Cents and Non-Cents About the Minimum Wage

How Much More Will This Cost?

How Much More Will This Cost?

Where would the money have to come from to pay for a mid range increase in the minimum wage (MW) for fast food workers in an affluent city like San Diego?  Lets assume a raise from $9.00 to $11.50 per hour, which is what the city council there is proposing (for all workers). By my estimates,  the MW in the fast food sector could be financed in three ways: (1) if customers are willing to pay 50 cents more per meal (from today’s $6.00 to about $6.50);  (2) if business owners could reduce their costs by about $60,000 a year, from the $700,000 they presently receive in annual sales revenue; or (3) if the customers and owners share the cost, doing a little of each.

If your view on the MW is based on how realistic you think it is for customers and owners to get past these hurdles, you’d be on firmer ground than listening to the clatter from lobbyists, advocates, economic modelers, and media headlines.

There are some credible efforts to score the effects of MW, like this one from Motley Fool; but also a lot of nonsense from sources like the Heritage Foundation “study.”

Mercifully, the latter has been buried, though it’s invaded the talking points of a lot of opinion leaders. If you believe Heritage, the fast food industry would have been decimated twenty five times over since the first MW was passed in 1939.

I chose this particular MW scenario for scrutiny because it happens to be the proposal on the table here in San Diego, where I live, though in the SD case, it would apply to more than just fast food restaurants. The SD proposal is somewhere in the middle, nationally,  in how much and how quickly it would change the MW.

I chose to look at just one business sector, fast food restaurants (nationwide), because that’s where most of the attention is now focused, and where many MW earners work. Also, that’s the sector with the best data.  And I can mostly evade the messy “tipped worker”  wrinkle on the MW if I stick with fast food places.

I use a definition of fast food restaurants and accompanying data from Pew Research and the National Restaurant Association, both credible sources; and then I fact checked them as best I could. I had to do some arithmetic to derive some numbers from the base data.

There are about 160,000 fast food establishments in the country; with annual sales of about $110 billion; and 50 million customers per day; a lot of fat and carbs, with a few salads here and there. That translates to about 300 meals a day served by each fast food restaurant, and an average of about $6.00 per meal. Total annual sales/revenue is about $700,000 per establishment. Obviously, all these numbers are “averages” and don’t apply to all the eateries.

On average, each restaurant currently employs about 15 workers (certainly, not all working full time). They earn about $13,700 annually. I don’t know the hourly rate paid to all of them, but in my exercise, I assumed that a 28 percent raise (based on the San Diego example) would apply to all the workers, boosting their annual equivalent salaries to $17,400; and the cost of doing business by $3,700 per worker. Spread across 15 workers, and absorbed entirely by raising the price on meals, this translates into a price hike of 50 cents per meal, or an increase in $60,000 in the annual cost of doing business.

Of course, 50 cents more spent on a meal at Burger King, is 50 cents less spent elsewhere in the economy. But, if the MW workers get a raise and have more spending money, other businesses in the community will see sales rise a bit.  In this simple model, it’s basically a wash for the overall economy. It’s also a transfer of modest income from customers and owners, to MW workers.  Joe the Plummer won’t like it, but that’s the point of the MW proposals. And also the basis of the opposition to it: “the MW is ‘redistributing’ the wealth by government fiat.”

Let’s look at the hurdles faced by customers and owners.

Economists (or at least their models) are not convinced that customers will merrily pay the higher price. The models say that a 1% increase in prices at fast food restaurants results in a 1% decrease in sales. That’s called “the price elasticity of demand.” In our scenario, it means an almost 10 percent decrease in revenue to each business owner if prices went up by 50 cents per meal; which means a $60,000 annual revenue loss to the average fast food business. If consumers behave according to the economists’ demand “elasticiities,” the average owner has almost $700,000 in annual revenue to find $60,000 to cut.

An obvious option for the owner is reducing the number of employees from 15 to 12. That would make up for most of the lost revenue. That’s what critics who talk about “job killing minimum wage hikes” say will happen. That amount of reduction in jobs is possible without loss of sales, if the manager achieves productivity gains from the remaining 12 workers. They may get those buns in motion if they fear more pink slips.

On the other hand, if we “follow the money” the way economic models do, then the 12 remaining workers earning almost $4000 more a year, will spend most of their higher pay checks in the community; thus, some new jobs will be created for their three jobless comrades.

After you set aside labor costs and fixed, or sticky, costs (like rent, taxes, licenses, repairs, maintenance, utilities), the average owner has only $200,000 left to play with, to find $60,000 in savings. These remaining costs are mostly for the food bought wholesale to make the burgers, salads, and milkshakes. There are ways to save here; which could degrade quality or take most of the chicken out of chicken salads. Oh, wait, that’s happened already?

Critics of the MW hike say, rather than a source of cost cutting, the price of ingredients will rise if the MW hike also affects the suppliers. That’s not a bad argument. It depends on the scope of the new MW policy, the location of the suppliers, and how they handle their own wage pressures.  I do not assume wholesale price increases. But, recall, elsewhere in the exercise, I’m arguably over-estimating the cost of the MW hike by assuming it applies to all employees at a restaurant, including the manager and assistant manager.

For establishments not on the bubble, cutting profits to handle the MW increase is of course another way to avoid price hikes. I don’t know how many of the fast food establishments are a half a buck per meal away from bankruptcy, but it’s many fewer than what the Heritage Foundation says, which (they say) is practically all of them.

In my own case, on the consumer side of things, I don’t often eat at fast food places, but the 50 cent increase wouldn’t bother me. I do, however, notice when mediocre Merlot at a higher end restaurant jumps from $8.00 to $12.00 a glass; or worse yet, when the price stays the same, but a fabulous, new Columbia Crest “Red Blend” suddenly appears on the menu as the house wine.

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5 thoughts on “Cents and Non-Cents About the Minimum Wage

  1. Alex MacLachlan

    Irv, let me tell you a few things you are missing in your MW hike analysis. Gross labor costs don’t happen in a vacuum. For every dollar more your employee makes, employer matching of all Federal business taxes like Social Security goes up too. Also, Workmans Comp insurance is based on Gross Wages. Your labor costs skyrocket, your insurance rates skyrocket. Remember that monster snow storm in South Dakota last October that caught all those ranchers by surprise and killed hundreds of thousands of head of cattle? Well, that shortage of cattle equated to some of the highest beef costs on record for all those hamburgers and all those fast food restaurants. Those franchise owners have absorbed ObamaCare, skyrocketing beef prices, and now the most expensive component of their business model is next. I wish it was as easy as a 50 cent increase, which I actually did this Spring in answering the MW increase July 1. Now we have politicians trying to outdo each other in how many votes they can buy with our money. I’m relegated to absorbing the Federal hike since I’m not in the City of SD or Seattle, but if they can get away with not allowing the citizens to vote on these things, we’ll have a ridiculous hodge podge across the country. South Dakota has a MW of a little over $2 an hour for tipped employees. I could hire 4 servers for the price of one in California, but this state makes no distinction between tipped and non tipped. The result of the July 1 increase was my most well paid employees got a $1 raise, and my most deserving (cooks) did not. I had a server make over $300 yesterday in combined wages and tips. I have to pay taxes on a $300 a day employee, not a $9 an hour employee. Now when more restaurants start going to the Panera Bread model of you stand in a line to order and get your own stuff until the non tipped food runner brings your lunch, don’t lament about the good ol days when young people used to learn customer service and refill your water glass when it got half empty. Also, when full service restaurants start charging you an automatic service charge of say 18% of your bill, don’t complain that your discretion has been taken away, you voted for your discretion to be taken away. That restaurateur is going to spread that 18% around to everyone who got that hot food to your table, not just the one who brought it to you. Owners are precluded from forcing that server to share their tips to non tipped employees like cooks and dishwashers, so this will be the only way to have an equitable sharing of politician’s largesse. You’ll wish 50 cents a plate was all that was needed, and if you doubt me, go ask that guy who washes your windshield and checks your oil level while pumping your gas.

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    1. Irv Lefberg Post author

      Alex, as usual, you make good arguments which are challenging, and sometimes even result in me reconsidering my “facts,” if not beliefs. (smiley face goes here)

      You are absolutely right about the higher employer taxes for social security (SS) that accompany salary hikes (except for workers who earn more than about $115,000). So, yes, I forgot that.

      I think the UI and workers comp is more convoluted and can differ a lot from state to state. In my Washington experience , the UI rate was based more on the company’s (or industry’s) layoff history than payroll; and in workers comp on hours worked and the “risk classification” of an industry or business,

      You remind me that for SS, although the amount of earnings subject to the SS tax has increased along with inflation for a long time, the SS tax has not adjusted to the rapid rise in earnings at the upper end of the wage spectrum. Thus, a senior Microsoft engineer making $500,000 (including stock option cash outs which are treated as salary), is paying about $7000 a year in SS taxes (and Microsoft is contributing the same thing), or 1.4% of his income. But a restaurant employee making $20,000 is paying about $1200 in SS taxes, or about 6% of her wages. That’s crazy to me. Since social security is not a true actuarial based insurance program anyway, then lets get rid of that fiction, increase the amount of salary subject to the tax by a few hundred thousand (which would raise a lot of money), and lower the tax rate for both the restaurant worker and the restaurant owner.. Easily done 🙂

      Yes, things like a spike in beef prices is a big deal. But, as you know, every industry sees costs go up and down when prices for their inputs change. But, yes, food prices are more volatile than other commodities, which is why we often hear inflation reported (excluding fuel and food). .

      Obamacare doesn’t apply to firms with under 50 employees (I think), Right? Nor to part time workers (with that threshold falling to , I think, under 30 hours(. Although this (present) comment doesn’t address the employer cost issue, those< BTW, are really bad incentives in Obamacare for businesses — incentives to keep employment under 50 and hours under 30. Not good. That didn’t have to happen if the bill drafters defined small business in terms of gross income instead of numbers of employees. And if they didn’t use “full time’ workers" as the basis for deciding employer’s obligation to provide insurance. That could have been based on the dollar amount of health insurance the business is (or is not) buying for its employees.

      I do agree with you on the tipped employees issue. I avoided it, as you know, by focusing on places that don’t have real wait people.

      More and more workers will be replaced by robots (I use that term broadly), whether or not we have a higher minimum wage and even if we didn't have the SS, UI, workers comp safety nets, We’ll likely see many eating places turn into big vending machines!! Customers view the entrees thru little windows, and buy what they want with a credit card or paypal code. The payment allows you to open a little door and get your meal. No waiters or cashiers needed. They of course had that in Manhattan in the 1950s. It was called "The Automat." No kidding! Here is link: http://www.theautomat.com/. My parents took us there every month or so. It was thrilling for me to insert the quarter, open the door and get my hamburger., Of course you still need cooks and people to keep the machines running. I don’t know why this model hasn’t proliferated. (seriously)

      Thanks as usual for adding some real business experience into this mix.

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  2. Nancy

    A lot more than BIG fast food corps are effected by this. It hurts the mom & pop non food businesses. I don’t have an answer to our poor economy. Not many jobs out there. The small business owner have reduced the work force. Husband and wife are working unreal hours to keep a float. They are the businesses that MW will push them over the edge.

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    1. Irv Lefberg Post author

      Nancy, My wife and and I started three small business during our marriage, None of them went too far, probably because we didn;’t want to risk giving up our salaried jobs, so we tried doing both, We almost killed ourselves doing it. All of the relatives and close friends I know who own “mom and pop” and family businesses are practically working 24/7. I believe, and have talked about this before on this biog, that “big business,:” and chains, and franchisers, and big box stores, and discount stores, are a much bigger challenge to “mom and pop” entrepreneurism than oppressive government, I realize you may disagree with that, But when i look at my own business “failures” (or mediocre results), i see the huge advantages that “big business” (and these other competitors) have in economies of scale, technology, marketing, pricing, in fact, I would argue that the internet, rather than leveling the playing field, has made it harder for small, mom and pop businesses. How many small businesses can afford to retain a social net work media staff to keep them show up on page one of google searches? . Or figure out how to deal with Yelp? Or lobby the state assembly or congress for tax breaks, I don’t have any easy answers on this, I know you feel that things like minimum wage are what’s pushing mom and pops over the edge. My sense is that its harder for a mom and pop place to deal with Costco or Walmart than with runaway government. Business taxes for example are lower today in most states than they were 20 or 30 years ago. I used to study that sort of thing in a prior career, (Notice I didn;t say that was the case in California. Am not sure) . Thanks again, Nancy, for your comment, Irv

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  3. Alex MacLachlan

    Right Irv, I was kind of bouncing back and forth from my under 50 employee small business and the fast food industry that you were trying to keep yours too before I expanded it a little. I was more trying to illustrate a cumulative effect of several factors adding up to the proverbial straw breaking the camel’s back argument. Yes, a dollar an hour an employee raise probably not breaking the industry, but in the larger context of everything else being thrown at this industry, do we really want to be cavalier until its too late? Anyway, I like your idea about the SSI rates. It’s crazy to think that 15% of my payroll every two weeks goes to this when a 24 yr old cook with a wife and baby could really use that extra $400 a month that is being taken from his pay check now.

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