What happens to jobs at your local strip mall if the minimum wage goes up from $7. 25 to $10.10? The answer depends a bit on how far in advance people know about the increase, and how long we wait for things to settle afterwards. The basic laws of supply and demand still hold, but the ramifications are a little tricky to figure out.
If the US raises the tax on gas by fifty cents per gallon, the price rises at the pump, but by less than the full fifty cents. Some people will skip a trip, some will take a bus to work, and consumption falls a little. This is elasticity of demand. The cost of crude falls slightly from the reduced consumption, and the consumer makes back a small part of the fifty cents.
If a vodka shortage hits us suddenly, whiskey will do (I'm told). Demand is highly elastic. In comparison, demand for gasoline in the short term is extremely inelastic. People still need to get to work. Over the long term, however, gasoline has a much greater elasticity of demand. People will form carpools, trade the Ford Behemoth for a Ford Hybrid, switch to telecommuting, or change either home or workplace to shorten the commute. Consumption falls significantly, and a real fall in the price of crude restores more of the bite from the tax.
This brings me to wages. Labor costs do not exist in a vacuum. Buy a meal in a restaurant, and labor is about a quarter of the cost. Rent is about a quarter. The ingredients are about a quarter. Advertising and profit and miscellaneous stuff make up the rest.
Do a thought experiment on rents paid by businesses. The owner of a strip mall is about to offer a five-year lease to a new business, and will charge what the market will bear. If the tenant knows in time, before signing, that minimum wage will be $10.10, that changes the basic business equation. Labor costs will be a little higher. Rent will have to be lower. Otherwise, the tenant and the owner won’t reach a deal.
Raising the minimum wage suddenly, in one big overnight jump with no advance notice, would cost some jobs in the short term. This is offset by increased spending power of the poorest workers, which creates some jobs. It might be a net positive. It is definitely a win for workers. But focusing on the short term only is short-sighted. In the longer term, rents charged to businesses fall because of elasticity of demand. Does anyone think the main problem with our economy is that dollars into the cash register go too much to workers, and not enough to property owners?
As wages for the poorest workers become a little more livable, the rental costs for starting a business will become a bit more affordable. And I see that as a good thing.