It’s long past time I laid this out, as laypeople — here defined as anyone who doesn’t actually have a grounding in business and economics — keep getting it wrong. So before anyone else with a degree from the University Of Common Sense And Memeology can mislead you again, let’s examine a case study of how wage increases actually affect pricing.
Price of goods covers a lot of different angles of microeconomics. For our example, we’re going to use our old standby, the McDonald’s hamburger. So let’s start by looking at the supply side, and how that burger gets to your table.
McDonald’s actually does very little of its own work. Most of your meal is prepared before the McDonald’s corporation ever takes possession of it. That primarily encompasses three other industries: farming, factory manufacturing, and transport. None of those industries have much incidence of paying minimum wage in the first place: according to Pew, food preparation and serving (i.e. restaurant workers) is far and away the greatest segment of minimum wage earners; sales comes next, at less than a third of food prep, and it drops off rapidly from there. Transportation, manufacturing, and farming, and their related occupations, are barely a blip on the radar. Most of those workers are part-time.
So it’s safe to assume that an increase in production costs for McDonald’s is negligible.
Now, McDonald’s employs 375,000 people worldwide, although they have many more franchise employees which they don’t count as official employees of McDonald’s. Still, with only about 1.5 million food service workers in America earning minimum wage or less, we can make some assumptions. They aren’t actually as big an employer as everybody thinks. For the sake of argument, let’s say that the wage increase will affect 500,000 employees. Let’s say, taking into account that they’re not all full-time and not all working at the same time, that works out to an extra $1 per day per employee.
Let’s also estimate that McDonald’s makes about $3 in revenue per burger sold, before wages. Burgers are actually among their least-profitable items, as they rely mostly on the sale of fries and drinks marked up thousands of times (they literally give drinks away in the summer, yet the consumer pays $2 more for fries and a drink with their Big Mac. They pay an extra $3 to add the exact same to two cheeseburgers. McDonald’s knows where their profits lie.) And so we have to estimate profits across their actual big earners to some extent. McDonald’s counts on the fact that most customers want fries and a drink.
So. Right now, we’re estimating an extra $500,000 a day for wages with a wage increase. That’s a lot. That’s an extra $182 million a year! In fact, let’s double it — make it nearly $400 million.
But here’s a fact. McDonald’s, according to Business Insider, sold 75 burgers per second worldwide; at least, that’s what their training manuals claimed around 2010. Their profits have since risen, although their sales have fallen. Remember that; it’ll be important later.
So, let’s make a wild estimate again. The U.S. has close to twice as many McDonald’s restaurants as every other country combined (it’s actually about 14,000 out of 36,000. So let’s say that 25 of those 75 burgers per second are made in America. At a profit of $3 per burger, that comes out to….. $6.5 million per day. In pure profit. And considering that McDonald’s reported a $27 billion profit last year, we’ve probably significantly lowballed our profit estimate (that works out to about 2.4 billion a year.)
Even with our somewhat-exaggerated figures here, McDonald’s can easily afford to absorb a wage increase. At twice again the increase they can afford it. At five times. And as for how that affects the cost of a burger? Well, we have real-world data on that. According to a Purdue study, a wage increase to $15 would — if McDonald’s increased prices to absorb the cost (which they probably wouldn’t, they like those nice round “$3.99” figures,) the price of a Big Mac would increase by…. $0.17. If anything, they’re more likely to bump fries and drinks an extra penny or two.
And, I cannot stress enough, fast food is the industry likely to be hit the hardest by a minimum wage increase.
Now, here are the final two parts of that equation. First, recent studies show, as in this paper from the NELP, that businesses are likely to save more on decreased turnover and lower rates of absenteeism than they will spend in additional wages. The actual and opportunity costs of hiring new employees are high, as are the costs of sick employees. Well-paid people are happier and healthier.
And that’s starting to be fairly well-discussed. Here’s the flip side of that. Remember what we said about McDonald’s actually earning more even as they have less customers? Well, a higher minimum wage across the board directly translates into more McDonald’s customers, both among their own employees and the general public. That means more sales, and more profit, for McDonald’s.
In short? Everybody wins, and when we examine this debate from any practical angle, it’s fairly obvious that the “prices will rise” scare story is exactly that: a fantasy created by minimum wage opponents and spread by the ignorant.
