A Living Wage; Who Pays?
By John D. Turner
27 Nov 2015

I hear a lot these days about raising the minimum wage to $15/hr. It has been done in some areas, such as Seattle, Washington, which raised its minimum wage throughout the city to $11/hrs this year, and is gradually increasing it until it reaches $15/hr on 1 Jan 2017. The announced purpose of this increase is to provide a “living wage” to the neediest and to lift them out of poverty. A noble desire to be sure. So what has been the actual effect of this effort so far?

The law took effect on 1 April this year (auspicious date, that), so it hasn’t been around long. Yet, some data has emerged. Good news! Overall job growth for the greater Seattle metropolitan area is higher than the national average – unless you are employed in a restaurant job. From January-September, the Seattle Metropolitan Statistical Area (MSA) gained almost 4,000 employees, but lost 700 restaurant jobs during the same period. That is compared to the entire state, which gained around 5,800 new restaurant jobs.

Restaurants are large repositories of minimum wage jobs.

It is easy, therefore, to blame the loss in restaurant jobs on the new law. However, it should be noted that the Seattle MSA includes not only the 600,000 people who actually live in Seattle, but also another 3 million who live in cities and suburbs nearby. The new minimum wage statute only applies to the 600,000 who live in the Seattle city limits. Maybe something else is happening in the suburbs that are causing restaurant jobs to plummet. The numbers are suggestive that something is happening. And the new minimum wage law would arguably have the biggest impact on the restaurant industry, which includes fast food restaurants.

There are other interesting effects as well. Money is a fungible asset, and people are people, with their own unique needs, wants, and circumstances. Many people, who work for minimum wage, or close to minimum wage, have adapted their lives to living at that level. They have done so by taking advantage of the myriad of government programs available to them for people living at “the poverty level.” This includes things such as food stamps, subsidized or free child care, and rent. Raising their pay, moving them out of the poverty level, threatens these other “revenue streams,” which dry up and go away when your income rises above a certain amount. The end result is that if you pay them more, some folks are willing to work less to protect those assets. In other words, by paying them more, you enable them to work less, rather than make more.

This effect is starting to show up in Seattle, where businesses report that some workers, after receiving the increase in pay, asked to work fewer hours in order to receive the same pay. So what should the business do? Tell the employee “too bad – these are your hours, take them or leave them?” And what if the employee quits? If they give the employee fewer hours as requested in order to keep them, do they now pay another employee overtime to pick up the slack, or do they try and hire another worker who also only wants to work part time? Or do they convert their entire workforce to part time, and also cut the cost of the benefits they pay? Is that fair to their other workers?

Then there is the cost to the business. If you raise the cost of employees, the money has to come from somewhere. Either you cut your profit margin (make less profit) or you increase the cost of your goods and/or services. Many restaurants operate on very thin profit margins as it is, so that may not be an option. Some restaurants in Seattle, instead of raising prices on the menu, have responded by simply tacking on a 15% surcharge to the total bill to cover the increased cost of wages. This has the advantage of keeping menu prices the same and highlighting that the additional cost of your meal is due entirely to the increase in minimum wage mandated by the city government.

This is sort of like what happened in the airline industry when fuel prices soared; ticket prices stayed the same or even declined some and the airlines made up the difference by charging you for luggage, meals, and anything under the sun they thought they could charge you for.

So, if the increase in food costs is mandated by the government, and applied to the bill as a surcharge, how does this differ, in effect, from a tax? Not a tax certainly that goes to the government, but one that transfers instead directly to the intended recipient without going through the government as a middleman? Is this not, in effect, a welfare payment to minimum wage employees?

Unfortunately, there are other ways a business can respond to increased cost other than by simply adding a surcharge to the bill. They can replace the employees instead.

Have you noticed that fast food restaurants in particular are very manpower intensive? They don’t have to be. A lot of those minimum wage jobs can be automated – and we live in an age of increasing automation.

One common thread in minimum wage jobs is that they are pretty much all unskilled labor; you can, with minimal time and effort, train just about anyone to do them. To be sure, some people are better at them than others – and those that the establishment wishes to retain are typically given small raises to keep them working. But all in all they are tasks that are not that difficult and readily lend themselves to automation.

For example, there is no reason why the voice that asks you for your order at the drive-thru has to be that of an employee in the building that you are visiting. He or she can be manning a kiosk at a call center. McDonalds has been doing this since at least 2006, as this article highlights. And the idea has not gone away, as this website for TeleRep indicates.

Technology marches on. In 2014, McDonalds announced plans to install self-ordering kiosks and mobile ordering at its restaurants. You may not have this at your local McDonalds yet, but it is coming. Other restaurants are following suit. Applebee’s, for example, has delivered tablets for taking orders to 1800 restaurants. This article points out that such automation would likely occur anyway, but that it comes at a time when pressure to raise minimum wages is growing.

But surely, everything can’t be automated. What about burger flipping itself? Surely you need a human at the handle for that task! Well, not really. Meet the Alpha by Momentum Machines. Alpha is a fully automated machine that can “cook, pack, and serve up to 360 perfect burgers per hour.” How about fries? Well, if you can make a vending machine that does fries, surely you can put an automated fry machine in a fast food restaurant. And here is one, made in China, which delivers you hot fries in 95 seconds. It even dispenses fry sauce.

How far can this go? Meet Eatsa, which opened on 31 August 2015 in San Francisco. Eatsa (video) is a completely automated high-tech restaurant – at least, the public-facing side of the establishment is automated. In actuality, there are still a few kitchen staffers behind the scenes who prepare the food. And one guy out front to help out the technically-challenged (though this job is probably endangered; as people get used to the format, the need for a physical human to do this will likely go away). Eatsa only accepts credit cards – no cash, doing away with even the need for a checkout person.

And while this may be new in the US, other parts of the world have done this well before us. Here is a video from back in 2008 of an automated restaurant in Germany. In some respects, it is even more impressive than Eatsa. And of course, if something technological is available somewhere in the world, it is probably available in Japan, where one can buy anything in a vending machine from automobiles (not really) to (supposedly) used schoolgirl underwear. Automated restaurants are no exception, as this video shows. Even China is getting in on this.

Humans are a money sink. There are wages to pay, Social Security and Medicare/Medicaid tax, unemployment insurance, and training costs. Humans get sick, come to work late, are sometimes disagreeable, quit in the middle of the job, and are otherwise unpredictable and non-uniform in their skills and abilities.

Automation has many advantages. Machines are good at repetitive tasks – they do the same thing the same way every time in a uniform manner. They always show up to work on time, have no training requirements, receive no pay, and work without drama or teenage angst. They can be depreciated over their lifetime. You could even run your restaurant 24-hrs a day if you like, with much less overhead than before.

Of course, humans are not completely out of the loop. Someone has to deliver supplies for the automated machinery to use. Someone has to clean, both the eating area and restrooms, and the kitchen area. The machinery needs to be serviced, and someone has to be on hand in case of a malfunction, although that could be an on-call repair person, not necessarily someone always on site.

Then again, now that you are paying a “living wage,” perhaps a single individual, who keeps the hoppers filled, the equipment and restaurant clean, and can make minor repairs when something goes off-line, and call a service center for more involved problems, would not be out of the question. You could even pay them $20/hr and still be saving money.

Of course, it’s possible that even that could be automated eventually.

In the meantime, it appears that a measure that was intended to reduce the need for public services might, instead, be leading to an increased demand as some people exercise their ability to forego more money from work to keep their money from public assistance, while others are added to the unemployment rolls as employers turn to automation to reduce costs. It will take some time to assess the final outcome and, as this is a complex issue, no doubt those on both sides of the minimum wage debate will use the available statistics to “prove” their positions, pro and con.

My guess? The $15 minimum wage will sweep the country. The results will be increased costs to the consumer, and a loss of jobs, particularly part-time jobs across the board as automation becomes more cost effective for businesses and replaces positions once held by humans. Teenage summer employment jobs will become scarcer. $15/hr will become the new “poverty floor” and the middle class, between paying more for goods and services and more in taxes to support more people on the dole, will be squeezed that much more.

The only people who will end up happy about this are politicians and leftist intellectual types ensconced in their ivory towers of “higher education,” while the rest of us, as usual, are left holding the bag.

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