New Jersey Gov.-elect Phil Murphy has suggested that the minimum wage in New Jersey be raised to $15 per hour. The current minimum wage is $8.44. Is this a good idea?
Murphy has good intentions. He believes that anyone working a full-time job should earn a livable wage, regardless of the value that the worker provides to the employer. How has this worked in other states?
In San Francisco, the local minimum wage is currently $13 per hour. It will gradually rise to $15 in six years. Because of high labor costs, companies like Café X are already starting to replace their unskilled labor with technological alternatives.
To purchase coffee from Café X, customers place their orders using a Café X mobile app. When the customer arrives at the store, a white robotic arm, like those used in car manufacturing facilities, moves a paper cup, adds appropriate syrup levels and then brews the hot cup of coffee. The robotic arm then hands the coffee to the customer.
A cup of coffee costs $2.95 at Café X. A similar cup of coffee is $3.75 at the labor-intensive Starbucks.
Wendy’s, a fast-food restaurant chain that employs many unskilled, minimum wage workers, has decided to drive down rising labor costs by replacing some of its order takers with machines. Following the example of many convenience stores, like Wawa, Wendy’s plans to install self-ordering kiosks at about 1,000 of its locations by the end of 2017.
With an expected cost of $15,000 for three units per store, the kiosks are expected to pay for themselves in two years. They will eliminate up to 5,000 minimum wage jobs.
Wendy’s chief information officer, David Trimm, said that the kiosks are intended to appeal to younger customers and to reduce labor costs. They will allow Wendy’s customers to order with shorter lines during peak periods while “increasing kitchen production.”
Raising the minimum wage is supposed to help unskilled workers, according to those who routinely support the wage increase. But the reality is that increases in the minimum wage hurt the people they are supposed to help.
The reason is simple: An ever-higher government-required minimum wage makes unskilled workers unemployable.
For many unskilled jobs, business owners are now able to choose between labor or buying a machine to do the work at a lower fixed cost and without benefits. The average businessperson won’t stay in business without keeping costs down. American non-financial industries have average net profit margin of about 5 percent and are sensitive to wage scales. They can’t afford to ignore the effect of mandated wage hikes vs. profitability in their attempts to keep costs down.
In weighing the advantages and disadvantages of hiring unskilled workers or machines to get the work done, the rational businessperson asks, “What will be my average annual costs for hiring and retaining workers over the expected lifetime costs of the machine?” The numbers ultimately make the decision: Hire unskilled workers, or buy the machine.
A full-time worker paid the minimum wage of $8.44 per hour will cost about $17,500 per year in wages. Health insurance, payroll taxes, regulatory costs (e.g., OSHA), workers comp and other labor-related costs will drive up that cost considerably. But if hiring workers at that wage will get the job done for less outlay than a robot, computers or other equipment, those workers will be hired.
Raise the minimum wage to $15, and a few people — the most skilled and reliable — will see their wage rise to $15. The rest will lose their jobs. In addition, the machines that replace them will never be rude to customers, call in sick, sexually harass another employee or threaten to sue the business.
A $15 per hour wage costs the business more than $31,000 per year. Add the 6.2 percent that the employer must pay for Social Security tax and the employer mandate for health care (if applicable) and the cost soars to more than $36,000 per year.
There will not be many jobs for unskilled workers who cost the firm that much.
Those pushing for the higher minimum wage argue from emotion in an appeal to compassion. But policy that springs from emotion rather than dispassionate analysis will fail to deliver the results compassion hopes for.
A $15 minimum wage would be disastrous for unskilled workers and would clobber seasonal businesses, particularly those at the Jersey shore.
Michael Busler, of Ventnor, is a professor of finance at Stockton University.