Share via Email


* Email To: (Separate multiple addresses with a semicolon)
* Your Name:
* Email From: (Your IP Address is 3.237.254.197)
* Email Subject: (personalize your message)


Email Content:

Raising the Federal Minimum Wage - Impact on the Egg Industry

08/18/2020

Wage rates are an important determinant of packing costs. In many areas the federal rate serves as a benchmark although local conditions including employment rate and industries competing for workers determine the scale of wages.  The federal minimum wage was established in 1938 as a component of the Fair Labor Standards Act.  Since this time the wage rate has been raised but infrequently and now stands at $7.25 per hour.  In most areas of the U.S. the actual amount of the federal minimum wage is essentially irrelevant since wage rates are determined by the availability of workers and the willingness of employers to pay "the going rate". 

 

Economics texts suggest that workers are paid in relation to the marginal product of their labor.  This means that employers are willing to pay a given wage to a worker who produces more than the expenditure on both wages and fringe benefits and related direct costs of employment.  The fact that there is an approximately $15 gap between the federal minimum wage and the median wage of hourly-paid U.S. workers suggests that the federal rate is no longer a benchmark.  States have imposed their own minimum rates that range from the federal $7.25 to Massachusetts at $12.75 per hour.  Individual municipalities have imposed higher minimum wage rates reflecting the cost of living or altruistic intentions.

 

On July 18th the House passed legislation that would raise the federal minimum rate to $15 per hour by 2025.  Thereafter the minimum wage would be indexed to median wages and would be adjusted annually.  It is calculated that raising the minimum wage to $15 by 2024 would benefit approximately 40 million workers mostly over 18 years of age.  Those receiving the proposed minimum would include 24 million full-time workers and the parents of 15 million children. 

Despite the fact that most employers are unable to determine the contribution of individual workers or job positions to operating profit, wage rates are set by local competition.  In a market with union dominance, wages are established by negotiation.  In recent years, workers and their representatives have regarded fringe benefits including healthcare, education assistance and work flexibility as more important than negotiating over a basic wage. 

 

The labor market is influenced by offshoring and outsourcing and also by automation and robotics.  Local factors are also important in establishing wage rates.  The presence of a large plant, especially if unionized in a rural county can increase wage rates paid to workers in an egg packing facility given competition for available labor and the wage rates and benefits determined by the major regional employer.  It is self-evident that workers in many southern states paid the federal minimum wage fear a twofold escalation in rate albeit over a four-year period.  In contrast, in industrialized states where there are both fewer agricultural operations and egg producers, such as in New England and in industrialized counties in Wisconsin, Ohio, Indiana and Illinois, higher wage rates are accepted as a norm.

 

Convention accepts that if minimum wages are increased, the result will be unemployment among low-skilled and especially young workers.  This argument has been used by politicians to restrain increases in the federal minimum wage.  This presumed effect of increasing wage rates is now being questioned. Differences in minimum rates between adjoining states and the introduction of a mandatory $15 per hour in Seattle have provided opportunities for structured economic studies as noted in The August 15th edition of The Economist.  In 1992 New Jersey increased the state hourly wage from $4.25 to $5.05.  Neighboring Pennsylvania retained the Federal $4.25 rate.  Economists at Princeton University followed the QSRs with regard to employment.  The study did not disclose any loss of jobs in New Jersey as a result of the increase in basic wage nor did it influence the number of restaurants that were opened.  Although studies have shown that there is no difference in the rate of QSRs openings as influenced by wage rates, when Seattle mandated a $15 minimum, a major chicken chain noted that it would not establish stores in the metropolitan area. 

 

The University of Washington evaluated the effect of the $15 per hour minimum on worker income in Seattle.  Comparing 2015 to 2016, individual worker hours were reduced and effectively monthly earnings dropped by $1.74.  A subsequent study in 2018 used individual worker salaries rather than average data to confirm that weekly earnings actually increased by approximately $10 per week.  The results of this study were confounded by the fact that some workers took second or third jobs to compensate for their loss in hours.  If a QSR can reduce hours as a result of increased wage rate and maintain both volume of sales and level of service, it implies inherent inefficiencies in use of labor. Alternatively the introduction of mechanization or reorganization of workflow to improve marginal productivity should reduce the number of workers required on each shift.

 

The inflationary effect of increasing wage rates has also been considered in relation to the selling price of products.  Again based on the $15 per hour minimum wage in Seattle, the University of Washington determined that a 10 percent increase in base wage increased the price of products by 0.9 percent. Concurrently, a 2019 study of supermarkets found no increase in grocery prices at the retail level attributed to increases in workers’ wage rates.  This implies either improved efficiency given reduced hours or that supermarkets absorb wage increases.

 

It is self-evident that there is a point at which capital investment in mechanization and robotics is justified since there is a limit to which labor efficiency can be increased by paying a higher rate.  In the context of an egg packing plant, the outstanding area for saving in labor involves the manual transfer of packs to outer packaging.  Numerous studies have shown relatively short payback periods or alternatively high internal rates of return on investment in robotic packers and in addition, robotic pallet stackers. 

 

An increase in minimum wage rates is inevitable irrespective of the Administration in office in 2021. Accordingly egg producers should carefully evaluate the benefits of robotic packing in anticipation of mandatory federal or state increases in rates. For those producers already competing with large industrial plants in close proximity, mechanization is probably overdue and worthy of evaluation.