How to raise the minimum wage 107 percent without losing jobs or profit

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A new study shows that the fast-food industry can pay a $15 minimum wage without cutting jobs or profit rates. Photo by Flickr user Xiaozhuli.

A new study shows that the fast-food industry can pay a $15 minimum wage without cutting jobs or profit rates. Photo by Flickr user Xiaozhuli.

Boosting the federal minimum wage would be great news for the workers who’d receive a higher paycheck. Not so much for those who’d be out of a job. That anxiety sums up much of the debate around increasing the minimum wage.

Fueling angst on the right, the Congressional Budget Office reported last year that raising the federal minimum to $10.10 would cost about 500,000 jobs. Even liberal restaurant owners, like the ones NewsHour’s Paul Solman spoke to in Seattle last spring, worried that paying their workers more would doom their businesses, while nonprofit organizations feared having to cut their staff and services.

Nearly half of all workers toiling at or below the minimum wage work in food preparation and service. The National Restaurant Association’s 2014 analysis of raising the wage to $10.10 concluded that tens of thousands of jobs would be lost across specific states.

If CEO compensation in the fast-food industry is any indication, the major fast-food companies could afford to pay low-wage workers more. In 2012, CEOs received 1,200 times what the average worker was paid, according to the Demos Institute. Right now, the assumption is that paying low-wage workers a higher wage would come at a cost. But what if the industry could pay workers more without cutting jobs? And more important to those CEOs, without cutting their profit margins?

That’s doable, according to a new study from the Political Economy Research Institute at the University of Massachusetts.

In fact, it’s more than doable. Economists Robert Pollin and Jeannette Wicks-Lim came to this conclusion by calculating the effects of raising the minimum wage to $15 an hour — that’s far higher than what the president and congressional Democrats have proposed, and is more on par with rates paid in the other Washington.

First, some basics. The proposed hike in this study would start gradually at $10.50 the first year, then increase to $15 after three more years — a 107 percent increase over the current minimum of $7.25. In 2013, 3.3 million Americans made that much or less per hour.

The authors estimate that 3.8 million fast-food workers, including those earning up to $18.62 an hour currently, would see a higher hourly wage as a result of a mandatory increase. (Employers have to maintain some sense of wage hierarchy, and in that sense, paying the lowest-paid workers more lifts many more boats than just those currently earning $7.25.)

How much would it cost the industry to pay 3.8 million people a little more? A $15 wage would cost the sector $30.7 billion, or about 14 percent of their 2013 sales. And a $10.50 wage, a much more politically realistic floor right now, would cost $7.1 billion, or 3.3 percent of the industry’s sales in 2013.

Pollin and Wicks-Lim’s goal here is to show that there are other ways — actually, more lucrative ways — to offset this cost than laying people off (or reducing hours).

The easiest (from the companies’ point of view) takes care of itself. Better-compensated workers have been shown to be better workers. Therefore, when companies pay a higher wage, they will save money from reduced absenteeism, lower turnover and training and higher productivity. Those gains would defray roughly 20 percent of the total increase in the industry’s wage bill.

The second option is the one no one likes: raising prices. With a mandatory wage raise, though, the benefit is that no one company in the industry would be at a disadvantage for increasing prices because presumably all fast-food chains would be doing the same.

Like the second, the third option relies on defraying greater payroll expenses with greater revenue. But in this scenario, the revenue used to offset higher wages would come from an expected 2.5 percent increase in sales per year (based on past economic growth trends). With steady revenue increases, companies can redistribute more revenue toward payrolls without lowering their average profit rate.

Of course, redistributing revenue could also entail, as Diana Furchtgott-Roth said on the NewsHour earlier this month, investing in technology to replace low-wage workers. Pollin and Wicks-Lim concede that that happens, but not enough to significantly affect overall fast-food employment. With a higher wage, and these compensatory measures in place, employment won’t decline, but it will grow more slowly (because of decreased sale volume), at least for the first few years the new wage is implemented, before picking back up to around 2 percent per year.

You might question how much a couple of academic economists in Western Massachusetts know about the boardroom preferences of America’s fast-food companies. All these alternatives to layoffs sound peachy in theory. Raise wages and keep everyone employed — too good to be true? Maybe. But remember, their model assumes no decline in profit rates, either. That’s something corporate America could get behind.

Of course, CEOs would prefer to see their profit rates increase. But cutting their workforces, Pollin and Wick-Lim suggest, isn’t likely to be the first choice of firms that want to expand and remain competitive.

Does the minimum wage really help the poor? Diana Furchtgott-Roth, of the Manhattan Institute, and Jared Bernstein, of the Center on Budget and Policy Priorities, debate the effects of the minimum wage earlier this month.

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