Yves here. One of the oft-made assertions is that increasing wages in low-wage positions will lead to job losses. But in many industries, direct labor is a not all that large a proportion of total product cost. And with corporate profits at record highs, the immediate impact would normally be to trim profit levels, which have risen to be such a high proportion of GDP as to be deemed by Warren Buffet as well higher than sustainable levels.
Moreover, as this Real News Network segment points out, businesses that pay only minimum wage or barely above it have lots of turnover. That is costly in terms of managerial time. Having a minimum wage that was more like a living wage would reduce employee churn, offsetting some of the cost of the pay increase. Costco has demonstrated that this approach works. It pays more than other discount retailers, and not only does it have less turnover, but it enjoys another gain: less inventory shrinkage, which is often due to theft by employees.
JESSICA DESVARIEUX, TRNN PRODUCER: Welcome to The Real News Network. I’m Jessica Desvarieux in Baltimore.
The fast food workers movement has taken storm across the United States and across the globe. Workers are demanding a $15 minimum wage. But employers have often cited that if they increase their pay, they’ll have to cut jobs. But now a new report is challenging that narrative and saying that it’s possible for companies to raise their wages, keep jobs, and still be profitable.
Joining us from UMass Amherst is one of the authors. Jeannette Wicks-Lim is an associate professor at the Political Economy Research Institute in Amherst, Massachusetts.
Thank you so much for joining us, Jeannette.
JEANNETTE WICKS-LIM, ASSOC. PROF., PERI: Hi. Thanks for having me.
DESVARIEUX: So, Jeanette, let’s look closely at your paper and specifically talk about the numbers. You propose two scenarios. One is if the current $7.25 minimum wage was increased to $10.50, which is close to what some Democrats in Congress are really advocating for. And the other model looked at what would happen if the minimum wage was raised to $15 an hour.
First let’s start and talk about $10.50. What kind of effect would that have on workers and the industry?
WICKS-LIM: Right. Well, the overall goal of the paper was to really think carefully about what a $15 minimum wage would look like for the fast food industry. And we tried to think about the research that’s already been done, about how businesses adjust to that kind of–or to minimum wages in general, and then think about the costs that would be associated with, first, a $10.50 minimum wage, and then a $15 minimum wage.
And the reason why we look at these two different levels is that when we look at how businesses typically adjust minimum wage increases and what we knew about the way the economy’s growing and how prices might adjust to the different cost increases, we thought about, well, what would be a reasonable policy that would get us to $15? And what we saw, looking at, again, how the economy’s growing and how much prices could adjust to cover some of the cost increases, we figured that a initial step to $10.50 for workers in one year would do a substantial amount to get workers up to a higher wage.
But then, over the next three years, we have let the economy grow, the revenues of the industry grow, and then that could accommodate a further increase up to $15, so that by the end of four years, a four-year adjustment period, we would get to $15 minimum wage, as you mentioned before, without shedding jobs, and without cutting into the profits of the industry.
DESVARIEUX: What about the effects, though? Food prices, for example–would we have to see higher food prices?
WICKS-LIM: Yeah. And one of the common ways that businesses to adjust to any minimum wage hike, not just this one, is to slightly adjust their prices. And so, part of the exercise of what we did was we took a snapshot of the fast food industry today, looking at how many workers there are, how many hours they’re working, what their wages are, and then really just did math exercise and say, well, how much would it cost for these businesses to raise the wages, and what does that cost increase look like relative to the revenue of this industry? So once you do that, you can get a good idea of what kind of price increases these businesses would need to implement in order to cover the costs of minimum wage at, say, $10.50 or $15.
But when you look at those cost increases, what we’ve found is that over a four-your time period–again, going first [incompr.] $10.50 and then to $15 an hour for the minimum wage amongst fast food businesses–we found that a 3 percent annual price increase over the four-year period–you know, ’cause each year, a 3 percent price increase–would be enough to cover a lot of the costs of this minimum wage.
And there are other adjustments that these businesses can make to cover the remainder of the costs. So one of them, one of the adjustment mechanisms is a price increase of about 3 percent per year. So if you want to think about something really basic, if you think about a $4.50 Big Mac–I think that’s roughly the average price for a Big Mac–a 3 percent increase represents about a $0.15 increase in price. So you’d go from about $4.50 to $4.65 in a year. And then, over the four years, you’ll get to Big Macs being a little bit over $5. So that’s the range of the price increases that we’re talking about.
DESVARIEUX: Alright. Not a really major increase, in my opinion.
What about retaining people? I think your study pointed that retaining people can actually save employers money down the road. If they’re paying people higher wages, people are going to want to stay at those jobs. Can you speak to that?
WICKS-LIM: Yeah. I mean, one of the common findings in the research is that–especially look at the service industry, is that there’s a high turnover rate amongst these businesses. And if you raise wages, that has a meaningful impact on reducing the turnover rates, and that does save employers money. It reduces their costs in terms of recruiting, hiring, and training workers, losing productivity when you have less experienced workers working with more experienced workers. So all those things help these businesses cover some of the cost increase from the minimum wage. And if you’re looking at the fast food industry, what we were able to gather from the research is that about 20 percent of the cost increase that these employers would experience from a minimum wage hike would be covered by the cost savings that they would experience because they have lower turnover amongst their workforce.
DESVARIEUX: So what does turnover actually do? Why is it more expensive to get new employees? Just explain that for us.
WICKS-LIM: Well, if you just think about it in just a common sense way, if you’re an employer and you’ve got a set of workers and all of a sudden you’ve lost that whole set of workers over the year and you’re finding yourself needing to hire new workers, you have to of course first spend money on ads. You have to spend money on screening those workers to see which workers you would like to hire. You would have to spend money on training those workers so that they have the skills that they need to do their job well. And not only that is when they’re on the job, when they’re still learning their skills, they’re going to impact the other workers on your workforce. So even the more experienced workers working with less experienced workers cannot be–they can’t be as productive if they had an entire workforce that was all very well experienced workers.
I think most people in their jobs [incompr.] day-to-day experience. Things change when you have new workers come on staff. You do what you can to help the new worker learn the ropes. But that takes time and energy from each worker who’s doing that. And you also know if you’ve been involved in any of the hiring exercises that it takes time and energy and it takes money to put in the ads, recruit workers, train them, and so on.
DESVARIEUX: So, Jeanette, your paper also points to the fact that there will be sort of higher economic growth. How are you ensuring greater economic growth, by raising prices, for example? Some would say higher prices would be a surefire way not to promote growth, because you’re not as competitive. What’s your response to that?
WICKS-LIM: Well, we actually don’t assume higher economic growth. What we try to do is make very reasonable assumptions about what we know about how the economy’s operating today and what we know about how businesses have adjusted minimum wages in the past. So in the exercise we do in this paper, we actually assume that the industry will grow at a pace of about 2.5 percent, which is about what we expect the economy to grow over time. That’s a reasonable assumption. I think that the estimates for how the economy is going to grow range actually higher than 2.5 percent. But we assume that industry sales grow at pace with the economy. That’s what we’ve seen over the last about–since 1997, that the industry has grown at that pace.
So we don’t make any projections about extra economic growth. We’re simply saying that given what we know about how the economy is growing today, how do we expect sales to grow in this industry, and given that, what does that say about the revenue that they’ll have available to them to cover the cost increases associated with a minimum wage that would take us up to $15 an hour.
DESVARIEUX: But what about those higher prices. Let’s say it’s not necessarily higher growth, but let’s say they sustain that growth. What about the higher prices? Would that affect their growth in any way?
WICKS-LIM: Yeah. I mean, the higher prices would likely affect consumer demand. To be honest, the research on how prices affect consumers in this industry has produced very varied estimates on what the actual response would be. But we looked over the literature, and we tried to again make reasonable assumptions about what would happen, and we assume that when prices go up, that consumer demand for these products in the fast food industry actually decrease slightly. But what we find is that based on the evidence that fast food restaurants do respond [incompr.] just by increasing their prices, that is, they try to raise more revenue by increasing their prices, and that we find that consumers, is one of the things that they value most about fast food, aside from prices–that’s important, but the convenience of those meals is an important factor.
The consumers, when prices go up, they don’t respond with a very strong response and reduce the consumption of fast food meals. They might reduce it somewhat. So we do assume in our exercise that with a 3 percent annual increase in prices, that consumers will reduce their demand slightly, but they won’t reduce it so much that the revenue that–they won’t reduce it so much that these fast food restaurants could still be gaining in their revenue by raising their prices. So we do assume that there’ll be a slightly slower rate of growth in the industry in terms of how much demand there will be for their product. That’s only over the four-year adjustment period. And once that adjustment period ends, then we expect the industry to go back to growing at the same pace, relatively at the same pace as the economy in general.
DESVARIEUX: Alright. Jeannette Wicks-Lim, joining us from Amherst, Massachusetts, thank you so much for being with us.
WICKS-LIM: Thanks a lot for having me.
DESVARIEUX: And thank you for joining us on The Real News Network.