Effects of a higher minimum wage? The answer isn't as simple as you might think

Posted at 5:33 PM, May 19, 2021
and last updated 2021-05-19 19:52:05-04

(WXYZ) — Protesters outside a McDonald’s on Van Dyke on Detroit’s east side Wednesday called for a higher minimum wage.

"McDonald's makes a lot of money. As many people that comes through here, they can afford to pay us $15," said Jamika Ruffin, a mother of three from Highland Park.

She makes $9.45 an hour at McDonald's. She said she came out to the protest for her children.


"I wish I could do more for him, but right now we are just surviving," she said.

President Joe Biden said he supports a $15 national minimum wage.

So what would the impact be if it happened?

"I think a lot of time the narrative that comes with minimum wage increases is that it could come with a lot of job loss. The research does not support that," said Patrick Cooney, who oversees the Partnership on Economic Mobility between the University of Michigan and the City of Detroit.

"There have been a lot of studies done in the last 20 or 30 years. There was a famous one at fast food restaurants in New Jersey and Pennsylvania when the minimum wage was raised, in the short run there was not a lot of job losses," he said.

Ari Shwayder is with the Business Economics and Public Policy Department at the University of Michigan Ross School of Business.

Cooney and Shwayder say while there are tradeoffs, it isn’t always clear what they will be. You may or may not see business profits, prices, or jobs impacted.

You may have seen a supply and demand curve used to explain how jobs would increase. In theory, if the minimum wage is raised, and you follow the demand curve, if the minimum wage is set above the market rates, you would see a shift to fewer jobs.

It can be a way to try to gauge what will happen, but other factors can shift these curves, such as higher incomes and the overall economy.

Plus, this only works if it is a competitive market.

"In other words, we assume that there are a lot of employers looking to hire people and a lot of employees looking for certain jobs. In some places that might be true, but certainly there are places that is not true," said Shwayder.

Shwayder said you might not have a competitive labor market if a large employer with a lot of power employs many, if unions aren’t empowered, or if workers have to sign non-competes, which a study found some food chains are using to drive down wages.

Theory and Evidence on Employer Collusion in the Franchise Sector by WXYZ-TV Channel 7 Detroit on Scribd

In some cases a higher minimum wage results in job losses.

"If a company decides to increase the rate of automation or reduce the number of people they are hiring because the wage rate is higher then you have a group of people who might have a job, but won’t because the wage rate is higher," said Shwayder.

The impact will be different in different geographies or industries.

In cities like Detroit where there are jobs unfilled and unemployed people, you might actually see an increase in the number of people employed.

"A lot of people talk about potential employer loss, but there is also this idea of potential employment gain, where if you can get more workers to reengage in the labor market at this higher clearing wage, that is a good thing," said Cooney.

McDonald's released a statement to WXYZ in response to the protests saying in part, "McDonald’s is lucky to have the hardest working and most dedicated restaurant crew in the industry, who have tirelessly served our communities during this challenging year. That’s why McDonald’s is raising hourly wages for more than 36,500 employees at McDonald’s-owned restaurants by an average of 10 percent."

The corporate wage increase plan does not impact non-corporate owned stores, which describes the vast majority of McDonald's stores.