Econ critique

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Minimum Wage and Effects on Employment on Fast-Food Industry

Draft 1

By

Ching Lun Tsai

Economics 322: Economics Seminar

Professor Roger McCain

Drexel University

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Weather increase in minimum wage will lead to decrease in employment rate or not, has been a

debate for economists over decades. But the result was ambiguous. In the article Minimum Wage

and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania two

authors took 410 fast-food restaurants in New Jersey and Pennsylvania to examine the effects on

employment rate when increases minimum wage in New Jersey. This article has three conclusions,

first, the raising minimum wage will relatively increase employment rate. Second the rising on

minimum wage have no or little effect on employer's fringe benefit. Third, when imposing a higher

minimum wage, restaurants tend to reflect this cost toward customers.

In November 1989 the New Jersey's minimum wage raised from $3.35 to $3.80 per hour, and in

1990 New Jersey went further to raise the minimum wage to $4.25, and 1991-1992 raised to $5.05

which New Jersey had the highest minimum wage among other states. There are many side effects

when raised the minimum wage, such as replacing a part-time employee to full-time employee,

non-wage benefit cutback, increase in meal price, decrease in new opening stores; and we will

discuss these aspects accordingly in the essay

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In a convention model we can assume that employers will substitute part-time employee to full-time

employee for two reasons. First, the increase in minimum wage induces employers to replace part-

time minimum workers. Secondly, in the fast-food industry full-time workers are usually more

skillful and experienced than part-time workers, replacing part-time workers can reduce wage cost

and increase productivity. Nevertheless, when looking at the wage-gap variable in New Jersey we

didn't see any significant shift from part-time employee to full-time employee. Shows that the

increase in the minimum wage have little effects on fast-food restaurant employee structure(Card

and Krueger, 1994).

An increase in salary cost for employers result either the employers will transfer this cost of

product, price, reduce the number of employment or cut back on fringe benefit from employees.

Fringe benefits are benefits other than regular salary, such as bonus, money rewards, health

insurance or service. One main fringe benefit for fast-food restaurant is the reduced price meal or

free meals. Employee get to purchase their own product with a lower price or free of charge. And

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for the restaurant, these fringe benefits are the unnecessary cost for restaurants that needs to cut

off if they have to increase the cost of employment. As the minimum wage raised, restaurants in

New Jersey and Pennsylvania dropped the number of reduced price meal. But, the reduction in

reduced price meal was compensated with an increased in free meals among fast-food restaurants in

New Jersey. Conclude that we find no strong evidence that the increase in the minimum wage result

the cutback of fringe benefit among fast-food industry(Card and Krueger, 1994).

Another issue is that whether or not the restaurant will increase the product price in response

to the higher cost on employment. In a competitive model when increase the minimum wage

will result meal price to also increase, but if in a monopsonistic environment the rise in the

minimum wage actually has a price fall as a result (Aaronson, French and MacDonald, 2008).

Nevertheless, in the fast-food industry, restaurants are competing the homogeneous products

in the same market. According to evidence when wages are significantly raising, and the firm's

profitability is significantly drop (Draca, Machin and Reenen, 2011). The burden on restaurants

force them to make choices, whether they will raise the meal price and pass the price change

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on customers or absorb the cost. If one restaurant decides to raise prices in a competitive

market it also means that the restaurant is going to lose the market competition. If not in the

long run the burden on the restaurant will force them to either increase productivity or close out

the business.

The last issue is that whether raising the minimum wage will decrease the number of new

opening fast-food restaurants. Again in a convention model we assume that when minimum

wage raise, it will discourage new entrants into the fast-food restaurants. From Card and

Kreuger's research, we found that higher minimum wage does have a negative relation with

new open restaurant, but statistically the point estimates change are very close to zero, which

Card and Creuger conclude that the effects on wage change is very small (Card and Kreuger,

1994).

We can conclude that when raising minimum wage it doesn't result the shift on part-time

employees to part-time employee because of the increase cost on part-time wages. It also

won't change the fringe benefit for part-time worker and have no significant impact on the

output price change due to the increase in cost.

Overall, we can see that in raising minimum increase the employment rate in a relatively small

amount of scale. That does answer the question we raised in the beginning of the essay. But

does Card and Kreuger's finding represent the whole fast-food industry that raising the

minimum wage will relatively increase employment rate.

In the research Card and Kreuger mentioned all their sample restaurants are from chain

stores, which exclude the independent fast-food restaurants. It may not seem obvious, but

think in this way, independent fast-food restaurants require more labor than those chain stores.

First, at MacDonald's or KFC hamburger, chicken, and buns are pre-made at the factory, at the

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store they only need to cook it and serve it, however, for independent restaurants they need to

start it from scratch. Second, chain stores are usually better equipped that to increase

productivity, compare to independent store for the same amount of time chain store can handle

larger amounts of orders than the independent store. We get the conclusion that in the fast-

food industry, we have two different kinds of sectors, one is the capital intensive chain store,

the other is the labor intensive independent restaurant. If raising the minimum wage will

decrease the labor consumption in the fast-food industry, we will see a more significant change

in the independent store than the chain store. What happen if we have huge raise in the

minimum wage? Those labor intensive independent stores may not have the budget to

purchase equipment or use other technology to substitute the labor lost, alternatively they will

go out of business.