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The Subway Diet, San Francisco Style

June 7, 2012 by Robert Asahina

Subway’s familiar “$5 Footlong” jingle will no longer drive sales — or grow the sandwich chain’s local franchises — in San Francisco. SF Weekly, the local alternative paper, reports that Bay Area gourmands entering Subway shops now encounter a sign reading, “Due To Higher Cost of Doing Business in San Francisco, ALL SUBWAY Restaurants in SF County DO NOT PARTICIPATE IN Subway National $5.00 Promotions.” The cause of the Subway patrons’ frustration is probably the city’s minimum-wage ordinance, the highest in the nation. “On Jan. 1 of this year,” according to SF Weekly, “it jumped from $9.92 to $10.24.” The paper suggests the increase in the minimum wage was responsible for “pushing Subway execs to revoke our county’s cheap sandwich privileges.” San Francisco, as usual, is ahead of the rest of the nation, but not far behind is New York City, where the City Council approved a “living wage” bill six weeks ago. Unlike San Francisco’s ordinance, it is narrowly aimed at employers receiving at least $1 million in tax abatements or low-cost financing, who would be required to pay a minimum wage of $11.50 an hour, or $10 with health benefits. The bill would “exempt workers in manufacturing, affordable housing, nonprofit organizations and small businesses.” However, Mayor Bloomberg promptly vetoed the bill, telling reporters that “the so-called living and prevailing wage bills” are “a throwback to the era when government viewed the private sector as a cash cow to be milked, rather than a garden to be cultivated.” Undeterred, the council overrode the mayor’s veto, setting the stage for the lawsuit Bloomberg promised ahead of the council’s vote. But even without a court challenge, the law will not go into effect for another six months. Meanwhile, the New York State Assembly passed a bill that would raise the minimum wage to $8.50 an hour, from $7.25. This bill faces stiff opposition in the New York State Senate, where the legislative session ends in two weeks. However, some “progressive” groups have been pressuring Governor Cuomo to raise the minimum wage unilaterally by executive order. And just this week, Reps. John Conyers, Jr. (D-Mich.), Jesse Jackson, Jr. (D-Ill.), and Dennis Kucinich (D-Ohio) introduced a bill in Congress that would increase the federal minimum wage to $10 an hour, from the current $7.25, and require annual raises indexed to inflation. The minimum wage has been a popular policy for many years. However, after World War II, skeptics began to mount a case that it might do damage. The classic skeptical document remains George Stigler’s 1946 paper, “The Economics of Minimum Wage Legislation,” which argues that a minimum wage

must be chosen correctly: too high a wage … will decrease employment.… [T]he optimum minimum wage can be set only if the demand and supply schedules are known over a considerable range. At present there is no tolerably accurate method of deriving these schedules, and one is entitled to doubt that a legislative mandate is all that is necessary to bring forth such a method…. [T]he legal minimum wage will reduce aggregate output, and it will decrease the earnings of workers who had previously been receiving materially less than the minimum.

But the fans of the minimum wage found new impetus in 1994, with the publication of David Card and Alan Krueger’s famous paper, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania” (later expanded into a book, “Myth and Measurement: The New Economics of the Minimum Wage”). Based on a “natural experiment” they conducted by surveying employers in the two states, Card and Krueger concluded that raising the minimum wage in New Jersey actually increased jobs in fast-food restaurants. This conclusion struck many economists as unwarranted, since the increase in New Jersey was mostly relative to the decrease in employment in Pennsylvania. In the words of one critic, John Kennan, this was like “having a drug trial in which the drug has no effect but the placebo makes people sick.” Notwithstanding this and other critiques “too numerous to document fully,” the debate over the elasticity of labor market supply and demand has continued since then, with 37.7% of economists in a 2006 survey of the American Economic Association conceding that the federal minimum wage should be increased — while 46.8% thought it should be entirely eliminated. This week, Julia Vitullo-Martin, of the Center for Urban Research at Columbia University, presented a forceful attack on “prevailing wage” legislation in New York:

Most officially set prevailing wage rates are significantly higher than the wages that truly prevail in a locality. This has serious consequences for everyone — employers, employees, government officials, developers, contractors, subcontractors, and, of course, taxpayers. The combination of an ongoing, persistent decline in union membership and the partnering of wage determination to collective bargaining agreements is a major cause of the discrepancy. The decline of unionization is especially important in the construction industry—the main target of prevailing wage. The data show that unions represent far less than 30 percent of the construction workforce throughout the state, including New York City. Now is the time to reexamine the entire universe of prevailing wage.

From a global perspective, Mo Pak-Hung recently argued

that countries with M[inimum] W[age] L[egislation] have a growth rate of about 20 to 30 percent lower than the sample mean. Although the initial impacts are small, in the ‘steady state’ where the marginal effect of the legislation years equals zero, a country will have a growth rate of about 30 to 38 percent lower than the average.

If this is true around the world, it is certainly long past the time to reframe the debate over minimum and “prevailing” wage legislation, as Vitullo-Martin suggests. Even if Card and Krueger’s arguments and conclusions are correct (which more than half of economists dispute), the effect they describe is small and local. Far more important is judging the effect of minimum and “prevailing” wage legislation not just on low-income workers but on economic output in general. At a time when unemployment remains stuck at unacceptably high rates, and labor force participation is declining, policy makers should be focused on growth, not on “social justice,” which too often is code for using the power of government to slice the economic pie to favor one group over another, rather pursue policies that make it grow for everyone. As Bloomberg put it, “it’s government’s job to stand up for taxpayers — and for job seekers.” And not just in New York City or New York State or the United States, but in every country where the economic challenge in these parlous times is not redistribution but rather expansion. The disappearance of the $5 Footlong from San Francisco’s Subway shops exemplifies what happens when politicians ignore the reality of labor markets. Far from merely extolling “cheap sandwich privileges,” that $5 Footlong jingle should become the rallying cry of a new realism about supply and demand.  


Author

Robert Asahina

Robert Asahina has been a newspaper and magazine editor and writer, a book publishing executive and editor, and a data management consultant. He was editor in chief and deputy publisher of Broadway Books, president and publisher of the adult publishing group of Golden Books, and vice president and senior editor of Simon and Schuster; deputy managing editor of The New York Sun and an editor at The New York Times Book Review, Harper's, George, and The Public Interest; and a consultant at Freddie Mac. He is the author of "Just Americans" and of numerous articles and reviews for The Wall Street Journal, Harper's, The New York Times Book Review, and elsewhere.

 

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