News from the Tennessee Valley Business

How much does minimum wage matter?

As the U.S. Senate dukes it out about whether to pass a bill gradually raising the minimum wage from $5.15 to $7.25, some in Decatur wonder what the fuss is about.

At least in the North Alabama fast-food industry, it is the free market not minimum wage legislation that dictates the cost of labor, according to an official with Wesfam Restaurants.

Weve been hiring at $6 per hour thats for walk in the door with no experience for quite awhile, said David Edwards, director of training for Decatur-based Wesfam Restaurants, which owns 27 Burger King restaurants.

Hes in the camp of economists who say a minimum wage is fine provided it is low enough to be irrelevant. That, he said, describes the North Alabama labor market.

I dont know of anyone out there paying minimum wage, Edwards said. If you find someone hiring at minimum wage, let me know. I want to know the trick.

As long as there has been a minimum wage, conventional wisdom among economists has been that it is counterproductive. The higher the price of employees, the fewer of them employers will hire.

A pair of economists in the early 1990s shook up the conventional wisdom with a study of fast-food workers that indicated a minimum wage increase had no impact on employment levels.

Their explanation was that in the real world, unlike the one in textbooks, employees lack the bargaining position of employers. That means employers can use their partial monopoly to suppress wages.

Under this model, the minimum wage effectively corrects a labor market that gives too much bargaining power to employers.

Statewide, a $7.25 minimum wage would be significant. As of the end of 2005, about 19.6 percent of hourly workers in Alabama made below $7.15 per hour, according to U.S. Department of Labor Bureau of Labor Statistics figures. That means as many as 226,000 workers would potentially feel the impact of the wage boost.

Paula Whitney, manager of Merry Maids in Decatur, dreads a minimum-wage hike.

Were going to have to raise prices, Whitney said. We try not to raise the prices of our current customers, but I am worried that we wont be able to sell (services to new customers) as much as we do now.

Which goes back to the conventional free-market model. If Merry Maids cleans fewer new homes, it needs fewer new employees. Increasing the minimum wage increases costs, which increases price, which reduces demand.

As Edwards puts it:

If you eat with me less often, I have fewer dollars for payroll.

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Eric Fleischauer
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