A New York State labor commission panel recently recommended a $15 per hour minimum wage for workers in the fast food industry, which is expected to be enacted. The panel endorsed an argument that businesses exploit taxpayers by paying sufficiently low wages that their employees remain eligible for the Supplemental Nutrition Assistance Program (SNAP, the former food stamps program), which is a component of our welfare system. Some McDonald’s workers do in fact qualify for SNAP benefits, as do families of some U.S. military personnel.
Claiming that traditional welfare programs constitute corporate welfare for businesses like McDonald’s is a clever argument. Underlying this and other minimum wage arguments is an assumption that businesses have discretion over the wages they pay employees. If you believe that businesses could easily afford to pay more, raising the minimum wage will look like an effective way to benefit low income Americans.
That large businesses can dictate terms and conditions to their workers seems like commonsense: McDonald’s does not negotiate wages with individual crew members. Yet on the whole, productivity and competition determine wages. Businesses assess how much they can afford to pay workers in different jobs, which productivity determines. Competition to hire qualified workers then drives wages up to this level. Workers who produce $10 per hour of value will make not make more than $10 an hour. The evidence that productivity and competition determine wages is to my mind strong. Ninety seven percent of American workers make more than the minimum wage, or more than required by law. Walmart, the nation’s largest employer, recently raised the pay of its associates to attract better workers. Raising the minimum wage does nothing to increase the job skills and productivity of workers. The consistent failure of the minimum wage to deliver on the promises of proponents is itself evidence of the role of productivity.
Let’s now consider government assistance. The generosity of our assistance programs and the need to preserve work incentives, not corporate welfare, explain why low wage workers will qualify for SNAP benefits. SNAP benefits are based on household size and reduced for earnings, but not dollar for dollar. A dollar for dollar reduction would be bad policy. Imagine that a household received $15,000 in government assistance with no earnings. Now the head of that household could earn $15,000 in a year (that is, they work full time at $7.50 per hour). With a dollar for dollar reduction, the household now receives no assistance and is no better off than when not working. The effect here mirrors the impact of high tax rates on higher income households. For low income households, the effective tax rate is the loss of assistance for each dollar earned. High tax rates will deter work effort by both high and low income households. A $15 per hour minimum wage will price persons whose job skills allow them to earn $8 or $12 an hour out of the labor market. This has already happened to poor households; about 10% of minimum wage earners today are in poor households. America’s non-working poor often lack the skills to enter the job market at $7.25 an hour. Raising the minimum wage to $15 an hour will lock thousands more Americans out of work. Some opinion leaders think that working for low wages is insulting, and might consider a life on the government dole more dignified. Yet research shows that earned success, which comes partly from holding a job, is as important for happiness as having money to buy goods and services. As Arthur Brooks of the American Enterprise Institute argues, our welfare programs deny recipients the opportunity to achieve happiness.
The generosity of our government assistance and the need to preserve work incentives combine to result in working Americans qualifying for SNAP. If assistance is currently set at an acceptable level, some McDonald’s employees will qualify for assistance, and this is not corporate welfare. And it is better for Americans to at least partially support themselves through work than to be shut out from employment altogether.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at dsutter@troy.edu and like the Johnson Center on Facebook.