James Sherk

A higher wage will force chains to replace humans with robots

Updated: 2013-09-19T21:40:36Z

By JAMES SHERK

The Heritage Foundation

— W Medieval doctors bled their patients with leeches. Far from improving their condition, it left them worse off. Raising the wages of fast-food workers to $15 an hour would produce similar results for those the proposal is intended to help.

In America, minimum-wage workers are better paid than the average worker in Mexico. Why? It’s not because U.S. employers are more generous than their Mexican counterparts. Nor do Americans somehow deserve better pay.

American minimum-wage earners make more because they produce more. Better education and greater capital investment make American workers more productive, raising their earnings.

Competition forces businesses to pay workers according to their productivity. If companies pay less, their employees will jump ship to competitors. And if they pay workers more than they produce, they go out of business.

For better or worse, fast-food jobs are relatively low-productivity positions, typically filled by inexperienced workers. Most fast-food customers want a quick, inexpensive meal. They will not regularly pay premium prices for a burger and fries.

Doubling McDonalds’ wages would raise their total costs by 25 percent — well above profit margins. But raising prices would drive customers away.

If Congress mandated fast-food restaurants to pay $15 an hour, they would have to change operations to deliver the kind of productivity to justify those higher costs. That would mean replacing current workers with machines and hiring fewer, more skilled workers to maintain them.

Restaurants could do this in a variety of ways, such as using iPad kiosks instead of cashiers to take orders, or installing the new robotic burger flipper that makes up to 400 hamburgers an hour.

At current wages these high-tech investments make sense for only a few restaurants; if wages doubled they would become widespread. The end result: far fewer jobs in the fast-food industry and higher pay for those who remain.

Those who consider such a trade-off worthwhile miss the economic role of minimum-wage jobs. For most workers, they are entry-level positions where they can gain experience that makes them more productive and helps them command higher pay in their next job.

Most Americans started out in a job paying within a dollar of the minimum wage. Few stay there long. The average fast-food employee stays at his or her restaurant for less than a year. These are simply gateway jobs, the first step on a career ladder. That is why the vast majority of fast-food workers are under the age of 25.

Most policymakers recognize this. Not even the most liberal state has a minimum wage anywhere near $15 an hour. But American Samoa offers a case study of what would happen if the “living wage” lobby prevailed.

The island territory used to have a separate minimum wage because of its lower incomes. However, in 2007, Congress applied the U.S. minimum wage to Samoa. For the tiny Pacific Ocean nation this was the economic equivalent of $20 an hour.

It did not boost purchasing power, stimulate demand or raise living standards. Instead unemployment septupled to more than 35 percent.

The Samoan economy collapsed. The islands’ governor begged Congress to suspend the wage hikes, pleading: “Our job market is being torched. Our businesses are being depressed. Our hope for growth has been driven away.… How much does our government expect us to suffer?”

Good intentions do not repeal the laws of economics. Requiring dramatically higher fast-food wages would eliminate hundreds of thousands of entry-level jobs. This would no more help fast food workers than bleeding them with leeches.

James Sherk is a senior policy analyst in labor economics at The Heritage Foundation.

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