Unseen consequences of a $15 hourly minimum wage

By Eric Boehm | PA Independent

As my colleague Ryan Ekvall wrote last week, union-led protests at fast-food restaurants around the nation are trying to build support for a $15-an-hour minimum wage.

Though they look like grassroots efforts, the protests were staffed by union activists – not actual fast-food workers – and they are organized by groups like Fast Food Forward and the Restaurant Opportunity Center, both of which are replete with ties to organized labor.  But let’s leave that aside for a moment and consider the merits of their calls for higher wages.

No one would argue that flipping burgers for minimum wage is exactly a dream job, but wages do not exist in a vacuum.

So, let’s crunch the numbers.

According to a 2010 study from Deloitte and the National Restaurant Association, an average fast food restaurant franchisee — lets call him Johnny Burger — makes about $1.2 million in revenue each year.

Johnny has to use most of that money to buy products — beef patties, french fries and soda — so he has something to feed to his customers.  After taxes, franchise fees and other “fixed costs,” he’ll use about about 30 percent of his revenue to pay his employees.  That works out to about $360,000 annually, on average.

When all the bills, taxes and employees are paid, Johnny Burger makes about $60,000 in profit for the year.

But if labor costs were to increase by just 50 percent – far less than what the protesters on Thursday were calling for – it would add $180,000 to Johnny’s annual labor costs.

Put another way, increasing minimum wage by about $3.50 per hour would consume three years’ profit in a single year.

“The $15 minimum wage cannot coexist with the same number of job opportunities as we see in the industry right now,” said Michael Saltzman, research director at theEmployment Policy Institute, a Washington D.C. think tank.

How would restaurants and fast food chains respond to that added cost?  It’s hard to say, but there are some examples out there in the world right now.

The first option is to simply raise prices, in an effort to generate more revenue to cover the higher labor costs.  But there are problems with that idea.

At Forbes, Tim Worstall makes a pretty solid argument that downward-pressure on prices from competition will keep McDonald’s from charging $10 for a quarter-pounder.

But other things can change.  Those “extra value” dollar menus would be a thing of the past, and customers could be charged extra for services now provided for free.

In Europe, where labor costs are higher because of minimum wage and benefit laws, most fast food joints require customers to pay an extra euro (about $1.32 at the current exchange rate) for packets of ketchup and other condiments — though why you’d ever put ketchup on fries when there are places serving samurai  sauce is beyond me, but I digress.

The same is true of restrooms — if you want to pee in a restaurant in Belgium, you better have a few coins in your pocket.

Higher prices would not be the only consequence.

Saltzman suggests the more likely option is that fast food chains would find ways to cut their number of employees, adding to the unemployment crisis that already exists for entry-level, low skill workers.

Many fast food joints could cut labor costs by replacing workers with machines.

If a company has to pay $15 per hour to its workers, why not install a computer system that can take orders faster, more efficiently and at lower cost?

Many convenience stores that serve prepared food (like the well-known Sheetz and WaWa stores in my native Pennsylvania) are already using this technology.  It seems like a natural fit for fast food chains as well.

McDonald’s restaurants in France — where, again, labor costs are higher thanks in part to government-mandated wages — installed touch screen technology last year to replace workers taking orders.

According to the U.S. Department of Labor, unemployment was 12.6 percent in July for workers between the ages of 20 and 24. That’s well above the national rate of 7.4 percent for all workers in the same month.

Workers under 25 make up only one-fifth of the overall labor force, but they account for half of all minimum wage workers.  That means they are likely to benefit the most from a higher minimum wage, but also the most likely to lose their jobs if employers have to cut back on labor costs.

All that information comes with the usual caveats – prices and wages will vary everywhere depending on cost-of-living and the costs associated with producing and transportation frozen patties of ground beef and processed slices of spuds.

But the bottom line is that higher wages will almost certainly be reflected in other places, and both customers or employees will pay the price.

Boehm is a reporter for Watchdog.org and can be reached at Eric@PAIndependent.com. Follow him on Twitter @EricBoehm87

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