Can Fast Food Afford a $15 Minimum Wage Without Cutting Jobs?

Yves here. One of the oft-made assertions is that increasing wages in low-wage positions will lead to job losses. But in many industries, direct labor is a not all that large a proportion of total product cost. And with corporate profits at record highs, the immediate impact would normally be to trim profit levels, which have risen to be such a high proportion of GDP as to be deemed by Warren Buffet as well higher than sustainable levels.

Moreover, as this Real News Network segment points out, businesses that pay only minimum wage or barely above it have lots of turnover. That is costly in terms of managerial time. Having a minimum wage that was more like a living wage would reduce employee churn, offsetting some of the cost of the pay increase. Costco has demonstrated that this approach works. It pays more than other discount retailers, and not only does it have less turnover, but it enjoys another gain: less inventory shrinkage, which is often due to theft by employees.

JESSICA DESVARIEUX, TRNN PRODUCER: Welcome to The Real News Network. I’m Jessica Desvarieux in Baltimore.

The fast food workers movement has taken storm across the United States and across the globe. Workers are demanding a $15 minimum wage. But employers have often cited that if they increase their pay, they’ll have to cut jobs. But now a new report is challenging that narrative and saying that it’s possible for companies to raise their wages, keep jobs, and still be profitable.

Joining us from UMass Amherst is one of the authors. Jeannette Wicks-Lim is an associate professor at the Political Economy Research Institute in Amherst, Massachusetts.

Thank you so much for joining us, Jeannette.

JEANNETTE WICKS-LIM, ASSOC. PROF., PERI: Hi. Thanks for having me.

DESVARIEUX: So, Jeanette, let’s look closely at your paper and specifically talk about the numbers. You propose two scenarios. One is if the current $7.25 minimum wage was increased to $10.50, which is close to what some Democrats in Congress are really advocating for. And the other model looked at what would happen if the minimum wage was raised to $15 an hour.

First let’s start and talk about $10.50. What kind of effect would that have on workers and the industry?

WICKS-LIM: Right. Well, the overall goal of the paper was to really think carefully about what a $15 minimum wage would look like for the fast food industry. And we tried to think about the research that’s already been done, about how businesses adjust to that kind of–or to minimum wages in general, and then think about the costs that would be associated with, first, a $10.50 minimum wage, and then a $15 minimum wage.

And the reason why we look at these two different levels is that when we look at how businesses typically adjust minimum wage increases and what we knew about the way the economy’s growing and how prices might adjust to the different cost increases, we thought about, well, what would be a reasonable policy that would get us to $15? And what we saw, looking at, again, how the economy’s growing and how much prices could adjust to cover some of the cost increases, we figured that a initial step to $10.50 for workers in one year would do a substantial amount to get workers up to a higher wage.

But then, over the next three years, we have let the economy grow, the revenues of the industry grow, and then that could accommodate a further increase up to $15, so that by the end of four years, a four-year adjustment period, we would get to $15 minimum wage, as you mentioned before, without shedding jobs, and without cutting into the profits of the industry.

DESVARIEUX: What about the effects, though? Food prices, for example–would we have to see higher food prices?

WICKS-LIM: Yeah. And one of the common ways that businesses to adjust to any minimum wage hike, not just this one, is to slightly adjust their prices. And so, part of the exercise of what we did was we took a snapshot of the fast food industry today, looking at how many workers there are, how many hours they’re working, what their wages are, and then really just did math exercise and say, well, how much would it cost for these businesses to raise the wages, and what does that cost increase look like relative to the revenue of this industry? So once you do that, you can get a good idea of what kind of price increases these businesses would need to implement in order to cover the costs of minimum wage at, say, $10.50 or $15.

But when you look at those cost increases, what we’ve found is that over a four-your time period–again, going first [incompr.] $10.50 and then to $15 an hour for the minimum wage amongst fast food businesses–we found that a 3 percent annual price increase over the four-year period–you know, ’cause each year, a 3 percent price increase–would be enough to cover a lot of the costs of this minimum wage.

And there are other adjustments that these businesses can make to cover the remainder of the costs. So one of them, one of the adjustment mechanisms is a price increase of about 3 percent per year. So if you want to think about something really basic, if you think about a $4.50 Big Mac–I think that’s roughly the average price for a Big Mac–a 3 percent increase represents about a $0.15 increase in price. So you’d go from about $4.50 to $4.65 in a year. And then, over the four years, you’ll get to Big Macs being a little bit over $5. So that’s the range of the price increases that we’re talking about.

DESVARIEUX: Alright. Not a really major increase, in my opinion.

What about retaining people? I think your study pointed that retaining people can actually save employers money down the road. If they’re paying people higher wages, people are going to want to stay at those jobs. Can you speak to that?

WICKS-LIM: Yeah. I mean, one of the common findings in the research is that–especially look at the service industry, is that there’s a high turnover rate amongst these businesses. And if you raise wages, that has a meaningful impact on reducing the turnover rates, and that does save employers money. It reduces their costs in terms of recruiting, hiring, and training workers, losing productivity when you have less experienced workers working with more experienced workers. So all those things help these businesses cover some of the cost increase from the minimum wage. And if you’re looking at the fast food industry, what we were able to gather from the research is that about 20 percent of the cost increase that these employers would experience from a minimum wage hike would be covered by the cost savings that they would experience because they have lower turnover amongst their workforce.

DESVARIEUX: So what does turnover actually do? Why is it more expensive to get new employees? Just explain that for us.

WICKS-LIM: Well, if you just think about it in just a common sense way, if you’re an employer and you’ve got a set of workers and all of a sudden you’ve lost that whole set of workers over the year and you’re finding yourself needing to hire new workers, you have to of course first spend money on ads. You have to spend money on screening those workers to see which workers you would like to hire. You would have to spend money on training those workers so that they have the skills that they need to do their job well. And not only that is when they’re on the job, when they’re still learning their skills, they’re going to impact the other workers on your workforce. So even the more experienced workers working with less experienced workers cannot be–they can’t be as productive if they had an entire workforce that was all very well experienced workers.

I think most people in their jobs [incompr.] day-to-day experience. Things change when you have new workers come on staff. You do what you can to help the new worker learn the ropes. But that takes time and energy from each worker who’s doing that. And you also know if you’ve been involved in any of the hiring exercises that it takes time and energy and it takes money to put in the ads, recruit workers, train them, and so on.

DESVARIEUX: So, Jeanette, your paper also points to the fact that there will be sort of higher economic growth. How are you ensuring greater economic growth, by raising prices, for example? Some would say higher prices would be a surefire way not to promote growth, because you’re not as competitive. What’s your response to that?

WICKS-LIM: Well, we actually don’t assume higher economic growth. What we try to do is make very reasonable assumptions about what we know about how the economy’s operating today and what we know about how businesses have adjusted minimum wages in the past. So in the exercise we do in this paper, we actually assume that the industry will grow at a pace of about 2.5 percent, which is about what we expect the economy to grow over time. That’s a reasonable assumption. I think that the estimates for how the economy is going to grow range actually higher than 2.5 percent. But we assume that industry sales grow at pace with the economy. That’s what we’ve seen over the last about–since 1997, that the industry has grown at that pace.

So we don’t make any projections about extra economic growth. We’re simply saying that given what we know about how the economy is growing today, how do we expect sales to grow in this industry, and given that, what does that say about the revenue that they’ll have available to them to cover the cost increases associated with a minimum wage that would take us up to $15 an hour.

DESVARIEUX: But what about those higher prices. Let’s say it’s not necessarily higher growth, but let’s say they sustain that growth. What about the higher prices? Would that affect their growth in any way?
WICKS-LIM: Yeah. I mean, the higher prices would likely affect consumer demand. To be honest, the research on how prices affect consumers in this industry has produced very varied estimates on what the actual response would be. But we looked over the literature, and we tried to again make reasonable assumptions about what would happen, and we assume that when prices go up, that consumer demand for these products in the fast food industry actually decrease slightly. But what we find is that based on the evidence that fast food restaurants do respond [incompr.] just by increasing their prices, that is, they try to raise more revenue by increasing their prices, and that we find that consumers, is one of the things that they value most about fast food, aside from prices–that’s important, but the convenience of those meals is an important factor.

The consumers, when prices go up, they don’t respond with a very strong response and reduce the consumption of fast food meals. They might reduce it somewhat. So we do assume in our exercise that with a 3 percent annual increase in prices, that consumers will reduce their demand slightly, but they won’t reduce it so much that the revenue that–they won’t reduce it so much that these fast food restaurants could still be gaining in their revenue by raising their prices. So we do assume that there’ll be a slightly slower rate of growth in the industry in terms of how much demand there will be for their product. That’s only over the four-year adjustment period. And once that adjustment period ends, then we expect the industry to go back to growing at the same pace, relatively at the same pace as the economy in general.

DESVARIEUX: Alright. Jeannette Wicks-Lim, joining us from Amherst, Massachusetts, thank you so much for being with us.

WICKS-LIM: Thanks a lot for having me.

DESVARIEUX: And thank you for joining us on The Real News Network.

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16 comments

  1. Sam Kanu

    “price increase”? No, no no – premise must be you want to employ a human being in America, then you pay that person a living wage. If your business model is not breaking even when you pay living wages, then you don’t have a business model that we want in America. What you actually have is a Giant Corporate Welfare Vacuum Machine Inc. Not a “job creator”. And America doe not need and cannot afford that kind of trash masquerading as “business”.

    Simple as that.

    . Add up all the salary premiums that the McDonalds management and executive layers are racking up over and over workers salaries. Add up the investor takeáway in dividends and stock appreciation. Why should they deserve all that on the backs of workers that they don’t even pay a living wage.

    The left in this country will never get anywhere unless they stop accepting the premises that the exploiter class sets out as “fundamental”. That is how they play mind tricks on you pretend that they are “creating value”.

    Start there and stop this nonsense about price increases. Its really annoying to see these sort of distractions from the real issues.

  2. washunate

    The framing on minimum wage legislation has intrigued me greatly over the past couple decades. First, who cares about the quantity of jobs at the margin? We know that breadwinner models of household income are more stable and resilient than multi-income models. Of course a few marginal jobs would be ‘lost’, as if that’s a bad thing. As if we need more aggregate hours worked in fast food and retail and healthcare and all the other crap jobs in this country. Child labor bans reduce jobs, too.

    The second piece of the framing is how low the minimum wage figures thrown about actually are. It’s all reactionary, always lagging behind the increase in the cost of living. When somebody proposes $30 or $40 an hour, now that will be interesting.

  3. Ep3

    yves, here’s my two cents after working 2 years at the big M from 1993-1995. I started at 4.10 and ended at 4.25. I was in high school, and my parents supported me, so the job provided spending money and experience working and saving. The restaurant was owned by a franchisee who also owned 4 other stores in the surrounding county. I was highly respected by senior mgmt and was asked to become a manager myself. But at that time, I could find work paying $12 an hour with benefits without the stress that involved being a manager (even tho a shift would be 10am to 7pm it was common a manager would not have had a lunch break, eat between customers, and then end up working an extra 2-3 hours beyond their scheduled punch out time, sometimes punching out and then going back to work). At the time, a hamburger was 49 cents, and a cheeseburger was 59 cents. A Big Mac meal was 2.99. So my first question is why is the same hamburger now a dollar? I liked my managers and store boss; they were all good managers. I did not speak with the owner; he would show up once a month, bitch that no one was getting work done, the place was a mess, etc. and then load up a bag with food and leave. In the time I was there, we added a playland and all new grills and fryers. Pay raises were based on a scale; 1-5, where a 1 got u a 5 cent raise and a 5 got u 25 cents. Most ppl got a 2. It was very hard to get a 5. Usually it was for people who worked days with the head store manager. Actually I only knew of one person who got a 5 and she was a good worker. Most of the turnover that we experienced was from kids who graduated high school and left for college. I did work with a handful of adults with families who were working to either support their families or pick up additional hours to pay bills. All were hard working.

    One thing that I think about is all these folks would currently draw a lot from the EITC and food stamps. But Once their pay gets above that threshold, they would stop receiving that extra money in February. I see and know lots of ppl wgo face a dilemma; once they start working more, they lose their govt benefits. Now everyone would think this is great. But when the math is done, they are actually in a worse financial position when their benefits are cut from earning more, than when they were making less and receiving benefits.
    Also, I think these places look at how busy a restaurant is and when they are busy all the time, which would mean highly profitable. A decision is made to open another operation that directly competes, stealing customers and profits. This lowers the extra profits from one store. So instead of that extra profit rewarding the workers, it is diverted to “corporate expenses” of another franchise (corporate franchise fee, corporate overhead expense paid to the store owner-so in essence by having two marginally profitable stores instead of one hugely profitable store, the owner has raised his income). Less profit, less wage increases.

    Yves, yes it would be great to raise these peoples’ wages. But it does not change the mindset and culture that run these places. We have to realize as Americans that when the guy cooking your food cannot pay his bills on the income he makes, what motivation will he have to be more productive.
    But also we have to look at the world. This planet cannot support 7 billion ppl living like the baby boomers. We would suck every natural resource dry in a few decades and then what?

  4. Yes, but you missed perhaps the main event.

    So what if increasing the minimum wage costs jobs? It wages are held high, and the law is actually enforced, this would kill the incentive for businesses to lower wages by importing large numbers of foreign workers or lobbying to not enforce the law against illegal immigration. I mean, the entire reason for mass immigration is not because there is a ‘shortage’ of labor – an impossibility in a market-based economy – but to drive down wages. Remove the ability to lower wages, and you remove the incentive to do so.

    The point of a minimum wages law is not to raise wages higher than market forces or productivity allow, but to prevent employers from driving wages lower than market forces or productivity would otherwise allow.

    I believe that FInland uses a strictly enforced minimum wage law to help control illegal immigration from Russia.

    1. Ben

      Also if you stop mass immigration you reduce the pressure on land which will see rents fall. Rents are the biggest component in most people’s living costs.

  5. Annoying — as always — I can’t help it.

    Why don’t these discussions begin — every time — with a precise estimate of how (usually) small a component of total product’s price labor’s price comprises. Possibly because we (including Card and Kruger) immediately get “hung up”: (in sixties druggie language) on fast food — which has by far the highest labor costs: 33%.

    Why does it never occur that minimum wage workers (or any workers) would gladly lose a few (or more!) jobs for the sake of doubling their wages. Gladly!!!

    Why does it not occur that the ghettos stain our country are in large part created by wages so low that people refuse to work for them. 100,000 out of (my estimate) 200,000 Chicago gang age males are in street gangs. 1968 was twice as productive per person as 1921 — we would expect a much higher bottom end wage in 1968 — min wage actually almost $11 an hour in 1968. Now it’s $7.25 nationally. Nobody’s going to work for a wage that would have to triple to catch up with the doubling of productivity since 1968 (nobody born here anyway).

    If someone asked Americans of 1968 what could possibly cause such a calamity in the future, what would they have guessed: a comet strike, multiple plagues, a limited nuclear exchange? The almost free market?!

    Walmart, to go to the opposite extreme (but closer to the norm) has 7% labor costs. If we doubled Walmart’s average wage from $12 (they say) for inside and outside, full and part-time workers — and — throw in at least half-again for benefits (including whatever now) Walmart’s prices would go up 10%. What effective union would not have taken advantage of that spread? (Only centralized bargaining is effective),

    Would Walmart workers weather losing a few jobs for that? Point of fact, many would quit one of their two current jobs (as Obamacare relieved many of the need for a medically insured job). Point of fact, raising the minimum to $15 would probably add minimum wage jobs — because minimum wage tends to patronize minimum wage. While the 65% of McDonald’s’ customers who come through the drive through in their gas eating four wheelers would not change their habits for a 25% price increase (they have to eat), the poorer customers would have an average $8,000 a year more to spend. Ditto for Walmart (except they might go more upscale to Target).

    Where is the money going to come from. $15 an hour transfers 3.5% of GDP (is that 3.5% of income — but 5% of income — I can’t figure that out) from the 55% who now take 90% share of income to the 45% who now take 10%. Long overdue; and nobody’s mortgage, car payments or health care costs are going up. Wen the upper buy one less shirt at Nordstoms, the lower buy two more at Target.

    This 3%, 3%, 3%, tippy-toe, tippy-toe, tippy-toe around price increases — like they were nitro ready to go off — is silly. 45% of the workforce is living (unnecessarily) in penury. $15 is the median wage — what the minimum wage minimally could (not should — what the market would easily bear) be. $26,000 is the median wage (must have lost some hours in there). According to chart 3-2 on p.44 of the Ms. Foundation book, Raise the Floor, the minimum needs line for a family of three who has to pay their own health insurance is double that. (Forget the crackpot gov line calculated at three times the price of an emergency diet — dried beans only; no expensive caned).

    45% of the workforce is not going to get laid off for a 3.5% shift in GDP. Likely just the opposite.

  6. Ben

    I want to see better living standards for people at the bottom. My concern with increasing wages is that non-commercial rents are set by disposable income. Increase wages and rents will rise.

    Don’t we need to tackle the fact that the US and UK are enormous wealth extraction machines and the primary vector is land?

  7. MyLessThanPrimeBeef

    Another perspective – consumers.

    Can consumers afford fast food at all?

    Can the way out be

    1. Sell healthier items
    2. Charge more
    3. Pay workers more

    It’s Win-Win-Win situation.

    And finally, women (and men) can say, ‘Hey, I don’t have time to be stuck in stuck. I need time to prepare quality food or wait patiently in a decent diner.”

    And when we all do that, the machine will have to shift into a lower gear.

  8. Vatch

    Here’s a sad story about a business that will close because of local increases in the minimum wage:

    Since this particular business is in competition with Amazon.com, they can’t raise their prices to cover their increasing payroll expenditures. I guess a lesson from this is that minimum wage increases need to occur at the federal level.

    1. I usually say min wage tends to patronize min wage — ergo, an increase can increase sales in such businesses. A boutique book store probably caters more to the high end (I have probably been in it, years ago when I lived there). The bright side is that the employees will find better paying (if possibly less amenable) employment elsewhere.

  9. run75441

    Hi Yves:

    A Restaurant in my opinion is similar to a manufacturing facility. It is mostly about the cost of food and how efficient you are in making a profit from it. The cost of the initial food is ~35-40%. add to that portion control, waste, spoilage, theft, inventory turns, etc and you can easily double that cost. People are not the big cost. Overhead and inventory are still the higher cost items.

  10. j7915

    On the borderlands bookstore closing:
    First I suspect the landlords past and present are a main cost driver.
    Second how many of their customers bought and buy at Amazon because…fill in.
    Amazon is to books what Goldman Sachs is to finance: a huge vaccum, abebooks and others are now part of their . The huge by “the pallet sales” of bestsellers by WalMart and others kills walk in traffic at bookstores. It certainly killed our large indie in Tulsa, OK. Borders had a bad lease plans, and the landlords did’t budge. One of two Borders locations again in Tulsa is still vacant. How many other locations around the country still vacant stores?

  11. Bob Hertz

    Always good to read your comments, Denis.
    One sentence was striking to me…”that the ghettoes are caused by low wages.”
    You might be right — but what is striking is that right wingers have the exact opposite view. They contend that minimum wages are too high, and that is what creates the ghettoes.
    They want a new Poor Law for America, where there are no alternative to low wage jobs, and so sooner or later everyone finds an awful job at $2 an hour. The ghettoes are filled with apple sellers and shoeshine boys and maids and hookers. But people are working……..

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