The case for a living wage

There have been a number of strikes carried out by fast food employees this summer. The most recent strike, which took place on Aug. 29th, was the largest yet, encompassing nearly 60 American cities. Their objectives? A $15 an hour wage, and the right to form unions without intimidation. In this matter, I support the strikers and their objectives. Not because I think they'll be successful in acquiring such a wage; I largely suspect they're using the standard negotiating tactic of asking for more than what they think they can get to give themselves some wiggle room at the bargaining table. But because fast food employees, like all employees, have every right to strike and demand higher wages for their labor, and because higher wages would be beneficial not just for the employees themselves, but for us all.

To understand why, it's important to understand the nature of our economy. We no longer live in a country awash in good paying manufacturing jobs. Today, we live in a service economy. We're a nation of fast food joints, chain restaurants, bars, hotels, and big box retail stores. This graph illustrates the changing nature of our economy:

The food service industry is, in fact, the fastest growing industry in the United States. Which means there's a greater demand for labor at McDonald's, Burger King, Taco Bell, and various chain sit-down restaurants today than there is at GM, Ford, and General Electric.

Not surprisingly, these fast food jobs don't pay nearly as well as their manufacturing counterparts. A recent study by the National Employment Law Project found that a mere 2.2% of these jobs are managerial, professional, or technical occupations. An additional 8.7% are first line supervisors. This means the remaining 89.1% work in front line occupations, where they earn a median hourly wage of $8.94.  It's no wonder that McDonald's had such a difficult time putting together a hypothetical budget for their employees to follow; even they recognized the absurdity of expecting workers to live off their wages alone. Hence, the assumption that they would work a second job:

It's incredibly important to understand this, and to place the demands of the fast food strikers within the context of our changing economy. In the 1950's and 60's, a man could graduate from high school, get a job at the local GM plant, and raise a family off of his income alone. Then, in the 1970's, as automation and globalization took their terrible toll on American manufacturing, wages became stagnant even as overall productively continued its upward climb: 

The decline of American manufacturing, and its gradual replacement with retail and food service jobs has led to this wage stagnation. This problem, unfortunately, has been exacerbated by the Great Recession of 2008. We've lost some 8.6 million jobs since the beginning of the Great Recession in September of 2008, and have recovered roughly 6.6 million jobs as of June, 2013. Alas, the jobs we're gaining are of the lower paying, part time variety. The economic recovery has been painfully slow-moving, in no small part, due to the poor quality of these new jobs.

The evidence is clear and overwhelming: the service economy is here to stay. Those good paying manufacturing jobs aren't likely to come back anytime soon, if ever, thanks to globalization and automation. If we want a healthy, sustainable middle class, then we need to boost wages in the fields they increasingly work in; specifically, the food service and retail industries. These jobs are no longer comprised of teenagers looking to make a couple extra bucks over the summer; rather, they are increasingly becoming the only available careers for Americans to work in, period. 

This point cannot be ignored. There aren't enough white collar jobs to go around for a nation of 310 + million people. And not everyone can be a small business owner, engineer, doctor, or lawyer because a country can't sustain itself on these jobs alone. No matter what, there's always going to be a much, much, higher demand for labor in the retail, food service, and hospitality industries than in white collar jobs, even in the most developed of first world countries. This would be true even if every able-bodied American worker fit the ideal conservative definition of the boot-strapping, college educated entrepreneur. In short, we're dealing with a systematic problem. The issue isn't individual Americans being lazy or lethargic, and unwilling to work hard for better paying jobs. The issue is that there simply aren't enough good paying jobs available in today's service economy, for college educated and non-college educated Americans alike.

The solution, then, is twofold. First, encourage unionization within the service economy to give workers in these industries the means to fight for better wages and benefits. Secondly, increase the federal minimum wage to at least $10.10 an hour by 2015, and then index it to inflation. 

Good paying manufacturing jobs didn't come about by mistake. They weren't gifts bestowed upon us by the wonder and glory of the free market. Rather, they were fought for by organized workers, some of whom gave their lives. We should encourage today's McDonald's and Walmart employees to unionize to increase their leverage in the workplace, just as yesterday's GM and Ford employees did.

Increasing the federal minimum wage, meanwhile, sets a baseline and provides some measure of protection for service economy workers who are otherwise unable to unionize. This research paper by the Economic Policy Institute lays out some of the benefits of such a minimum wage increase:

• Increasing the federal minimum wage to $10.10 by July 1, 2015, would raise the wages of about 30 million workers, who would receive over $51 billion in additional wages over the phase-in period.
• Those who would see wage increases do not fit some of the stereotypes of minimum-wage workers.
• Over 88 percent of workers who would benefit are at least 20 years old.
• Although workers of all races and ethnicities would benefit from the increase, non-Hispanic white workers comprise the largest share (about 54 percent) of those who would be affected.
• About 44 percent of affected workers have at least some college education.
• Around 55 percent of affected workers work full time, 70 percent are in families with incomes of less than $60,000, more than a quarter are parents, and over a third are married.

Those opposed to raising the minimum wage typically claim that doing so will 1) significantly reduce the availability of such low paying jobs, and 2) increase the cost of goods and services, as employers will simply shift the higher cost of labor onto consumers.

As to the first claim, they're wrong.

A Center for Economic and Policy Research paper published in 2013 concludes:

"The employment effect of the minimum wage is one of the most studied topics in all of economics. This report examines the most recent wave of this research - roughly since 2000 - to determine the best current estimates of the impact of increases in the minimum wage on the employment prospects of low-wage workers. The weight of that evidence points to little or no employment response to modest increases in the minimum wage."
...

"Hristos Doucouliagos and T.D. Stanley (2009) conducted a meta-study of 64 minimum-wage studies published between 1972 and 2007 measuring the impact of minimum wages on teenage employment in the United States. When they graphed every employment estimate contained in these studies (over 1,000 in total), weighting each estimate by its statistical precision, they found that the most precise estimates were heavily clustered at or near zero employment effects."

Here's the graph demonstrating the lack of negative employment effects:

Those opposed to increasing the minimum wage can stomp their feet and pretend that it will lead to job losses all they want, but the bulk of the empirical research suggests otherwise.

There is some merit, however, to the claim that employers will shift the higher costs of labor onto consumers. But again, the empirical evidence suggests that the increase wouldn't be so onerous as to wipe out the benefits of higher wages. Far from it.

The University of California, Berkeley Center for Labor Research and Education published a study in 2011, in which they measured the impact of setting the minimum wage of Walmart workers to $12 an hour. They found:

"Even if Walmart were to pass 100 percent of the wage increase on to consumers, the average impact on a Walmart shopper would be quite small: 1.1 percent of prices, well below Walmart's estimated savings to consumers. This works out to $0.46 per shopping trip, or $12.49 per year, for the average consumer who spends approximately $1,187 per year at Walmart. This is the most extreme estimate, as portions of the raise could be absorbed through other mechanisms, including increased productivity or lower profit margins."

Obviously, an extra $12.49 a year wouldn't break anyone's bank. In the case of Walmart, it's clear that the benefits of increased wages for workers at the nation's largest private sector employer would be greater than the overall costs of higher prices for goods. Those workers would take their higher wages and dump it right back into the economy, thus boosting aggregate demand across all other sectors. Besides, just as the authors point out, higher labor costs need not be entirely passed along to consumers. After all, the rules of supply and demand don't go out the window simply because workers are getting paid more. If Walmart increases prices by too much, then other retailers will capture consumer revenue by undercutting them with lower prices.

Walmart's sales rose to $466.11 billion in the last fiscal year, while earnings per share rose to $5.02 a share. Its CEO, Mike Duke, earned $20.7 million in compensation. And, lest we forget, the combined wealth of the Walton family ($89.5 billion) is equal to the combined wealth of the poorest 48.8 million American families, or roughly the bottom 40% of all American families. So they're not exactly hurting for cash. The same can be said of much of the fast food industry. In 2012, YUM! Brands, which includes KFC, Taco Bell, and Pizza Hut, put up a 13% gain in annual earnings over its previous year, while its total shareholder return was 15%.

Meanwhile, these companies spend billions on advertising, and millions on lobbying. It's pretty clear that there's some wiggle room here to cut costs and boost wages. Ultimately, though, as former Secretary of Labor Robert Reich suggests, higher wages for employees would most likely come out of company profits, which means reduced returns to shareholders and executive compensation. But I also agree that this "wouldn't be such a bad thing." It's easy to come to this conclusion when one considers that an average McDonald's cashier needs to work about a million hours (or, more than a century on the clock) in order to earn the $8.75 million its CEO earned in 2011. Or when one considers that McDonald's spent $6 billion on share repurchases and dividends, which amounts to about $14,286 for every McDonald's employee. We've witnessed the decline of wages come at the expense of greater profits over the past several decades. It's time to shift the balance back in labor's favor.

It's not as if there isn't a precedent for paying fast food employees a living wage. After all, the supposedly mythological paradise in which McDonald's workers earn this "outrageous" compensation of $15 an hour already exists: it's called Australia. This summer, Australia's Fair Work Commission signed an agreement between the company and its workers in which the current minimum wage of $14.50 an hour will be gradually increased up to 15% by 2017. And Australians aren't paying exuberant prices for fast food, despite McDonald's workers earning these wages. Per The Economist's Big Mac index, an interactive currency-comparison tool that let's users compare the costs of Big Mac meals across the globe, the current average cost of a Big Mac meal in Australia is about $4.62, only 6 cents more than the current average cost of $4.56 in the States.

One doesn't need to look overseas to see profitable food service and retail companies paying their employees living wages, either. Costco has been doing it for years, and its blowing the competition out of the water as of late. The average cashier's salary at Costco is $15.60 an hour.  The company prides itself on providing superior customer service, and it should be no surprise that better paid employees are more willing to provide it. Empirical research suggests that investing in labor is better for a business' bottom line. Costco isn't the only retailer to have discovered this. Publix, a retailer based out of Florida, has found an innovative way to share its profits with its employees: turn them into collective shareholders. Indeed, Publix's rank and file employees, including cashiers, baggers, and bakers are the controlling shareholders, with an 80% stake in the company.

Some conservatives/libertarians would suggest that food service and retail employees don't deserve these kinds of wages, because its simple manual labor, or because these jobs don't typically require a college education. It should be noted that such rhetoric does nothing but create divisions amongst the American middle and lower income classes, while the CEO's are only happy to play the divide and conquer game as they rest comfortably above the fray with their multi-million dollar compensations. All work has dignity, and all labor has value. The $12 an hour employee should take no pride in the cardboard box he lives out of, simply because it's a little bit nicer than the cardboard box the $8 an hour employee lives out of.

Suggesting that someone "go to college, work hard, and go out and find a better job" may seem like great advice to give to your buddy while sitting at the bar. But this advice does little to address the systematic problem of good paying jobs being increasingly crowded out by jobs of the low paying retail and food service variety. In this economy, my spending is your income, and vice versa. As such, boosting wages in the service economy is in everyone's best interest, even if it means we pay a few more cents for cheeseburgers and pizzas.