There’s a petition signed by 100 left-leaning economists that proposes raising the minimum wage to $10.50 an hour. The petition relies on an estimate by Jeannette Wicks-Lim and Robert Pollin that says it would only increase business costs to a McDonald’s by 2.7 percent and suggests a restaurant would increase the price of a Big Mac by just a nickel, or 1.3 percent.
But rather than extrapolating from studies like the economists did, let’s look at hard numbers. Those show increased costs would be considerably more than 2.7 percent and any Big Mac price increase would be a lot more than a nickel.
Let’s say that the average non-management restaurant employee at a franchised McDonald’s makes $8.50 an hour. The crew’s pay, including payroll taxes, equals about 22 percent of a McDonald’s store’s revenue, according to Janney Capital Markets research. If you increase their pay by an average 24 percent, it would increase the store’s costs by 5.2 percent, all else being equal. That’s a hair under what the average franchised McDonald’s earns in operating profit, according to Janney.
A $4 Big Mac would go up 5.2 percent to $4.21. But franchisees only take in about 78 cents of every revenue dollar, according to one multiple-franchise owner I talked to who asked not to be identified. The rest goes to franchise and rent fees that are a percentage of sales. So a store would actually have to raise Big Mac prices (along with the price of everything else) by 6.3 percent to $4.25.
But when you raise prices, you typically sell less stuff, and elasticity is particularly significant in fast food. So to get back to even, a store would have to raise prices even further, though some of that would be mitigated because competitors would face the same increase in labor costs.
Now there are ways to mitigate such a price increase, as the economists point out: Taking a lower profit, slowing wage growth for higher-paid employees, and increasing productivity (which would likely mean fewer total employee hours, unless sales went up). McDonald’s could also lower its franchise fees.
The latter in particular is unlikely. But you can see how it’s quite possible for McDonald’s to weather a $2-an-hour wage increase—particularly at its company-owned stores, which have much higher profit margins than franchised outlets—through a combination of price increases and cost cuts. But it’s highly unlikely they’d be able to keep the price increase to a nickel.
But what about an even bigger increase in the minimum wage? How much would it cost to more than double it, to $15 an hour?
The Daily Beast took a pitiful stab at that a couple of weeks ago, cobbling together a McPoverty Calculator based on the research of Wicks-Lim and Pollin. Put in how much more you’d be willing to pay for a $4.56 Big Mac (which seems high, by the way. One costs $4.49 at my local McDonald’s in high-cost Seattle), and The Daily Beast spits out how much of a raise that would cover.
Except it’s wildly unrealistic. Recall The Huffington Post’s seriously flawed story that claimed the chain could double pay by adding 68 cents to a Big Mac’s price, something I and others quickly debunked.
The Daily Beast claims McDonald’s could cover an $8-an-hour wage increase by raising Big Mac prices just 22 cents, or 4.8 percent (I should note that I’m assuming that the Big Mac is a stand-in for the entire McDonald’s menu, because prices would have to be raised across the board, or at least on average).
This is nuts.
Let’s use Janney’s research that shows the crew costs about $585,000 in wages and payroll taxes. Again assuming an $8.50 an hour average wage, moving those workers en masse to $15.23 an hour would raise labor costs $463,000 or 79 percent, all else being equal. That would raise the store’s overall costs by 17 percentage points (and that’s not considering management pay increases and increased supply-chain costs if the $15.23 was a minimum wage, rather than a McD’s-only wage). If we use The Daily Beast’s own $7.25 figure, labor costs would rise 110 percent and overall costs jump 23.8 percent.
You try covering a 17 percent or 24 percent cost increase on a 5 percent revenue increase. It’s not going to happen, particularly when your profit margin is less than 6 percent. I don’t care how much “extrapolating” was done by the economists you consulted.
And again, The Daily Beast’s price increase doesn’t take into consideration the fact that only about 78 percent of any revenue increase goes to the franchisee, nor does it account for the fact that sales would surely fall somewhat if prices increased.
This is all not to criticize raising the minimum wage. I’m all for a much higher minimum wage, phased in over several years. And even my realist’s math shows that a $15 an hour wage isn’t that outlandish.
But let’s be honest about the real costs of such a move. There have been huge structural changes in our economy that have allowed low-end wages to collapse over the last several decades. There will need to be big structural changes to correct that.
Further reading:
A Big Mac miss by The Huffington Post. Poor reporting on a “study” by a Kansas undergrad.
Big Mac numbers too good to check–or to correct. Fixes and non-fixes following a Huffington Post story.
Minimum sense on the minimum wage. A WSJ op-ed from a front group for low-wage employers gets it very wrong.
John Stossel’s poor logic on minimum wages and jobs. Fox host fails to explain away Australia’s high wages and low unemployment
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.
