As inconvenient as it may be, the forces of supply and demand are difficult to counteract—especially in labor markets. The Obama administration has exerted much effort attempting to do so over the last seven years, and it has yet to succeed.
Its latest attempt to suspend economic gravity was the National Labor Relations Board’s decision last month that made it easier for employees of franchises and contractors to be considered “jointly employed” by both the immediate employer and the parent company. With this ruling, the administration and labor activists hope that it will become much easier for workers to organize a union at the administration’s enemy du jour—the dreaded McDonald’s—and its ilk, which it fervently believes will lead to a substantial boost in wages and living standards for low-income Americans.
It’s not going to happen. The problem is that there’s no reason to think that if a union were to be established at McDonald’s it would ever have much leverage to negotiate, no matter how much the government puts its thumb on the scale.
Unions are good at extracting higher wages when it’s difficult to replace labor with machines and when labor is a small proportion of total costs. For instance, these two conditions happen to fit longshoremen perfectly, and as a result they have been masterful at negotiating high wages and benefits.
When longshoremen go on strike they can impose enormous costs on their employers—as well as the rest of the economy. Since they can’t easily replace the workers, port operators have little recourse but to quickly cave in to strikers’ demands. As a result, longshoremen are extremely well paid—it’s not unusual for a longshoreman to clear $200,000 a year—and they may be the last workers in America who have a health insurance plan that has no monthly employee contribution or co-pays. West Coast port operators pay more than $50,000 per worker per year for health insurance, a cost so steep that one health insurance broker told me the only way he could devise a plan that expensive would be to include regular massages.
McDonald’s workers—as well as unskilled workers at other franchises and contractors—don’t have this leverage. In fact, they have virtually no leverage at all. Fast food restaurants are already experimenting with touch-screen ordering kiosks and machines that cook and prepare burgers without a grill chef. It doesn’t take too much imagination to foresee fast food restaurants that bear a resemblance to the automats of the 1950s, with many fewer workers behind the counter than today. And there’s no reason to think that further labor innovations wouldn’t arise to reduce still more the need for labor at a fast food restaurant.
Also, labor is a more significant cost for fast food franchises than port operators: Most of them can’t easily absorb a significant increase in prices or pass it on to their customers. McDonald’s, Burger King, and the like not only compete against each other, but they also face competition from local restaurants that serve similar fare and would presumably be able to avoid unionization, at least until the next NLRB ruling.
And it’s facile to say that higher wages can be financed on the backs of the shareholders through lower profits. The shareholders (or their board) aren’t going to let that happen and will fire any CEO who tries to do such a thing. The result of a higher wage negotiated by a union is the same as a higher minimum wage: Some workers will get raises, but at the cost of lower employment in the unionized businesses. Prices will rise, business will go down, some McDonald’s restaurants will inevitably close, and the ones that remain will hire fewer employees.
While some people might aver that a little more unemployment among unskilled workers is a price worth paying for much higher wages for the rest, that’s not the tradeoff that proponents of unionization or a higher minimum wage typically offer. They insist that there’s a free lunch to be had and that the government can impose policies resulting in sharply higher wages for unskilled workers without affecting employment or the health of the business at all. Some even argue that employment could increase if wages increase, presumably through some sort of economic fairy dust.
The way to boost the wages of low-skilled workers is to give them skills, and the starting point is to make it easy for them to climb onto the first rung of the work ladder. If we want to increase the wages of low-income workers, the Earned Income Tax Credit is a much more efficient way to do so, allowing the government to boost the take-home pay of working adults without diminishing employment opportunities for teens.
Pretending that we can force employers to pay sharply higher wages without curbing job opportunities amounts to an economic fantasy, one that this administration continues to peddle to its gullible supporters.
Ike Brannon is a senior fellow at the George W. Bush Institute and president of Capital Policy Analytics.
