Economists generally teach our students that if the minimum wage is increased by law, the effect will be that firms will have an incentive to use more capital and less labour. A colleague in the socionomology department once countered, "How do you use more capital goods and fewer burger flippers?" presumably referring to his own department's graduates.
He made the mistakes of assuming:
- there is no substitution possible in the use of capital for labour in burger flipping. (i.e., in economics jargon, he assumed that the burger production function has fixed co-efficients)
- there is no substitution possible elsewhere in fast-food burger establishments.
- that if the price of burgers went up, people would not substitute away from burgers.
Capital-Labour Substitution in Burger Production.
Consider what fast-food burger production looked like back in the 1960s vs what it looks like now. We had no microwaves when I worked at one then; rather, burgers were produced on grills and kept warm in bins. We fried burgers in batches of 9, and depending on the expected demand and time of day we would do as many as 54 at a time. Nowadays, burgers are prepared to order with computerized ordering and microwaves to finish them.
Capital-Labour Substitution Elsewhere in Fast-Food Establishments
This item is what prompted me to write this post [h/t many people on FB, including Kip Esquire].
McDonalds recently went on a hiring binge in the U.S., adding 62,000 employees to its roster. The hiring picture doesn't look quite so rosy for Europe, where the fast food chain is drafting 7,000 touch-screen kiosks to handle cashiering duties.
The article also points out that computerized order allows McDonalds to track the orders and collect a lot more data, which they also expect will be valuable. But the point is that this is capital substituting for labour in ways we didn't imagine 20 or 30 years ago.
Demand Curves for Burgers Are NOT vertical
The implicit assumption behind many incorrect arguments is that when the prices of burgers increase, people will still buy just as many burgers. Not so.
As the price of burgers rises, some people, some of the time, will substitute away from burgers. The most likely substitutes for burgers are other fast foods, but if wage increases in the fast food industry are generally imposed, then people will substitute away from fast food restaurants to other types of fast food that can be mass-produced with even more capital-labour substitution, e.g. frozen foods from grocery stores: pizzas, pizza pockets, sliders, etc. -- things that can be microwaved quickly at home. The result will be a general substitution away from labour and toward capital in the economy.
Fortunately, in many North American markets, the legislated minimum wage is near or even below the equilibrium wage rate for York University socionomology graduates unskilled workers, and so these effects are minimal at best. But in other markets the effects are being felt. And in those markets, raising the minimum wage would only make a bad situation worse.