(Brad Polumbo, Foundation for Economic Education) The push for a $15 federal minimum wage continues across the country. But new research shows that if the “Fight for $15” wins, the biggest loser may just be your wallet next time you want to chow down on a Big Mac or Egg McMuffin.
A recently-released study reveals that past minimum wage hikes resulted in much higher menu prices for consumers.
Princeton economist Orley C. Ashenfelter and Czech economist Štěpán Jurajda studied price and wage data from almost every McDonald’s restaurant in the US. They found a “full or near-full price pass-through of minimum-wage-induced higher costs of labor.” In English, this means that by vastly increasing production costs, minimum wage hikes resulted in an equivalent increase in menu prices.
A Nominal Minimum Wage Increase Doesn’t Actually Mean Workers Are Better Off
What does this mean?
Well, minimum wage hikes are intended to help workers. Proponents say that everyone deserves a “living wage” and argue that a government-mandated wage increase will mean higher wages for workers.
In contrast, the most common counterpoint against minimum wage increases is that they lead to unemployment. This is indeed true, and the nonpartisan Congressional Budget Office estimates that a $15 federal minimum wage would eliminate at least 1.4 million jobs.
However, the McDonald’s example reminds us that there’s another angle to this debate as well. Even if minimum wage hikes didn’t shed jobs, they would still cause harm in other ways.
Supporters of hiking the minimum wage point to workers’ nominal wages and argue, correctly, that some workers would see higher numbers on their checks every week. However, nominal figures aren’t actually what matter. A worker’s real income and standard of living is best measured by the purchasing power of their wages.
If a McDonald’s cashier’s take-home pay increases 20% after a minimum wage hike, but the prices for the food and other things they spend their wages on increase by a similar amount, they aren’t actually any better off.
This would happen throughout the economy, not just in fast food.
One poignant example comes courtesy of the Heritage Foundation’s Rachel Grezler, who studied how minimum wage hikes would impact the cost of childcare; an enormous expense for many working-class families.
“Childcare costs would increase by an average of 21 percent—an extra $3,728 per year for two children—and up to 43 percent, or more than $6,000, in some states,” Heritage reports. “The impacts would be greatest in lower-cost areas; in Louisiana, Oklahoma, and Mississippi, costs would surge between 37 percent and 43 percent.”
So, much to the chagrin of progressive legislators hawking minimum wage hikes, working parents wouldn’t actually be helped by a nominal rise in their weekly paycheck, because it would simply lead to higher prices for the goods and services they rely on.
Minimum Wage Advocates Obsess on the Seen and Ignore the Unseen
So why do proponents of minimum wage hikes continue to push the policy despite these realities? It’s simple: They fall victim to the tragically widespread fallacy, first identified by economist Frederic Bastiat, of focusing on the seen and ignoring the unseen.
In explaining Bastiat’s theory, economist Henry Hazlitt decried the “persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups.”
Hazlitt called this “the fallacy of overlooking secondary consequences.”
This is exactly the mistake made by minimum wage advocates. They see only the nominal rise in workers’ weekly paychecks that a government mandated wage increase can bring. Yet they fail to see beyond that. They fail to consider the future workers who will not be hired at all and the millions of minute price increases that would largely erase nominal wage gains regardless.
As McDonald’s response to minimum wage hikes clearly shows, there’s no such thing as a free lunch. That’s why the “Fight for $15” would hurt most the very same working Americans it’s meant to help—who’d be stuck paying more for their next Big Mac, McFlurry, or (overrated) McDonald’s french fries.