What Does the New SF Minimum Wage Law Have to Do with the Price of Tuna?

Every Economics 101 Course starts with the same simple graph. 

Reduced to its essence, this graph tells us that the quantity of any good or service changes inversely as the price of the good or service changes.  As price increases, demand decreases and vice versa.

When we head to the grocery store, what winds up in our grocery cart is guided by this basic economic principal. I love a juicy, thin-sliced roast beef sandwich with mayo, cheese, lettuce and tomato.  But when the price of premium roast beef goes from $4.99 per pound to $11.49 per pound, I will demand a lower quantity.  I might wait to buy more of my favorite roast beef until the price comes back down.  I might buy a lesser quality product.  I might put less roast beef on my sandwich. Or I might replace roast beef all together with turkey or tuna.  This inverse relationship between price and quantity demanded factors into our purchase of most goods and services we consume – not just roast beef.

That’s why I question the San Francisco’s decision to lead the country in raising the minimum wage in the city to over $10 per hour. I understand that San Francisco has a higher cost of living than many other big cities in the nation. But San Francisco also has a high unemployment rate and is trying to stimulate employment. Going back to Economics 101, can’t we expect that as the price of labor in San Francisco increases to over $10 per hour, consumers of that labor (large and small businesses alike), might consume less labor?  Won’t a higher minimum wage make San Francisco (or Berkeley if we were to follow suit) less attractive to companies that hire minimum wage workers? Shouldn’t we worry that raising the minimum wage in a tough employment market will reduce opportunity for the unskilled workforce that relies on entry-level positions?

If you’re a professional who works in a medical office, a law office, or for a high tech firm, this bump in the minimum wage won’t affect your bottom line much. That said, the impact will definitely be felt by the small businesses that provide you with services you probably take for granted: your corner dry cleaner, the bakery that makes the best scones on your block, and the Mom & Pop deli owners who pile the roast beef, tuna, or tofu onto your sandwich just the way you like it. If the minimum wage went up in Berkeley, would Saul’s Deli or The Virginia Bakery go out of business?  Would they raise prices?  How would they compensate for higher costs?  If you are a mega-corporation like Starbucks that relies upon minimum wage workers, this increase to over $10 an hour will certainly reduce your profits, although no one but shareholders will be “Sleepless in Seattle” over your lower profit margins. However, if you operate a tiny neighborhood coffee shop and your profits are already miniscule, having to pay your barista more could drive you out of business.

And what happens to the baristas, hamburger flippers, and box boys/girls? If you are a low-wage worker, you might benefit from a higher minimum wage. But you might also lose your job if your employer goes out of business or decides to invest in a technology that makes your job redundant (Have you seen those self service checkout lines at Safeway?) Or you could be let go because you don’t have the skills to produce at the $10.24 per hour level. For young or under-educated entrants into the job market, a higher minimum wage could backfire, making it more difficult to find a job for the folks who need one the most.  Could the demand curve explain why unemployment rates are so much higher today for teenagers & those without a college degree?  The Bay Areas’ low wage workers of today and tomorrow may find themselves making choices that are far more difficult than deciding between premium roast beef and second-rate turkey next time they head to the grocery store. Forcing their employers to pay a higher price for labor may actually force them out of a job. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations to any individual.

Jonathan K. DeYoe is an LPL Registered Principal. Financial Planning, Securities and Advisory Services Offered through LPL Financial. Member FINRA/SIPC.