have to pay the normal CA minimum wage, not the $20. So, the labour intensive part of the overall system has just been handed a competitive advantage against the capital intensive end of it. We would expect, could possibly measure, that the overall employment outcome is positive.
No, really. I’d be willing to defend the idea that it could be, certainly. Note that “could”. So, we’ve two sectors, capital intensive, labour intensive. We’ve just said that the capital using guys now have to pay more - much more - for their labour than the labour intensive guys. The capital intensive guys can only respond by higher prices or worse service (ie, fewer labour hours). The labour intensive sector might end up picking up so much of the traffic that they expand employment - expand employment so much as to actually increase overall fast food sector employment. By shifting from the capital to the labour intensive sectors.
This should be studied, right? Now, my actual economic skills - rather than ruminations - are zero so it’s not going to be me checking this out. But I recommend it as something for someone looking for a PhD subject to think about. Possibly even someone more senior than that looking for a point upon which to make their bones.
Does a higher minimum wage that only - only - applies to the capital intensive portion of an economic sector like fast food actually increase employment? By shifting the sector over to the more labour intensive sector not subject to that higher minimum wage?
Logically, it could, significant empirical work would be necessary to show it though.
So, anyway, there’s the free idea. Anyone picks it up send me a link to the publication in good time.
Oh, one final bit - if this turns out to be true then that casts that little shade on the Card and Krueger finding. Because if internal shifts within the fast food market can explain ……well, you get the point.
So, you know, given that David Card got his Nobel, in part, for that study this little idea might not suit those at or trying to get into Berkeley.
OK, so;
One industry, two sectors.
Red Sector A, Evil Capitalist Bastards, must pay 20 bucks per hour for labour.
Blue Sector B, Mom & Pop, must pay only 16.00 per hour.
The Oppressed and Exploited Workers have a choice;
Slice buns, mix salads and accept 16 from the M&Ps, or press buttons, pull levers for the ECBs, and get 20.
Which is a 25% premium to the OEWs.
The ECBs get far more applications from the OEWs, and can afford to be extremely selective in handing out the extra 25%.
The M&Ps get the muppets.
To get away from the muppets, M&Ps must begin to compete with the ECBs on compensation, increasing their overall offer to the OEWs.
M&Ps end up just as fucked as they would have been if there were no differential in the MW required between sectors.
Given enough time, I'd expect that compensation offered would split, with a bit of a step change between two clusters; the OEWs at 20-22, and Whip-Cracking Overseers at 25-28 say.
Edit: mixed up the CA MW with the WA MW given in the post.
Darn, I was just about to cover this subject in the substack that'll go out tomorrow AM. That's OK, I've got some other angles on it. As I mentioned in a comment on some previous post of yours, the appendix of my book (available separately free on request) was a detailed thrashing of the Card/Krueger study.
The issue of the Mom and Pops ("M+Ps") was one of the many distortions of the truth that the study contained. The C/K study covered what happened during nine months in the year 1992. Thirty years ago in the US franchised fast food was still a new and hot industry, gaining market share from the previously nearly universal M+Ps, collectively known at the time as "greasy spoons.". The C/K study did not cover M+Ps, even though the increase in minimum wage in NJ applied to them too, because they found that they couldn't get the owners to waste time on the phone answering their detailed surveys. And within the fast food world, they had the same problem with McDonalds, the most expensive franchise to buy, and the owners there also had no time to waste.
So what the study actually covered was only the non-McDonalds segment of the fast food industry, a very curated, as they say, sample. Also, in those pre-Amazon days, nearly everything bought at retail was bought at retail stores, where much of the staff was paid the minimum wage, and their wages went up too. C/K didn't look at what happened there, nor at the many factories still around in the pre-Chinese imports days with loads of minimum wage workers. So far from being a universal study, it measured only a tiny portion of the establishments which were affected by the rise in minimum wages in NJ, compared to PA where the minimum was unchanged.
In any event, I believe that the lack of layoffs in the NJ fast food restaurants despite the mandated increase in wages reflected several things, none of the backing the argument that raising minimum wages won't cause a loss of employment. The biggest was probably the fact that the M+Ps were all folding under the pressure of the franchised operations, which offered predictable quality and were helped by national TV advertising.