More On the Minimum Wage Debate

Last weekend, the Wall Street Journal ran an excellent article by Michael Saltsman, director at the Employment Policies Institute.  He rightfully noted that the examples President Obama uses of businesses that pay their employees well above minimum wage are businesses that can afford to do so.  For example, on a stop at the University of Michigan, he touts Zingerman’s Deli and its generous wages.  Why can’t all restaurants and fast food chains offer generous wages like Zingerman’s?  The catch is that Zingerman’s charges $14 for a Reuben sandwich.  But as Saltsman points out, not all restaurants can raise their prices in order to accommodate substantial wage hikes without losing business.

This article reminds me of the small Texas college town where my best friend resides.  Every time I go to visit her, I notice that one restaurant that has been open for a year or two has closed, and another one has taken its place.  Interestingly enough, the restaurants that have remained steadfast in this college town are Dairy Queen, McDonald’s, Sonic, Golden Chick and the like.  When an upscale steakhouse attempts to make a name in my friend’s small town, it does not stick around for long.  Why?  I would venture to say that it’s all about the customer and what they can afford.  This is a town full of college students who are looking for cheap rent and cheap food.  They are happy to get a pizza or a burger and will rarely bother with upscale steak or seafood.

Thus, restaurants that are above the price point of the average college student will go out of business quickly.  Similarly, if a restaurant in a college town must raise its prices to accommodate a mandatory minimum wage hike that is more fitting in a city of high-income, high-tech professionals, college town restaurants will be gone in a flash.

Comments (6)

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  1. Brian Williams. says:

    The minimum wage is appealing to some people who don’t know any better. But if a minimum wage is such a great idea, why stop at $10/hour? Why not mandate a minimum wage of $20 or $50 or $100 per hour?

    • Gabriel E says:

      Agree, if people believe that there is no downside to increase the minimum wage, why stop at $10.10? This discussion is one of the reasons why schools should teach economics, so that when they are making these sorts of demands they at least know what they are fighting for.

  2. Joe Barnett says:

    “Costco pays its employees more than Walmart but is very profitable. Why doesn’t Walmart just raise its prices slightly and pay its employees ‘a living wage.'” I’ve heard this statement a number of times recently, and I think Pam’s post is relevant to this issue. (I don’t know, in fact, that Costco pays its employees more; that may not be at all true. Certainly, Walmart employees are not minimum wage workers.) Costco serves a different set of consumers than Walmart; for one thing, they pay a membership fee. Unsurprisingly, many people who can afford it will pay a membership fee just for the privilege of not having to shop at the same store as the general public. Exclusivity is a characteristic of some goods and services, and Costco’s fee serves that appetite. Walmart, on the other hand, claims to have the lowest prices, and appeals to customers on that basis. It could raise its prices slightly and pay its employees more than they are paid currently, but if it affected their price competitiveness, they would have to attract a different set of customers — such as Costco’s customers — and brand the stores differently. But that would leave Walmart customers with fewer options (DollarTree? Kmart?), and the competition between Costco and Walmart would likely reduce the profit margins of both companies, and lead to store closures (as well as openings in new markets). So the fact that both are profitable is irrelevant to the question of employee compensation; they serve diffent market segments. And if their employee compensation structure is different, that reflects the productivity of their employees — in the jobs they have, serving the market they serve. The two should not be compared.

    • Roman F says:

      I’ve never understand when people criticize Walmart by claiming that their employees don’t earn enough. They criticize that Walmart “is not paying enough for its employees to buy at Walmart” and they compared with Henry Ford’s idea of paying the workers enough to purchase a car. It seems that people forget why Henry Ford paid more:
      •Highly skilled work (Ford and its moving assembly line changed the manufacturing process completely, requiring people to have a degree of specialization in order to complete their tasks)
      •Maintaining their knowhow (Ford had revolutionized the world with the car and the moving assembly line, which gave him a competitive advantage over his competitors. If employee turnover was high, Ford’s competitive advantage would rapidly decay as employees changed jobs and taking with them the valuable knowledge.
      •Building culture and marketing (In a period where only few could own cars, if Ford employees were able to afford one, it will give them a sense of pride that will incite them to work harder.
      Walmart situation is very different. It is a large employer that pursues low cost by whatever means available. For them they hiring individuals of their target market makes sense, knowing that those are individuals that will be inclined to buy at Walmart.

  3. Lucas says:

    There was an article ran a couple weeks ago detailing the miraculous story of a KFC employee lobbying for a minimum wage increase. Her local government eventually granted that desire. My question:

    How does a KFC minimum wage employee know anything about the intricacies of economics?

    • ManleyMan says:

      Sadly Lucas, no, I don’t think they do. How can they when they are constantly sold a bill of goods by their politicians that is predicated totally on emotion, not economics? It is easy to emotionally manipulate the public through the media and through campaign speeches made in front of idealist college students, much harder to encourage them to think critically and economically.

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