If minimum wage soared, consumers would feel it

The push by some big-city workers to get $15 an hour has caused a debate about economics and the cost of living.

CHICAGO TRIBUNEAugust 4, 2013 

  • MINIMUM WAGE DEBATE

    The minimum wage, a policy designed by the New Deal administration in the 1930s, peaked in the late 1960s at $9.22, when adjusted for inflation to today’s dollars, said John Hinshaw, a professor of labor history at Lebanon Valley College in Pennsylvania.

    Conventional wisdom in economic circles has been that raising the minimum wage costs jobs. That’s because when you raise the price of something, generally demand decreases. For example, pricey labor might accelerate employers’ search for alternatives, such as adding more machinery to replace people or outsourcing jobs to foreign countries.

    But some recent academic research seems to suggest that raising the minimum wage might not be the killer of jobs it’s made out to be.

    In real-world analysis, a rise in the minimum wage seems to have no negative effect on low-wage employment. One study even found that higher wages reduced employee turnover, which saves businesses money.

    Other academic research has found that minimum-wage hikes increase consumer spending. A study by economists at the Federal Reserve Bank of Chicago reported that immediately after a wage increase, incomes in households with minimum-wage earners rose on average by about $1,000 a year, but spending rose by roughly $2,800 a year.

    Illinois Gov. Pat Quinn and President Barack Obama have called for an increase in the minimum wage. Many Republican leaders and business groups have lined up against it, calling it an anti-jobs idea.

    Gregory Karp

A national movement to raise employee wages at restaurants, supermarkets and elsewhere has pit labor organizers against business owners.

Not directly included in the discussion is an important constituency: the customers.

If they support the idea of increased pay, do they also support higher prices for hamburgers, clothes and other goods?

Economists who study consumer behavior say that shoppers might react sympathetically to the call for an increased minimum wage, but in the end they will take care of their own needs.

“I would pay a couple of dollars more for products, but the question then is, do I get a raise, too? If my salary goes up, I will be willing to pay even more for my products,” R.B. Barrett, 45, said outside a Whole Foods store in Chicago where about 100 people chanted and passed out fliers Wednesday outlining their demands: $15 per hour and better working conditions.

Business groups say significant wage increases would require many of their members to lay off workers and pass on costs to consumers. Some argue that more than doubling pay — the federal minimum wage is $7.25 an hour — would combine with the increased employer costs of the national Affordable Care Act to put their members out of business.

“You can’t isolate just the cost of a sandwich at a restaurant,” said Scott DeFife, executive vice president of policy and government affairs at the National Restaurant Association. “Lifting the minimum wage in that manner, to that degree, increases pressure on all of the other industries around it.”

On Wednesday and Thursday, demonstrations were held in Chicago, New York City, Detroit and Milwaukee as part of a nationwide movement of organized events.

In Chicago, many who protested earn an hourly wage around Illinois’ minimum of $8.25, which would translate into an annual salary of about $17,000. A raise to $15 per hour would mean a salary of $31,200.

BAD JOB MARKET

The workers’ push for higher wages comes as the nation is still trying to recover the jobs lost during the recession. There are nearly 12 million people unemployed, and economists say many thousands more have given up hope.

The high unemployment seen after the Great Recession is hurting wages across the board, said Heidi Shierholz, a labor economist with the Economic Policy Institute, a labor-oriented think tank based in Washington.

“There is a very tight link between high unemployment and low-wage growth. It’s just as simple as if your employer knows you don’t have any outside options. They don’t have to pay you wage increases to keep you,” Shierholz said.

In theory, wage growth is tied to productivity, but globalization, politics and economic policy broke that relationship in the 1970s, Shierholz said. If the trend had continued, she said, the federal minimum wage today would be close to $18.

While consumers say they empathize with the struggle, for the many whose wages have stagnated and don’t feel confident about the future, price trumps making a moral or ethical purchase.

“There is a big competition inside every consumer’s mind between really wanting to do something that would help other people and really wanting to save money,” said Kit Yarrow, a professor at Golden Gate University in San Francisco.

Yarrow said consumers would likely choose to support a noble cause once or twice, but ultimately personal financial security would win. That’s partly because no one feels great about the future of the U.S. economy.

“I think the wound was so deep and so great during the recession and so frightening that it made people kind of permanently a little bit more cautious about spending,” Yarrow said.

Ayelet Fishbach, a professor of behavioral science and marketing at the University of Chicago, said people don’t apply their values every time they make a decision.

“What you find most people would do is be willing to pay more, but under some situations,” Fishbach said, noting that people make a moral decision to pay more if that decision makes them feel good or makes them look good.

‘NOT WILLING TO PAY MORE’

Gina Evans, 46, said she would support the push for higher wages if companies would just absorb the new costs — which rarely happens.

“I fully support the fact that workers need a higher minimum wage, but I am not willing to pay more for this to happen since I am already overcharged by retailers as it is,” said Evans, an HIV training specialist who makes more than $75,000 a year.

Like Evans, many other consumers are not so sure companies would be willing to absorb costs, whether they sell $5 items or $250 products.

“Part of me thinks minimum wage should be higher, but part of me understands that it is so hard to pay people a higher amount when stores like Wal-Mart expect to sell their products so cheap,” said Lisa True, 36.

Despite some consumers’ seeming willingness to pay more for hamburgers and fries and chicken sandwiches if the workers making them were getting better wages, the idea runs counter to fast-food trends. Major chains such as McDonald’s, Burger King and Wendy’s are embroiled in a war over which can sell the most items for $1.

“You don’t have the choice if you don’t have the money,” said Diane Swonk, chief economist of Mesirow Financial. “We are still struggling as a nation, and we are not the only country struggling.”

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