Minimum wage hikes may malign fast-food jobs and discount shoppers

By Andrew O'Reilly Economic Indicators FOXBusiness

The Associated Press (Copyright 2016 The Associated Press. All rights reserved.)

On a rainy afternoon last week outside a suburban Chicago office complex, hundreds of fast food workers gathered with signs declaring “Resist Wage Theft” and ones depicting President Trump in Ronald McDonald make-up.

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The protestors – part of the “Fight for 15” movement – were demanding wage increases and union rights for workers as McDonald’s (MCD) shareholders met inside the fast food giant’s headquarters for their annual meeting. McDonald’s was the target of the protest in Illinois, but demonstrations were held in cities across the country that day in support of raising the minimum wage for workers in low-paying job sectors ranging from restaurants to retail.

"Instead of paying their CEO $15 million, they should give him $10 million and pay their workers what’s right," said Terrance Wise, a 42-year-old McDonald’s employee from Kansas City.

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Despite the movement for a $15 minimum wage gaining a national following and the support of numerous Democratic lawmakers, many economists and business executives warn of the potential for a higher minimum wage doing more harm than good for workers as it could also lead to higher unemployment rates.

“There are only two ways you pay for it,” Zane Tankel, the CEO of Apple-Metro, a franchisee for Applebee’s Neighborhood Grill & Bar, told FOX Business' Stuart Varney earlier this year of raising the minimum wage. “You raise your prices, which the consumer is not going for, or you don’t hire the same number of people you currently do.”  

Despite Tankel’s view, economists are torn on whether or not higher wages lead to higher rates of unemployment. First, it is still early days as cities like Los Angeles, San Francisco and Seattle begin to implement higher minimum wages. As economists prepare to study these new changes, the majority of existing research points to more downsides than upsides.  

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A Harvard Business School study looking at the restaurant industry - the most intensive user of minimum wage labor – found that fast food and other lower quality restaurants are disproportionately impacted by increases to the minimum wage. A one dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of a 3.5-star restaurant closing, but has no discernible impact for a 5-star restaurant.

Others feel there is a tipping point when a higher minimum wage can backfire. Tim Worstall, a fellow at the Adam Smith Institute in London, told Fox News an argument can be made for setting the minimum wage at $12. “A small jump in the minimum wage will have almost no effect at all,” he said. “It’s all different when it comes to a big jump. Once the minimum wage gets over 45 percent to 50 percent of the median wage you start to see a change.”

In a recent investigation, researchers at Washington University in St. Louis analyzed data from six states — California, Massachusetts, Michigan, Nebraska, South Dakota and West Virginia — that enacted large increases in minimum wage between 2014 and 2015. The national minimum wage is $7.25 an hour, while in California it currently sits at $10.50 an hour for companies with more than 26 employees and is slated to rise to $15 an hour by 2022. The results of the data found that while minimum-wage workers were no more likely to lose their jobs than if they kept their old pay, employers were reluctant to dole out the money to hire new low-wage employees.

“For an area experiencing fast growth, having a high minimum wage will be a bad deal for the new entrants as they might have a tougher time finding a job,” Radhakrishnan Gopalan, a professor of finance at Olin Business School, said in a statement. “On the other hand, if you’re in an area whose population is not growing very fast, then raising the minimum wage will definitely benefit your existing low-wage employees, and the number of new employees who are hurt will be a minimum.”

Another concern voiced by analysts is that companies will have to raise the prices of their goods to meet the demand of paying a higher minimum wage. Experts contend that people working in low wage jobs are the most likely ones to feel the effects of a price increase as they are overwhelmingly the ones shopping at places that hire them. “People with minimum wage jobs are shopping at Walmart, not Neiman Marcus,” Worstall said. “Price increases would just hurt the people getting minimum wage.”

Any clear evidence of whether or not employment growth slows down with enactment of the minimum wage policies will likely have to wait of a few years as cities act as policy laboratories in the closest thing economists will get to a real-life controlled study.

Reuters contributed to this report.