Minimum Wage, Fast Food, Workers, and Consumers

The concept of a minimum wage troubles me. Many nations do well without mandated minimum wages, while others do well with complex minimum wage systems.

In an ideal market, workers would have sufficient leverage to walk away from low-paying employers. Other employers, seeking the most skilled and efficient workers, would entice workers away from competitors.

As the cost of living rises in a region, theoretical wage pressures lead to increased salaries, too.

Where I live, in Central Texas, most entry-level jobs pay $15 or more per hour because there’s so much competition for workers. I’ve seen banners promising up to $18 an hour at a national hamburger franchise. Another franchised chain is offering $60,000 per year for day-shift managers.

Not everywhere is booming quite like Central Texas.

In higher-wage professions, competitive pressures do raise wages regardless of location. High-tech companies compete for talent. Many engineering fields have seen wages rise faster than overall inflation. It helps to be in demand on the job market. Companies know highly educated or trained talent will relocate for more opportunities.

What special skills do fast food and casual dining employees have? Up-scale restaurants compete for chefs and expert wait staff, but low- to mid-range chain dining experiences seldom require specialists in the kitchen or at the tables. Few people earning minimum wage and lacking special skills can relocate to a booming region with more opportunities.

Though unions have helped in other nations, our low-skilled workers are rarely unionized. In fact, few private-sector workers are unionized in the United States, for a variety of reasons.

And while I don’t find unions a universal good or a universal bad, it should be noted that those nations with strong economies and no mandated minimum wages do have strong unions, even within the fast food and casual dining segments of hospitality services. In fact, most of the hospitality sector is unionized in Northern European nations without minimum wage laws.

I personally prefer union models that still enable individuals to negotiate. That’s what we see in entertainment and sports, for example. The workers in demand, those who bring significant value to a project, can and do negotiate higher salaries.

My ideal version of unions and guilds aside, fast food workers don’t exactly fit into the apprentice, journeyman, expert model of union and guild training. Fast food jobs take minimal training. Showing up on time and having a good work ethic are the primary skills. Show up and follow the procedures.

With that background established, I do accept that cities and states might need to adopt minimum wages in lieu of natural market pressures.

Employers can and do maintain low wages in fast food precisely because workers cannot go to other employers or, more dramatically, relocate to another location. Trapped workers might be disgruntled, but they don’t believe they have much power to request or demand better pay.

Now that cities, counties, and states are raising minimum wages, some commentators are sounding alarms.

Are we going to see $38 Taco Bell burritos because of a $15 hourly wage? Of course not.

Labor costs represent about 2 to 5 percent of dining costs passed to consumers in fast food, where minimum wage is common. Labor costs are 15 to 30 percent of operations costs in fast food. (Labor costs include wages, taxes, insurance, etc.) Casual and fine dining labor costs are 20 to 30 percent of the final consumer charge. Wait staff relies on tips, an unfair model unique to the United States.

Labor costs represent far more of the cost, averaging 50 percent, in white-collar services. Skilled labor, the services might be 60 percent payroll costs (mechanics, plumbers).

Raising fast-food wages from $8 to $12, for example, should add $0.05 cents per dollar to menu items.

Minimum Wage Increases: The Myth of the $38 Burrito

[Orley] Ashenfelter, the Princeton economist, said labor costs represent between 20% and 30% of the final consumer price. He said new research of his, on McDonald’s wages and Big Mac prices, estimated that a 10% increase in the minimum wage would raise Big Mac prices by 1.4%.

“Some of Taco Bell’s most expensive burritos show no price difference whatsoever between places with very high and very low minimum wages,” said Gary Burtless, a senior fellow in economic studies at the Brookings Institution, who called Rachel’s claim “easily disproven.”

Burtless compared prices for two different types of burritos at San Francisco’s 710 Third St. Taco Bell to prices for the same burritos at a Taco Bell in Alexandria, Va., where the state’s minimum wage is currently $7.25 per hour, equal to the federal minimum.

In Alexandria, a Bean Burrito goes for $1.29, while a Burrito Supreme costs $4.19. At the San Francisco location, a Bean Burrito sells for $1.99, and a Burrito Supreme costs $4.19.

The most expensive burrito on the menu, the Crunchwrap Supreme, costs $4.19 in Alexandria and $4.49 in San Francisco, a difference of about 7%.

While a $15 hourly wage won’t raise most prices. It could decrease fast-food employment by 1 to 3 percent. That is a lot of jobs. Job losses or hours cut, vs raising some people a tiny bit.

That’s why I keep arguing for universal basic income. UBI doesn’t lead to a rapid workforce reduction. A higher minimum wage might significantly reduce employment among low-skilled workers, requiring supports.

According to researchers at the University of Washington, in Seattle a 3 percent rise in prices correlated to a 7 percent reduction in total payroll through improved automation and workflows. That’s why you see new drive-through models being adopted by some chains: they were able to cut people and actually saved money.

Seattle’s reduction in work hours? It lowered actual take-home pay. Then COVID-19 struck, so UW researchers have no idea if this was a temporary issue. But, before the coronavirus pandemic, researchers noted the effects of kitchen automation; self-service and app ordering; tablets at tables; and some restaurants went to cafeteria lines, replacing table service.

Dual-lane drive-through models cut labor costs up to 25 percent and make customers happy. Duncan and other chains are emphasizing drive-through only “hut” that cut employee counts by half.

Imagine a dine-in donut shop. You need at least one counter cashier, one drive-through cashier, one or two food prep workers, and often an employee cleaning up after customers. There are huts with only two employees. One creative design uses three, with two service windows. Three workers compared to five, that’s a savings even with higher salaries for those remaining workers.

And so on.

As the Washington Post reported in 2017,

On the whole, the study estimates, the average low-wage worker in the city lost $125 a month because of the hike in the minimum.
The paper’s conclusions contradict years of research on the minimum wage. Many past studies, by contrast, have found that the benefits of increases for low-wage workers exceed the costs in terms of reduced employment — often by a factor of four or five to one.

“This strikes me as a study that is likely to influence people,” said David Autor, an economist at the Massachusetts Institute of Technology who was not involved in the research. He called the work “very credible” and “sufficiently compelling in its design and statistical power that it can change minds.”

Vigdor said that restaurateurs in Seattle — along with other employers — responded to the minimum wage by hiring more skilled and experienced workers, who might be able to produce more revenue for their firms in the same amount of time.
That hypothesis has worrisome implications for less skilled workers. While there those with more ability might be paid more, junior workers might be losing an opportunity to work their way up. “Basically, what we’re doing is we’re removing the bottom rung of the ladder,” Vigdor said.

Note: Seattle’s wage in 2020: $16.39

People claiming a higher minimum wage of $12.50 to $17.00 will raise fast-food prices significantly either don’t understand our capitalist market or they want to misrepresent current research.  Prices will rise slightly, adjustments will be made, and new productivity enhancements (including automation) will be adopted by the fast-food industry. Some workers will see higher wages, some will see fewer hours, and others will never be hired.

The market will adjust. 

Labor is less than a third of the final consumer costs within the fast-food industry. That’s why Taco Bell in San Francisco is about the same price as Taco Bell here in Texas or Pennsylvania or Georgia. Promotional pricing by chains is offered nationally. Yes, franchisees have complained about these promotions, but they also realize consumers want that uniform experience. A $5 meal deal is $5 almost everywhere in the Continental United States, not $7 or $8 in some cities.

Working out the price increases, it would take a minimum wage of $22, approximately, to raise prices more than 15 percent per menu item. Even then, most companies would raise the more costly items by a greater percentage while trying to maintain a discount menu as a loss-leader to entice consumers. A 15 percent increase takes a $5.00 item to… $5.75. Not exactly breaking the bank.

However, if I own a store, I’ll find ways to reduce overall labor costs (and other costs) by as much as I can to reduce any necessary price increases. That has happened in Seattle: automation and self-service win, and some jobs are lost or hours cut.

Capitalism is an economic model in which the parties negotiate via the market. Consumers will pay or trade X for service or good Y. They won’t pay more than something is worth to them. In an airport or theme park with cranky children, I will pay $10 for a fast food meal because we’re a captive market. I cannot take my business elsewhere. (We still “shop” the market in airports, as best we can.)

Too many people claiming capitalism is bad are not using the economic term properly. Capitalism is anyone trading one form of capital (of the six forms) for another form of capital. The first bead trade for a pelt was capitalism. Trading bread for milk is capitalism. Trading your knowledge or labor for something is capitalism.

I’m not going to trade $50 for a Happy Meal. But, I do often trade $50 for a full meal for our family at a Tex-Mex restaurant. I value the experience and food differently.

Fast food chains know that if I’m paying more, I’m going to eat somewhere “worth” the extra cost to me.

Socialism is technically when the workers own the means of production. An employee-owned fast food franchise might be a good idea. Maybe it should be tried. Socialist ownership doesn’t preclude those workers from engaging in capitalist trade with other workers. The two modes are not always exclusive.

Only when you suggest “everyone” (the government) owns all means of production (Marxist socialism) does it start to preclude market pressures. (And even then, as the USSR, China, and Venezuela discovered, you can’t make what people don’t want or value.)

Workers could own franchises. There’s no reason they cannot pool their money, invest and form a corporation. Isn’t that what small business people do all the time? They own and work in the business? [Some] of the workers own the means of production.

Returning to my main point: No, you won’t see $20 Happy Meals and $38 burritos. Those menu items wouldn’t sell at those prices in today’s market. Instead, companies would adjust because they don’t want to fail. They’d cut costs. They’d change their model.

I anticipate a $12.50 national minimum wage passing in the next year or two. It won’t affect much because so many people live in regions with higher mandates already in place.