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  • The Costs to Fast-Food Restaurants of a

    Minimum Wage Increase to $10.50 per Hour

    Jeannette Wicks-Lim and

    Robert Pollin

    Political Economy

    Research Institute

    University of Massachusetts,

    Amherst

    RESEARCH BRIEF September 2013

  • T H E C O S T S T O F A S T - F O O D R E S T A U R A N T S O F A M I N I M U M W A G E I N C R E A S E  P A G E 1

    The Costs to Fast-Food Restaurants of a

    Minimum Wage Increase to $10.50 per Hour

    JEANNETTE WICKS -LIM AND ROBERT POLLIN

    September 2013

    INTRODUCTI ON In response to a rise in political activity around proposals to raise the federal mini-

    mum wage, currently at $7.25 per hour, major media outlets have begun to focus on

    the specific question of how much a minimum wage increase would cost low-wage

    businesses, such as fast-food restaurants.1 Whether business costs from a minimum

    wage hike are large or small is a critical issue. If these cost increases are large, em-

    ployers may try to minimize the impact of the higher minimum wage on their wage

    bill by reducing their workforce. Low-wage workers may then lose their jobs or expe-

    rience cutbacks in their work schedule sufficient to outweigh any earnings gains

    through their higher wage. Such outcomes could lead to worsening, instead of im-

    proving, the living standards of low-wage workers. On the other hand, if the cost in-

    creases are small, such negative unintended consequences are unlikely.

    As part of this debate, we considered the potential impact of a proposal to raise the

    minimum wage to $10.50 put forth by Florida Congressman Alan Grayson in H.R.

    1346. We concluded that such a minimum wage hike would meaningfully improve

    the living standards for low-wage workers and their households in part because the

    new minimum wage would impose only modest costs to businesses, including low-

    wage, fast-food restaurants. The $10.50 minimum wage would therefore boost earn-

    ings while avoiding the negative, unintended consequence of reducing employment.

    We presented these findings in a petition supporting H.R. 1346 signed by over

    100 professional economists.2 In particular, we described how raising the minimum

    to $10.50 would impose a cost increase to the average fast-food restaurant equal to

    2.7 percent of their sales revenue. In other words, assuming all else equal, the aver-

    age fast-food restaurant could fully cover the costs of the $10.50 minimum wage

    by raising their prices 2.7 percent. This is equivalent to increasing the price of a

    $4.50 Big Mac to $4.60. This illustration caught the attention of writers at the

    Daily Beast, who then used our estimates to create its “McPoverty Calculator,”

    1 See for example, “This Is What Would Happen If Fast-Food Workers Got Raises,” by Venessa

    Wong, Bloomberg BusinessWeek, August 2, 2013 and “$12 Minimum Wage for Walmart Workers

    Would Cost the Average Shopper Just 46 Cents per Trip,” by Caroline Fairchild, The Huffington

    Post, July 18, 2013.

    2 This July 2013 petition, “Economists in Support of a $10.50 U.S. Minimum Wage,” can be

    viewed at: http://www.peri.umass.edu/fileadmin/pdf/resources/Minimum_Wage_petition_

    website.pdf .

  • T H E C O S T S T O F A S T - F O O D R E S T A U R A N T S O F A M I N I M U M W A G E I N C R E A S E  P A G E 2

    an interactive website feature posted on 8/1/2013 that allowed readers to see how

    much fast-food workers’ wages could rise given small increases in fast-food prices.3

    Commentary by Ryan Chittum of the Columbia Journalism Review claims in his

    piece “Daily Beast Doubles Down on Big Mac Minimum Wage Nonsense,” (8/16/13)

    that the Daily Beast’s estimates of the costs of a minimum wage increase, based on

    our research, are too low. He specifically calls into question our estimate that a

    $10.50 federal minimum wage would raise the costs of the average fast-food restau-

    rant by an amount equal to 2.7 percent of their sales revenue. The main thrust of

    his critique is that our estimate is unreliable because it is extrapolated from past re-

    search as opposed to calculated directly from current industry data.

    Chittum misunderstands the basis for our 2.7 percent estimate. As we explained in a

    technical appendix to the petition4, we extrapolated our 2.7 percent figure from the

    findings of five empirical studies firmly grounded in industry-specific data. Each of

    these studies measures how the business costs of fast-food establishments increased

    in response to minimum wage hikes in the range of 10 percent to 65 percent. This al-

    lows us to observe the pattern of how costs increase for minimum wage hikes of vari-

    ous sizes, and predict well how costs will rise given a 44.8 percent minimum wage

    hike from $7.25 to $10.50. In other words, we effectively built our estimate from the

    industry data analyzed in all five studies. Moreover, Chittum makes assumptions

    about the basic pay structure in the fast-food industry that are at odds with the em-

    ployment and wage data from the Labor Department. We demonstrate this in detail

    in this research brief.

    In what follows, we provide a step-by-step illustration of how the minimum wage

    impacts the business costs of fast-food restaurants to explain: (1) why a 44.8 percent

    federal minimum wage hike from $7.25 to $10.50 would result in a modest cost in-

    crease equal to 2.7 percent of its sales revenue for the average fast-food establish-

    ment, consistent with past research findings; and (2) how Chittum’s assumptions

    about the way a $10.50 minimum wage would impact the fast-food industry’s pay-

    roll do not reflect available industry data.

    ESTIMATING BUSIN ESS C OST INCR EASES FROM C URREN T INDUSTRY DATA

    The crucial number challenged by Chittum is our estimate that the average fast-food

    business could cover the entire cost increase associated with a $10.50 minimum wage

    with 2.7 percent price increase. Where did we get this 2.7 percent figure? This figure

    is based on a key statistic—the cost-increase-to-sales ratio. Specifically, this is a ratio

    of a business’s total cost increase, relative to its revenue, resulting through a mini-

    mum wage increase.

    3 See the “The McPoverty Calculator,” by Sam Schlinkert and Filipa Ioannou, The Daily Beast,

    August 1, 2013.

    4 This technical appendix can be found here: http://www.peri.umass.edu/fileadmin/pdf/resources/

    minwage_notesjune19.pdf

  • T H E C O S T S T O F A S T - F O O D R E S T A U R A N T S O F A M I N I M U M W A G E I N C R E A S E  P A G E 3

    As we noted above, we extrapolated our 2.7 percent figure from a set of five empiri-

    cal studies that specifically measure how minimum wages affect the business costs

    of fast-food restaurants. To test the reliability of our extrapolation, we now also es-

    timate the cost-increase-to-sales ratio directly using current industry data.

    We begin with an estimate of the overall costs. Specifically we need to answer the

    following questions: (1) How many workers can expect to get raises? (2) How big are

    these raises? (3) What is their overall impact on the wage bill?

    The wage, hours, and employment figures are based on 2012 standard labor market

    data published by the U.S. Labor Department. These include the Occupational Em-

    ployment Statistics (OES), the Current Population Survey (CPS), the Quarterly Cen-

    sus of Employment and Wages (QCEW), and the Current Employment Statistics

    (CES).5

    We include in our cost figure two categories of raises. The first is mandated raises—

    the raises that get all workers to the new $10.50 minimum. The second is ripple-effect

    raises. These are non-mandated raises that put near-minimum wage workers above

    the new minimum. Employers provide these ripple-effect raises in order to maintain

    a similar wage hierarchy before and after a minimum wage increase.

    We assume that any limited-service restaurant workers earning between $7.25 and

    $10.50 will receive mandated raises that get them at least up to $10.50. Estimating

    which workers would get ripple-effect raises, as well as the size of these raises, is nec-

    essarily a more speculative exercise since such raises are not legally required.

    We estimate the size and extent of ripple-effect raises using the results of a study

    by one of us.6 That study looks at the impact of minimum wage hikes, from 1983 to

    2002, on wages across the wage distribution. Its basic finding is that ripple-effect

    raises strongly compress wages at the low end. We apply the study’s estimated

    minimum wage effects on wages across the wage distribution, and assume that the

    impact from a 44.8-percent minimum wage hike can be expected to extend up to

    workers earning $12.00 per hour. We present the figures for determining the costs

    of both mandated and ripple-effect raises in Table 1. (See Technical Appendix for

    details

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