Some years ago a student told me about a Socionomology prof who opined that raising the minimum wage wouldn't cut employment. "How many burger-flippers can you lay off?" he asked.
My response to the student was along the lines presented here.
When the minimum wage is raised above the equilibrium wage rate, employers look for ways to substitute capital for labour. In the fast-food industry, there have been loads of substitutions over the past 50+ years that I'm aware of since I worked at a McDonalds.
The fries are prepared offsite now, the cheese is sliced offsite, the burgers are pre-formed offsite, the milkshakes are made differently, computers are used to record the orders and calculate the amount due, etc.
In general there are two forms of substitution that take place:
- More capital and less labour are used on site.
- More inputs are produced offsite using more capital-intensive methods of production. Another prime example comes from Tim Hortons donuts. They used to be mixed and formed on site. But over a decade ago, Tim Hortons made the decision to make their donuts in factories at central locations and to ship them to the local outlets. More capital, less labour per donut.
But here is another type of substitution:
As the wages for unskilled and semi-skilled labour go up and the costs of production go up, the prices of food at fast-food restaurants goes up. Consequently, over time, people begin to buy less fast food than they otherwise would from fast-food outlets and more from the freezer sections of their supermarkets.
The capital-labour substitution that takes place doesn't occur just at the fast-food outlets. It occurs in people's homes as they acquire bigger freezers and more microwave ovens to quickly prepare frozen dinners and snacks. And it occurs in food-preparation factories where zillions of dollars worth of capital are used with very little labour to prepare all the frozen dinners, frozen snacks, etc. that are now available.
This point is in addition to the one made recently by Tim Worstall, in this column,
The basic point being that Card and Krueger studied the capital intensive part of the food industry, not the industry as a whole. ...
... [T]hey are very specifically recording the reaction of chain restaurants to the change in the minimum wage. They have no data, nothing, from the Mom and Pop stores that make up the subs, meatballs and deli sector. And I think we’ll all agree that the two are very close substitutes for each other in terms of consumer demand. However, they’re also quite different in terms of the labour and or capital that they use as inputs. The chain restaurants are hugely more mechanised: the Mom and Pops rely a great deal less on capital and a great deal more on labour. So, we would expect a change in the relative prices of labour and capital (which is of course what a rise in the minimum wage is) to have different effects on the two sectors. That change in relative prices means that we would expect to see a decline in the size of the labour intensive sector and an increase in the size of the capital intensive one.