The effect of the minimum wage and getting a foot-long Subway!

Because each of the 50 states in the USA has its own laws, it can provide rich sources of data on a number of different topics, something exploited by the Freakonomics crew. Here is another example that I’m sure that students will be able to relate to – the effect of different minimum wage laws on the availability of foot long sandwiches from Subway.

Subway USA have a standard price of $5 for a number of foot long subs and back this up with heavy advertising. However, Subway restaurants in San Francisco are the only place in the USA not to offer this deal and they blame the newly increased minimum wage. The city of recently implemented a minimum wage of $10.24 per hour (compared to the mandatory federal minimum wage of $7.25 per hour). This has meant that the $5 foot-longs are simply not profitable in San Francisco. A link to an article on the topic can be found here.

But before the higher minimum wage is blamed for causing job losses at Subway, students should reflect on the flip-side. Are residents of San Francisco more able to afford the more expensive subs (and other gods and services) because they have higher incomes? What is the most important factor? I usually give 4 examples of businesses to relate an increase in the minimum wage to.

Firstly a used car business. They probably don’t pay the minimum wage but perhaps their customers are more likely to receive it. They may well benefit.

Secondly, a cleaning services business. They probably pay minimum wage but their customers eg schools and companies in offices do not get any benefit from an increased income. Probably lose.

Thirdly, a movie theatre. This is similar to Subway in that they pay minimum wage but also many of their customers will earn minimum wage as well. Effect might be uncertain.

Fourthly, a law firm specialising in tax advice to large businesses. Does not pay minimum wage nor do its customers earn minimum wage. So very little effect.

This cartoon is always a cracker to finish up with when evaluating the effect of a minimum wage!