Wage Hikes & Labor Strikes: A Winning Macroeconomic Scenario?

While checking the daily news late last week, the first thing to catch my eye was a CNNMoney article reporting that fast-food workers were again striking across the United States for a $15-an-hour minimum wage.  It appears that, while waiting for any forthcoming legislative changes that might never materialize (and probably won’t at the federal level, at least not soon), workers are choosing to walk off their jobs in order to pressure their employers to give them a higher wage. Currently, the Federal Minimum Wage is $7.25 an hour, where it as been for since July 24th, 2009 (although states and localities also set their own minimum wages, so the actual minimum in a given location may vary).  Workers argue that it is a matter of workers’ rights to a “decent” wage, to help them care for their families, etc.  Although I honestly do sympathize with the difficulties many lower-income people in this country face, I am not so sure that attempting to force their employers to raise the rates will ultimately benefit them and the country as a whole (although bargaining is certainly more preferable than one-size-fits all legislative mandates and price floors).

First, the usual classical liberal argument: forcing employers to raise wages could deter them from further hiring (even if worker productivity is sufficient for employers to absorb higher rates with little impact).  Even if fast food chains can technically “afford” to pay current workers more without firing anybody, the added cost of hiring could disincentivize them from doing so (or could even incentivize layoffs).  The workers that remain might benefit, but at the expense of others who are “shut out” (e.g. unemployed).  Macroeconomically, too, the costs could largely cancel out the benefits: any extra consumer demand resulting from workers receiving a higher wage would be offset by less demand from newly unemployed people (or people who otherwise would have found a job).  The effect could  be similar to the theorized outcome of above-equilibrium minimum wage hikes: higher unemployment, slower hiring, and a less flexible labor force (see first chart below).



Second, if wages are bargained “too high”, this could create a dependency scenario where people continue to work in the fast food industry without any incentive to pursue higher value-added careers that require more complex skills, depriving the economy of skilled workers and limiting future potential output.  For living standards to continue rising in the long run, workers must be able to specialize in new and innovative industries, many of which never existed before.  Low wage jobs exist (or, in my opinion, should exist) merely as a stepping stone up the economic ladder; indeed, I think the low wages themselves act as a necessary disincentive from people becoming dependent upon them.

Lastly, as harsh as it sounds (and as The Economist has previously pointed out), many of the low-skilled jobs being performed by fast food workers are probably replaceable via automation and new technology.  I believe the only things holding back big fast food chains from replacing their workers with automation are:

1) a recognition of consumers’ desire for human interaction for a quality fast-food experience

2) a desire to avoid being cast as unsympathetic to the plight of fast food workers, which could hurt the corporate image if mass layoffs are announced

3) the use of some workers as an established way of doing business

What’s a policymaker to do, then?  If we really want to help workers, I think we should be aggressively training them to perform emerging higher value-added jobs (computer engineering, programming, supply-chain management, etc).  The problem is, student loans provided by the private sector are often too costly/unobtainable for low-skilled workers (as there is much more risk involved).  At the same time, having the government (or state governments) further subsidize student loans for post-secondary education might further inflate college tuition unless new measures are enacted to ensure college competitiveness to hold costs down.  The government could fund alternative forms of education (job training like apprenticeships), which are unfortunately still quite scarce in the United States.  However, as the financial crisis and countless other crises have demonstrated,  it must be ensured that beneficiaries have some skin in the game for the programs to succeed.  It must also be recognized that even with such programs, not everyone can become a high-skilled worker.  Does this mean we will have a permanent class of unemployed or underemployed people?  Maybe, though I tend to be rather optimistic: historically, the economy has tended to create unforeseen opportunities for everyone, though the transitions are often rough.

Whatever the many governments within the United States decide to do policy-wise, the question of what corporations should do in the face of striking workers and demands for wage increases must be addressed soon.  Already, several McDonalds workers have been arrested this week after protesting for a $15-an-hour wage.  Further strikes and arrests could be economically disruptive at a time of historically weak economic growth.  The question is, will companies cave in to worker demands, or continue to hold their own?  The answer could end up reshaping the norms and trends of American wages for years to come.




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