Cents and Non-Cents About the Minimum Wage

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.