Fast-food workers across the nation are striking for higher pay, aiming to get the federal minimum wage raised to $15 per hour. While a larger paycheck may sound nice in theory, a smaller paycheck is better than none whatsoever -- what will happen to many if the minimum wage were to be increased. Raising the federal minimum wage would certainly lead to fewer jobs -- companies like McDonald's (NYSE:MCD) and Domino's Pizza (NYSE:DPS) are already turning to automation; that trend will only accelerate if the minimum wage is raised.
Why a higher minimum wage is a terrible idea
I understand all the arguments for raising the minimum wage -- getting by on an annual salary of $15,000 is nearly impossible for one person, let alone a family, and contrary to popular belief, most fast-food employees aren't teenagers working for gas money; the average fast-food worker is 29-years old. Overall, fast-food employees are some of the most disadvantaged members of American society -- what's wrong with giving them a few extra dollars? The feel-good notion of putting more money in the pockets of the lowest-paid workers is overwhelming; unfortunately, it completely ignores reality.
Raising the minimum wage inevitably leads to higher unemployment, though this is often hard to see, as increases in the minimum wage are generally small, and are rolled out gradually over time. But the negative effects of the minimum wage are easily illustrated with a simple thought experiment:
Suppose that the minimum wage was instantly increased to $100 per hour (an hourly rate several times greater than what the typical employee makes). What would happen? Some employees would be worth keeping; those whose salary already exceeded that threshold would stay on. But most workers would find themselves out of a job -- businesses wouldn't earn enough to offset their labor costs.
Obviously, that's an extreme example, and one that would likely never take place. But simply by projecting that intuitive logic out, one can see that even small increases in the minimum wage can have a negative effect.
Defending a bad law with a flawed study
Unfortunately, some economists don't want to acknowledge reality, instead letting emotion cloud their judgment. In an effort to defend the minimum wage, a few studies have been concocted that purport to show that raising the minimum wage has no (or virtually no) effect on employment levels.
But most of these studies are so absurdly flawed that it's difficult to see how anyone could take them seriously. Perhaps the most famous was conduced by economists David Card and Alan Krueger, who looked at employment trends after a minimum wage hike.
In 1992, New Jersey raised its minimum wage from $4.25 to $5.05, while the neighboring state of Pennsylvania did not. Prior to the hike, and then after, Card and Krueger surveyed several hundred fast-food restaurants in both states, looking to detect a pattern. If a higher minimum wage led to increased unemployment, they reasoned, then employment among fast-food workers in New Jersey should be down relative to Pennsylvania. However, that was not the case -- to the contrary, after the increase in the minimum wage, fast-food employment in New Jersey actually increased.
Card and Krueger published a book, Myth and Measurement, and their findings have been used to support raising the minimum wage ever since. Yet, there are many problems with their study.
For starters, the economies of Pennsylvania and New Jersey are infinitely complex, and trying to isolate one single factor is impossible. The two states may be more similar than say, Connecticut and Georgia, but they are certainly not the same. Regional differences in fast-food demand, employment trends, and other state-specific laws regarding the fast-food industry and business in general could have had a major effect.
There's also a question of measurement -- the impending minimum wage hike was put into law years before it took effect -- the corporate fast-food restaurants Card and Krueger surveyed, like McDonald's, were well aware of the coming wage hike, and had likely positioned themselves far in advance.
And while fast-food workers are the stereotypical minimum wage employee (and indeed, are the ones striking), an increase in the minimum wage affects more than just fast-food. Many industries, notably retail, and lots of small businesses, also employ tons of minimum wage workers. Card and Krueger ignored all other industries.
The robot employment act
The creeping effects of the minimum wage can be seen in the way that companies are already working to limit their employment costs. Domino's Pizza, one of the largest employers of minimum wage workers, has been aggressively promoting online ordering in its advertising. The more customers order with an app, the fewer workers are needed to man the phones.
Years ago, workers on McDonald's drive-through once had to pour each soda for every order -- but not anymore. Now a machine does it -- workers only need to put on a lid and hand it to the customer. As labor costs tick up, it's likely that even more machines will be employed -- earlier this year, robotics firm Momentum Machines unveiled a conveyor belt system that's capable of autonomously cooking 360 hamburgers per hour.
Beyond fast-food, other firms with minimum wage workers are turning to robots: sit-down restaurant chain Applebee's announced that it would put tablet terminals in thousands of its locations earlier this week. Customers will use the tablets to order drinks and pay for their meal -- waiters will still be needed, but with machines making their jobs much easier, individual restaurants should be able to get by with much smaller staff.
Making the cut
Those who are not productive enough to earn the minimum wage will simply be put out of a job, as firms slowly turn to robots in an effort to offset ever-increasing labor costs. Those workers that remain employed may be better off, but there will be fewer of them.
On its face, a higher minimum wage may seem to make the lives of the most disadvantaged Americans better, but it only does the opposite, making it even more difficult for them to get a job and earn a living.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.