The Card-Krueger minimum wage study missed something

The Card-Krueger minimum wage study of 1994 found that New Jersey’s raising of the minimum wave from $4.25/hour to $5.05/hour did not reduce employment in the fast food industry. In fact, the study found that demand for employees went up after the minimum wage was raised. The current Federal minimum wage is $7.25. Obama has proposed raising it to $9 by the end of 2015.

We can expect that the Card-Krueger study will be trotted out to deflect criticism from economists that the new minimum wage will cause lots of fast food workers to lose their jobs.

The economists will have an argument to make, nevertheless. The Card-Krueger study is flawed by an incomplete data set.  That study considered the fast food chains as the entire fast food industry. But the chains, Burger King, McDonalds, Wendy’s, Arby’s, etc., are only one-half of the fast food industry.  That’s the half that Card-Krueger studied. It’s the wrong half. The other half are the independents, consisting of the delis, Mom and Pop stores, meatball and subs shops, etc. and these make up the second half of the fast food industry.

The big difference between these two sectors is in the division of capital and labor they each deploy.   The chains are less labor intensive than the independents and more capital intensive.  The chains have already automated some aspects of their operation. The independents, the ones Card-Krueger ignored, are labor intensive. They haven’t used as much automation or other capital facilities because they rely on labor and haven’t spent as much in capital costs.

Part of the reason is they are mom and pops for the most part and simply don’t command the amount of capital the chains have. The chains have publicly traded stock, and they have and can again raise capital through stock offerings. Independents have only what their mom and pop owners can contribute to the business. Hence, their labor costs are a much higher percentage of their fixed costs than is the case for the chains.

The chains’ advantage over the independents in raising capital cannot be overestimated. They have borrowing ability the independents will never have, and the chains also rely on franchising which taps into the capital of franchisees who often are individuals who have made the big bucks in executive employment or business endeavors and seek to diversify by investing in the ownership of a fast food franchise.

Bottom line is that the independent mom and pops that make up at least one-half of the fast food industry are the ones who will be hit hardest by Obama’s minimum wage increase. Many of the independents may go out of business. The Card-Krueger study never even looked at that sector of the fast food industry.

This is typical Obama. Everything he has done so far has benefited those who already own substantial assets and done little or nothing at all for those in the middle class. In fact, most Obama policies have done positive harm to the middle class, and his minimum wage increase will go further and harm those of lower income who are trying to climb into the middle class.

Finally, it is possible that the chains will not be harmed by the minimum wage increases, and could even get a boost from it.  This analysis is more social science than economics.  As wages rise in the chain operations we can expect the chains to begin to demand better resumes from prospective employees, and a more experienced, better educated and higher skilled class of workers will have a renewed interest in fast food due to the higher wages. These employees will have more satisfactory work experience, and better arrest and drug records.  Thus, many lower skilled employees who have jobs now but simply aren’t worth the higher wages will lose their jobs.  A Card-Krueger type study will not count them because the overall employment level in the franchise chains will not have gone down, and may even have gone up.

For the fast food consumer the price of a big mac will be higher, but the service might be better and the burger might even better. The offerings will probably expand into other more sophisticated dishes.

The crime rate might be higher as well as the low-skilled workers are edged out. This will be another part of Obama’s domestic legacy, in addition to his foreign policy legacy of turning the Middle East into a cauldron of fire.

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