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What Subway Teaches Us About the Minimum Wage

The minimum wage forces the allocation of capital in the same manner without any consideration of the size or growth goals of a business.

Minimum Wage increases sound great. Even companies like the Gap and now Subway are calling for them.  Not said by any of these companies is that they have the freedom to do this at any time. Like right now, go ahead, do it. #Raisethewage.  So why are they hectoring the government to do it?

Minimum Wage increases not only hurt the poor and consumers, it insulates big business from new competition.   It should not be surprising that now that Subway, has expanded “to more than 41,000 restaurants in 106 countries—making it the largest restaurant chain in the world” it has a new comfort with minimum wage policy that previously it did not.  The reason is simple. Subway started out just like any other big company, as a small one.  One imagines they had to manage through many moments of adversity, gaps in income flow, and false starts before they became the known entity they are today.  But here are Subway CEO Fred Deluca’s remarks from an interview with CNBC:

DeLuca: I’m not concerned. I know our stores owners are concerned.

Two things catch the eye pretty quickly.

For example, what if you were a sandwich shop that incurred a high cost for your ingredients because you don’t make your bread out of yoga mat material and you think there’s a market for people who want simple fresh ingredients in their food.  Those same customers may be less price-sensitive but there will be a point where they’ll balk if your product price gets pushed too high.  To keep this type of small competitor open means they can’t absorb the new cost by pushing it on their consumers.  A raise in the minimum wage would inhibit their ability to raise capital to continue to expand if they are forced to reallocate capital while they are starting up to wages for counter staff.

Granted, if this company grows to the size of Subway, they likely can absorb the cost of a wage increase much easier.  It will result in per their own CEO, increased costs for their customer.  One imagines that some of Subway’s customers make minimum wage and as you push the cost of goods up through policy like this that their raise ends up being functionally useless.  What good is a raise if the cost of everything you buy increases?  It’s even worse for the person who doesn’t get that new minimum wage job because the increase cost of hiring means less jobs.  So they get hit twice. No income and an increase in costs for purchases.

Subway hasn’t suddenly gotten magnanimous toward “the people”. They have gotten to the top of the market for “healthy fast food” and they want to stay there.   The easiest way to do that is to never have to face a competitor.  If you raise the cost of doing business, new ideas have a higher hurdle to even get a shot at being tried out.   Having the federal government set a wage price is taking off the table one point of flexibility for a new business.

Imagine you start a business with a few workers and you hit a rough patch. The company hasn’t made a profit yet and to keep going the business is going to need to cut somewhere.  It’s a tight knit crew so they meet together and decide instead of letting a person go, they’ll all forgo a paycheck or a drop in pay until business picks up again.  In a few months things turn around and instead of having to fire someone, they are all back to being paid more and then some.  This flexibility is gone if the federal government by setting a minimum wage makes this illegal. Instead of a more egalitarian decision for the team as a whole, the owner will be forced to fire one of the employees in order to maintain an arbitrary wage rate.

Alternatively, the owner can’t invest in a new tool or feature that would grow his business paving the way to hiring and paying more in the future. This might mean that the business goes entirely under instead of experiencing a brief period of time in the red where everyone loses their job.  Wage setting forces the allocation of capital in the same manner without any consideration of the size or growth goals of a business.  All of this is good news for a company the size of Subway because it means that little sandwich shop won’t be taking customers from them.

In a country where small business provides the most new jobs and new ideas that change the way we do things, stopping them from even getting out of the gate with one size fits all mandates directly undermines the engine of growth in this country.  There are better places to eat than Subway. Someday if it’s cheap enough to get a business started there might be one in every city in the country, but not if Subway keeps pushing to raise the cost of doing business.

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