Good intentions cannot overcome the laws of economics

Nov 9, 2017

Proving good intentions can’t overcome the basic laws of economics, a pizza shop in Boston dedicated to paying “fair wages” is closing after just two years in business.

Billed as “pizza with purpose,” the non-profit behind the Dudley Dough pizza shop said it “attempted to put social enterprise model into action.”  The problem is that social enterprise model wasn’t turning a profit and the non-profit could not continue to subsidize the project.

Meanwhile, three restaurants that opened the same year as the pizza shop are still open.

It turns out paying workers an unreasonably high wage for making pizza doesn’t pencil out.  And simply hiking prices doesn’t work; there is a limit as to how much consumers will pay for a slice of pie, even if that slice is supporting the so-called “fair wages” of the workers who make it.

This is a lesson in basic economic principles many policy makers seem to have missed during Econ 101.

When the owner of a cupcake bakery in Seattle explained the impacts of paying her workers a $15 minimum wage, noting it would increase her annual business costs by $1 million, Seattle City Council member Kshama Sawant told her to “just raise the price of your cupcakes.”  As the owner notes, this overly simplistic view “reveals a basic lack of business knowledge.” As she correctly notes, she can’t just raise prices, cupcakes aren’t a necessity, and people will buy cupcakes elsewhere or simply go without if prices rise too much.  Her profit margin is what will ultimately bear the brunt of the higher costs.

Dudley Dough learned this lesson the hard way.

Minimum wage advocates continue to claim increasing the minimum wage is a “win-win-win” for employers, workers, and the economy, but the reality is much different.  A “living” wage for the employees of Dudley Dough is now a ZERO wage.  That doesn’t sound like much of win for them.

A high minimum wage hasn’t been a win for fast-food workers in New York City either.  After that city passed a $15 minimum wage law for the fast-food industry, employment growth at fast-food establishments has been cut in half over the past year, despite the fact the number of fast-food restaurants in the city is rapidly increasing.  Employers are simply replacing jobs with automation to save on labor costs.  Job hunters with little or no skills or work experience now have significantly fewer employment opportunities in New York City.  Ironically, the skills and experience they gain in what used to be low-wage, entry-level jobs are what enable them to command higher wages in the future.

Nor has a $15 minimum wage been a win for workers in Seattle.  According to a study by the University of Washington (UW) earlier this year, Seattle’s lowest-wage workers are certainly making more per hour, but they are actually taking home less pay as the result of reduced hours.  The UW study reveals the wages of Seattle’s working poor increased by 3% but they worked 9% fewer hours, which amounted to a nearly 7% cut in their monthly earnings.  That pencils out to nearly $125 less each month. The UW study also found the higher wage cost Seattle 5,000 jobs.

Unfortunately, many policy makers continue to buy into the “win-win-win” theory—the Montgomery County Council in Maryland just unanimously passed a $15 minimum wage law.  

As evidence continues to pour in demonstrating the real world impacts of a too-high minimum wage, let's hope other cities and counties heed the hard learned lessons of Dudley Dough, Seattle, and New York, and abandon the minimum wage madness.