The CEO of CKE Restaurants, which runs 2,000 restaurants nationwide, published an outstanding editorial in the Wall Street Journal last weekend that explains why a government mandate increasing the minimum wage is bad for employers and workers.
In his editorial, Andy Puzder uses a real world scenario to illustrate the unintended consequences of forcing small employers to pay workers arbitrarily-set higher wages. Puzder breaks down one of CKE’s typical franchise restaurants to paint the picture of how increasing the federal minimum wage by 40% (from the current $7.25 to $10.10) would negatively impact employers and workers:
Our typical franchised restaurant employs 25 people and earns about $100,000 a year in pretax profit—about 8% of the restaurant’s $1.2 million annual sales. Our general managers, often also the store owners, are responsible for the success or failure of the business. They manage the employees and are in charge of a million-dollar facility. General managers are responsible for at least 25% of store profits. The other 24 employees are responsible for the remaining 75%, which comes to about $3,125 an employee. That is a generous estimate, as entry-level employees likely contribute less than their more experienced colleagues.
If minimum-wage crew members working 25 hours a week received a 40% raise, they would earn an additional $3,705 a year. That is $580 more than what the employee contributes to the restaurant’s profits.
The point is simple: The feds can mandate a higher wage, but some jobs don’t produce enough economic value to bear the increase. If government could transform unskilled entry-level positions into middle-income jobs, the Soviet Union would be today’s dominant world economy. Spain and Greece would be thriving.
But here’s what middle-class business owners, who live in the real world, will do when faced with a 40% increase in labor costs. They will cut jobs and rely more on technology. Such changes are already happening in banks, gas stations, grocery stores, airports and, more recently, restaurants. Almost every restaurant chain in the country from Applebee’s to McDonald’s is testing or already implementing automated ordering with tablets or kiosks.
The only other option is to raise prices. Yet it would be near-impossible to increase prices enough to offset the wage hike, particularly given today’s economic conditions. More important, price increases burden consumers, particularly those with low incomes who are supposed to be helped by a minimum-wage increase.
The better policy would be to encourage the private sector to create more middle-income jobs. North Dakota enjoys the lowest unemployment rate in the country, at 2.8%, thanks to the state’s energy boom. The state minimum wage is $7.25, but entry-level employees typically make $12 to $15 an hour. This happened because the state’s dynamic economy created a demand for labor and supports increased pricing to offset increased wages."
In his editorial Puzder cites research published by the Washington Policy Center when making the point that only a tiny fraction of minimum wage earners are breadwinners trying to support a family. Puzder correctly notes that the vast majority of workers earning the minimum wage are young people in entry-level jobs. Those jobs are the first rung on what Puzder calls the “ladder of opportunity.”
While expressing his opinion that increasing the minimum wage would have harmful economic consequences, Puzder suggests the common sense policy of at least exempting young workers from an increase in order to mitigate the impact on their employment opportunities. Puzder makes a compelling point. Washington State has the highest minimum wage of any state, and also has one of the nation's consistently highest teen unemployment rates.
