On Thursday, fast food workers will hold a one-day strike in support of raising their minimum hourly wage from $7.50 to $15.
The strikers’ argument has tremendous emotional appeal. A minimum-wage job has yearly pay below the federal poverty level and the ongoing recession has forced more low-skill workers into fast-food and other service-sector jobs. That means Thursday’s protesters will not just be the teenagers and part-time workers who stereotypically work at fast-food chains — they will also be mothers and fathers struggling to provide for their families.
Although all but the most hard-hearted observer will sympathize with the strikers’ plight, raising the minimum wage remains an ineffective public policy choice that will hurt the overall economy while only marginally helping workers in low-wage jobs.
Low-skill jobs aren’t low-paying because businessmen are Scrooge-like villains who enjoy seeing people toil without much reward — they’re low-paying because businesses are rational. Virtually anyone can do these jobs with very little training. This means the supply of potential labor exceeds the demand, making salaries low and benefits like health insurance almost nonexistent. But those low salaries are part of what allows fast food chains to have low prices, which helps customers save money and lets the companies be profitable.
Labor activists like to argue that businesses could just endure the costs of a minimum wage hike, cutting executive salaries and shareholder dividends to help workers live a decent life. But that argument doesn’t stand up to the realities of most service-sector businesses.
For example, the average fast-food franchise will have a 10% profit margin, and employee salaries are usually around 25% of revenue. Though not all employees make minimum wage — longtime employees get pay raises and store managers average $42,000 a year — forcing franchises to pay $15 an hour would be at least a 20% cost increase.
The average fast food store would go from profitable to unprofitable overnight. Some would close immediately, leaving their workers worse off than they were when working for $7.50 an hour, while others would raise prices and try and remain in business, hurting consumers.
Only some stores would be able to stay open by raising prices. Just as the recession has forced more people into minimum-wage jobs, so has it made consumers more sensitive to price increases. Commuters who grab a Big Mac on the way home from a long workday would be more likely to cook for themselves if the price suddenly increased. Even if the franchises could stay open with these reduced profits, workers would be laid off to save money.
The workers who strike on Thursday will be among the people most hurt by the policies they propose. That’s why policymakers should ignore their pleas for an increased minimum wage, no matter how effective the strike is at tugging on heartstrings.