Purdue: $15 dollar min. wage would raise fast food prices 4.3%

[THE_DEVIL]

Study: Raising wages to $15 an hour for limited-service restaurant employees would raise prices 4.3 percent

July 27, 2015
WEST LAFAYETTE, Ind. - Raising wages to $15 an hour for limited-service restaurant employees would lead to an estimated 4.3 percent increase in prices at those restaurants, according to a recent study.

Researchers from Purdue University's School of Hospitality and Tourism Management also examined the impact of limited-service restaurants offering health-care benefits and found that, due to current tax credits in the Affordable Care Act, there would be a minimal effect on prices at limited-service restaurants with fewer than 25 full-time employees.

Limited-service restaurants are what many consumers refer to as "fast-food restaurants," where there usually is no tableside service and no tipping.

The study says increasing wages to $22 an hour, which the Bureau of Labor Statistics says is what the average American private industry employee makes, would cause a 25 percent increase in prices.

The current federal minimum wage is $7.25 an hour, which also is the standard in Indiana. Some states and cities across the United States, including Illinois, Michigan and Ohio, have raised the minimum wage to more than $8 an hour. In the past two years, fast-food workers across the nation have gone on strike or had demonstrations calling for (living) wages to be increased to $15 per hour, the study says.

"We wanted to find out what happens if food-service employees' wages go up to $15 an hour and what happens if you take it to $22 an hour," said Richard Ghiselli, professor and head of the School of Hospitality and Tourism Management. "Health-care benefits are a little more complex. We did an analysis based on information at the time we started the study (2013). There were tax credits available then. With those tax credits available, giving full-time employees health insurance shouldn't affect businesses that much. When those tax credits expire, then it changes."

Employee turnover in the foodservice industry led to the study, Ghiselli said.

"Turnover has been one of the more troublesome problems to manage in the foodservice industry. In 2013, franchised establishments experienced a turnover rate of 93 percent," he said. "People often hypothesize that if you raise pay and offer benefits, turnover will go down. I don't think we answered the question of whether that reduces turnover, but the study showed that if you raise pay and offer health insurance, prices will go up."

Ghiselli said the study's results were close to what he expected and that there could potentially be other effects of raising wages and offering health benefits.

"There were no surprises. We thought prices would go up. We just wanted to know how much they would go up if you raise pay and offer health insurance," he said. "The other way to look at this if you don't want to raise the prices is to examine the impact on product size. As expected, a hamburger would be much smaller."

Data from the National Restaurant Association, taken from across the United States, was used in the study to determine the impact of higher wages on prices. To determine the price impact of offering health-care insurance to limited-service restaurant employees, Ghiselli said researchers obtained information from HealthCare.gov, based on the typical portrait of food-service employees in Indiana.

The study, which was co-authored by Jing Ma, a doctoral student and graduate teaching assistant in the School of Hospitality and Tourism Management, was published recently in the Journal of Foodservice Business Research.

Writer: Greg McClure, 765-496-9711, gmcclure@purdue.edu

Source: Richard Ghiselli, 765-496-2636, ghiselli@purdue.edu

 

[Aegon_Targaryen]

A couple things are stupid with this article.

It assumes it knows how business owners would deal with the minimum wage increase, which THEY have full control of. Which because of that, nothing can be seen as conclusive.

It also likely ignores that the high turnover rate, is that a good portion of the fast food workers are teenagers who are just there until they move on until the next chapter in their lives.

Other than that, it seemed to understand what would actually happen with the raising of the food prices. Not to mention that the middle class is who will get hurt by this when all is said and done.

 

[Old_wrestling_fan]

I didn't see where they "showed their work"...like I used to have to do in math class back in the day. But I would be curious to see it, since it seems dubious to me that you could double your labor cost, which is likely around 30%-35% of your cost structure and then end up with only a 4.3% increase in price.

That, to me, either assumes a MUCH larger profit margin is in effect than anything that I am aware of for fast food restaurants OR some serious fault(s) in the Boilermaker, ahem, "research". Not only does journalism suck more and more these days, but you just can't take the headline from a "study" and run with that...although I admit it does work on most people these days.

 

[naturalmwa]

This reminds me of when Papa Johns got all bothered over the ACA because it raised the price of pizza by less than a quarter.

 

[cidhawkeye]

In Seattle they have seen some interesting things with their living wage

 

[What Would Jesus Do?]

I didn't see where they "showed their work"...like I used to have to do in math class back in the day. But I would be curious to see it, since it seems dubious to me that you could double your labor cost, which is likely around 30%-35% of your cost structure and then end up with only a 4.3% increase in price.

That, to me, either assumes a MUCH larger profit margin is in effect than anything that I am aware of for fast food restaurants OR some serious fault(s) in the Boilermaker, ahem, "research". Not only does journalism suck more and more these days, but you just can't take the headline from a "study" and run with that...although I admit it does work on most people these days.

So . . . game it out for us.

How many worker hours per day?
How much would wages go up?
How many burgers, fries, drinks, etc. sold each day?

Let's really oversimplify and say you sell 500 "meals" a day and the increased wages cost you an extra $500 per day. That's a buck a meal increase, assuming you make no other changes.

Now we just need to plug in more accurate numbers.

 

[TexMichFan]

This article gives a little balance to the argument.

http://www.nationalreview.com/artic...-wages-would-raise-prices-only-4-percent-very

by JAMES SHERK August 5, 2015 4:00 AM If something seems too good to be true, it probably is. Unfortunately, many journalists did not remember that when covering a new report claiming $15-an-hour wages would raise fast-food prices only 4 percent.

A closer look shows that the study underlying the report had major methodological errors. More serious analysis shows that $15-an-hour wages would raise fast-food prices by over a third — at least until stores automate work currently done by humans.

The study, by Purdue University economists Richard Ghiselli and Jing Ma, has made quite a splash. The Washington Post covered it extensively, concluding that the higher wages for fast-food workers would add just 17 cents to the cost of a Big Mac. Local papers have covered it too. ThinkProgress argued that the study undercuts arguments against $15-an-hour fast-food wages. If the study were accurate, it would be hard to argue with them.

However, Purdue’s report offers a case study in why journalists should consult multiple sources before going to press. Simple back-of-the-envelope calculations show that the Purdue results are impossible. RELATED: Minimum-Wage Laws: Ruinous ‘Compassion’ Labor accounts for a quarter to a third of the average fast-food restaurant’s costs. Currently, wages in the fast-food industry run around $9 an hour. Going to $15 an hour means increasing pay by over 50 percent. Prices would have to rise by at least one-sixth (50 percent multiplied by one third) to cover the base-wage increases. Of course, those price increases would drive some customers away, so restaurants would need to raise prices again. But as a baseline, prices would have to rise by at least one-sixth.

The Purdue study finds price increases an order of magnitude smaller. It does so by making a basic math error. The Purdue researchers got their data from the National Restaurant Association’s (NRA) 2014 operations report. The report surveys restaurants and shows how much the median restaurant spends on various expenses, such as payroll, food, marketing, etc. The Purdue researchers added those figures to derive the balance sheet of the typical fast-food restaurant.

Mathematically, however, medians do not work that way. Average values will add to the overall sum, but medians typically do not. The preface of the NRA Operations Report emphasizes in highlighted text that researchers cannot add median values to get overall expenses. Nonetheless the Purdue researchers did exactly that. Consequently, their derived restaurant-balance-sheet profits and costs sum to 92 percent of total sales. Fully 8 percent of fast-food restaurant expenses disappear.

The Purdue study proceeds to calculate how much wages would have to rise to pay $15 an hour and adds that amount (and a constant profit margin) to the undercounted expenses. They then compare this new (undercounted) figure to the sales of the typical restaurant. The missing expenses absorb two-thirds of the higher labor costs. The Purdue study makes two other errors. The economists estimated fast-food workers make about $10.60 an hour — somewhat more than the Bureau of Labor Statistics reports. As a result, they underestimate how much restaurants’ labor costs — and hence prices — would need to rise.

They also ignored fast-food customers’ price sensitivity. Most Americans eat fast food because it is fast and cheap. When prices rise, sales fall — a lot. Studies find a 10 percent increase in fast-food prices cuts sales by 9.5 percent. So fast-food restaurants will need further price increases to cover fixed costs such as rent. In equilibrium, prices rise by about double the amount needed to initially cover the higher wages.

Last year, the Heritage Foundation estimated how a $15-an-hour minimum wage would affect fast-food prices — accounting for all these factors. That report used data on average fast-food balance sheets, relied on BLS wage estimates, and accounted for customers’ price sensitivity. This model found very different results: Prices would have to rise 38 percent to cover the higher wages, while sales and employment would both fall by over a third. In the short term, the price of a Big Mac would rise from $3.99 to $5.50. A Big Mac meal would go from $5.69 to $7.85. That takes a much larger bite out of consumers’ wallets than a 17-cent hike. Moreover, this money won’t come from “the rich.” Warren Buffett and Bill Gates don’t spend much on fast food. Low- and middle-income Americans would bear the brunt of the higher prices.

RELATED: The Insidious Political Power of Minimum-Wage Laws In the longer term, fast-food restaurants would almost certainly react by replacing humans with machines. McDonald’s is already experimenting with replacing cashiers with kiosks. California inventors have developed a robot that cooks 360 hamburgers an hour. Mandating higher wages guarantees restaurants will implement this technology more quickly and automate more jobs than they otherwise would. That will mean lower prices, but fewer entry-level jobs. Milton Friedman famously observed that “there is no such thing as a free lunch.” He could have added “or a free burger.” Increasing fast-food wages by over 50 percent will substantially raise fast-food prices — until those jobs get automated. The new report claiming otherwise was, in fact, too good to be true.

 

[22*43*51]

So . . . game it out for us.

How many worker hours per day?
How much would wages go up?
How many burgers, fries, drinks, etc. sold each day?

Let's really oversimplify and say you sell 500 "meals" a day and the increased wages cost you an extra $500 per day. That's a buck a meal increase, assuming you make no other changes.

Now we just need to plug in more accurate numbers.

I've done this very same exercise with you before.

It was over your head then and it will be again.

 

[THE_DEVIL]

This article gives a little balance to the argument.

http://www.nationalreview.com/artic...-wages-would-raise-prices-only-4-percent-very

by JAMES SHERK August 5, 2015 4:00 AM If something seems too good to be true, it probably is. Unfortunately, many journalists did not remember that when covering a new report claiming $15-an-hour wages would raise fast-food prices only 4 percent.

A closer look shows that the study underlying the report had major methodological errors. More serious analysis shows that $15-an-hour wages would raise fast-food prices by over a third — at least until stores automate work currently done by humans.

The study, by Purdue University economists Richard Ghiselli and Jing Ma, has made quite a splash. The Washington Post covered it extensively, concluding that the higher wages for fast-food workers would add just 17 cents to the cost of a Big Mac. Local papers have covered it too. ThinkProgress argued that the study undercuts arguments against $15-an-hour fast-food wages. If the study were accurate, it would be hard to argue with them.

However, Purdue’s report offers a case study in why journalists should consult multiple sources before going to press. Simple back-of-the-envelope calculations show that the Purdue results are impossible. RELATED: Minimum-Wage Laws: Ruinous ‘Compassion’ Labor accounts for a quarter to a third of the average fast-food restaurant’s costs. Currently, wages in the fast-food industry run around $9 an hour. Going to $15 an hour means increasing pay by over 50 percent. Prices would have to rise by at least one-sixth (50 percent multiplied by one third) to cover the base-wage increases. Of course, those price increases would drive some customers away, so restaurants would need to raise prices again. But as a baseline, prices would have to rise by at least one-sixth.

The Purdue study finds price increases an order of magnitude smaller. It does so by making a basic math error. The Purdue researchers got their data from the National Restaurant Association’s (NRA) 2014 operations report. The report surveys restaurants and shows how much the median restaurant spends on various expenses, such as payroll, food, marketing, etc. The Purdue researchers added those figures to derive the balance sheet of the typical fast-food restaurant.

Mathematically, however, medians do not work that way. Average values will add to the overall sum, but medians typically do not. The preface of the NRA Operations Report emphasizes in highlighted text that researchers cannot add median values to get overall expenses. Nonetheless the Purdue researchers did exactly that. Consequently, their derived restaurant-balance-sheet profits and costs sum to 92 percent of total sales. Fully 8 percent of fast-food restaurant expenses disappear.

The Purdue study proceeds to calculate how much wages would have to rise to pay $15 an hour and adds that amount (and a constant profit margin) to the undercounted expenses. They then compare this new (undercounted) figure to the sales of the typical restaurant. The missing expenses absorb two-thirds of the higher labor costs. The Purdue study makes two other errors. The economists estimated fast-food workers make about $10.60 an hour — somewhat more than the Bureau of Labor Statistics reports. As a result, they underestimate how much restaurants’ labor costs — and hence prices — would need to rise.

They also ignored fast-food customers’ price sensitivity. Most Americans eat fast food because it is fast and cheap. When prices rise, sales fall — a lot. Studies find a 10 percent increase in fast-food prices cuts sales by 9.5 percent. So fast-food restaurants will need further price increases to cover fixed costs such as rent. In equilibrium, prices rise by about double the amount needed to initially cover the higher wages.

Last year, the Heritage Foundation estimated how a $15-an-hour minimum wage would affect fast-food prices — accounting for all these factors. That report used data on average fast-food balance sheets, relied on BLS wage estimates, and accounted for customers’ price sensitivity. This model found very different results: Prices would have to rise 38 percent to cover the higher wages, while sales and employment would both fall by over a third. In the short term, the price of a Big Mac would rise from $3.99 to $5.50. A Big Mac meal would go from $5.69 to $7.85. That takes a much larger bite out of consumers’ wallets than a 17-cent hike. Moreover, this money won’t come from “the rich.” Warren Buffett and Bill Gates don’t spend much on fast food. Low- and middle-income Americans would bear the brunt of the higher prices.

RELATED: The Insidious Political Power of Minimum-Wage Laws In the longer term, fast-food restaurants would almost certainly react by replacing humans with machines. McDonald’s is already experimenting with replacing cashiers with kiosks. California inventors have developed a robot that cooks 360 hamburgers an hour. Mandating higher wages guarantees restaurants will implement this technology more quickly and automate more jobs than they otherwise would. That will mean lower prices, but fewer entry-level jobs. Milton Friedman famously observed that “there is no such thing as a free lunch.” He could have added “or a free burger.” Increasing fast-food wages by over 50 percent will substantially raise fast-food prices — until those jobs get automated. The new report claiming otherwise was, in fact, too good to be true.

ok never mind.....

 

[ChrisVarick]

I HATE PURDUE!

 

[TexMichFan]

ok never mind.....

My thread does not make yours wrong or right just a different view.

I do find it hard to believe a 50% increase in labor would only mean a 4% increase.

 

[mstp1992]

This article gives a little balance to the argument.

http://www.nationalreview.com/artic...-wages-would-raise-prices-only-4-percent-very

by JAMES SHERK August 5, 2015 4:00 AM If something seems too good to be true, it probably is. Unfortunately, many journalists did not remember that when covering a new report claiming $15-an-hour wages would raise fast-food prices only 4 percent.

A closer look shows that the study underlying the report had major methodological errors. More serious analysis shows that $15-an-hour wages would raise fast-food prices by over a third — at least until stores automate work currently done by humans.

The study, by Purdue University economists Richard Ghiselli and Jing Ma, has made quite a splash. The Washington Post covered it extensively, concluding that the higher wages for fast-food workers would add just 17 cents to the cost of a Big Mac. Local papers have covered it too. ThinkProgress argued that the study undercuts arguments against $15-an-hour fast-food wages. If the study were accurate, it would be hard to argue with them.

However, Purdue’s report offers a case study in why journalists should consult multiple sources before going to press. Simple back-of-the-envelope calculations show that the Purdue results are impossible. RELATED: Minimum-Wage Laws: Ruinous ‘Compassion’ Labor accounts for a quarter to a third of the average fast-food restaurant’s costs. Currently, wages in the fast-food industry run around $9 an hour. Going to $15 an hour means increasing pay by over 50 percent. Prices would have to rise by at least one-sixth (50 percent multiplied by one third) to cover the base-wage increases. Of course, those price increases would drive some customers away, so restaurants would need to raise prices again. But as a baseline, prices would have to rise by at least one-sixth.

The Purdue study finds price increases an order of magnitude smaller. It does so by making a basic math error. The Purdue researchers got their data from the National Restaurant Association’s (NRA) 2014 operations report. The report surveys restaurants and shows how much the median restaurant spends on various expenses, such as payroll, food, marketing, etc. The Purdue researchers added those figures to derive the balance sheet of the typical fast-food restaurant.

Mathematically, however, medians do not work that way. Average values will add to the overall sum, but medians typically do not. The preface of the NRA Operations Report emphasizes in highlighted text that researchers cannot add median values to get overall expenses. Nonetheless the Purdue researchers did exactly that. Consequently, their derived restaurant-balance-sheet profits and costs sum to 92 percent of total sales. Fully 8 percent of fast-food restaurant expenses disappear.

The Purdue study proceeds to calculate how much wages would have to rise to pay $15 an hour and adds that amount (and a constant profit margin) to the undercounted expenses. They then compare this new (undercounted) figure to the sales of the typical restaurant. The missing expenses absorb two-thirds of the higher labor costs. The Purdue study makes two other errors. The economists estimated fast-food workers make about $10.60 an hour — somewhat more than the Bureau of Labor Statistics reports. As a result, they underestimate how much restaurants’ labor costs — and hence prices — would need to rise.

They also ignored fast-food customers’ price sensitivity. Most Americans eat fast food because it is fast and cheap. When prices rise, sales fall — a lot. Studies find a 10 percent increase in fast-food prices cuts sales by 9.5 percent. So fast-food restaurants will need further price increases to cover fixed costs such as rent. In equilibrium, prices rise by about double the amount needed to initially cover the higher wages.

Last year, the Heritage Foundation estimated how a $15-an-hour minimum wage would affect fast-food prices — accounting for all these factors. That report used data on average fast-food balance sheets, relied on BLS wage estimates, and accounted for customers’ price sensitivity. This model found very different results: Prices would have to rise 38 percent to cover the higher wages, while sales and employment would both fall by over a third. In the short term, the price of a Big Mac would rise from $3.99 to $5.50. A Big Mac meal would go from $5.69 to $7.85. That takes a much larger bite out of consumers’ wallets than a 17-cent hike. Moreover, this money won’t come from “the rich.” Warren Buffett and Bill Gates don’t spend much on fast food. Low- and middle-income Americans would bear the brunt of the higher prices.

RELATED: The Insidious Political Power of Minimum-Wage Laws In the longer term, fast-food restaurants would almost certainly react by replacing humans with machines. McDonald’s is already experimenting with replacing cashiers with kiosks. California inventors have developed a robot that cooks 360 hamburgers an hour. Mandating higher wages guarantees restaurants will implement this technology more quickly and automate more jobs than they otherwise would. That will mean lower prices, but fewer entry-level jobs. Milton Friedman famously observed that “there is no such thing as a free lunch.” He could have added “or a free burger.” Increasing fast-food wages by over 50 percent will substantially raise fast-food prices — until those jobs get automated. The new report claiming otherwise was, in fact, too good to be true.

So, what it all boils down to is that my annual expense for fast food would increase by roughly 0%.

Thanks for the heads up

 

[Old_wrestling_fan]

In Seattle they have seen some interesting things with their living wage

Please share more...including what the current "living wage" is that is being paid in Seattle...now...not what is intended down the road.

 

[TexMichFan]

So, what it all boils down to is that my annual expense for fast food would increase by roughly 0%.

Thanks for the heads up

All things in moderation.

A steak finger basket and salted caramel truffle blizzard from Dairy Queen once a year in not a bad thing.

 

[mstp1992]

All things in moderation.

A steak finger basket and salted caramel truffle blizzard from Dairy Queen once a year in not a bad thing.

Now that I think about it, we do treat ourselves to Dairy Queen a couple times a year. So, if they start raising the prices of 'blizzards' well, there's gonna be H E double-toothpicks to pay dadgummit!!

 

[Pepperman]

So, what it all boils down to is that my annual expense for fast food would increase by roughly 0%.

I understand there is some sarcasm there. But this is exactly why I'm for the minimum wage going to $15 at the places I don't frequent. It won't impact me, after all!

 

[mstp1992]

I understand there is some sarcasm there. But this is exactly why I'm for the minimum wage going to $15 at the places I don't frequent. It won't impact me, after all!

My personal opinion is that there does need to be some sort of minimum wage, but they need to be set at the local/county level; not federal, not even state. In Illinois $15.00/hour in Lake County is much different than $15.00/hour in Hardin County.

 

[22*43*51]

P&L for dummies. I wish I could copy in a spread sheet with formula's to make this easier.

You have to think in terms of total sales and everything else as a % of your sales. Fill out the info below. I started in the ball park of where I think a fast-food P&L would be.

Put in any sales figure you like. Change the % any way you like so long as the sum of variable + fixed + gross = 100% of sales.

When you get it the way you think it should be, go back and double your labor % and see where you want to take that increase out of the rest of your business. Remember you have to have costs and Gross margin = 100% when you're done.


Sales – (Insert any $$ you want here)


(Variable Costs)

Materials(ingredients) – 40% of Sales

Labor – 30% of Sales

Non-Labor(hairnets, packaging material, plastic gloves, cleaning supplies etc.) – 5% of Sales


= Contribution Margin – 25%


(Fixed Costs)

Overhead/Benefits etc. – 15% of Sales

SG&A(Sales, General and Advertising) – 5% of Sales


= Gross Margin – 5%

 

[TexMichFan]

P&L for dummies. I wish I could copy in a spread sheet with formula's to make this easier.

You have to think in terms of total sales and everything else as a % of your sales. Fill out the info below. I started in the ball park of where I think a fast-food P&L would be.

Put in any sales figure you like. Change the % any way you like so long as the sum of variable + fixed + gross = 100% of sales.

When you get it the way you think it should be, go back and double your labor % and see where you want to take that increase out of the rest of your business. Remember you have to have costs and Gross margin = 100% when you're done.


Sales – (Insert any $$ you want here)


(Variable Costs)

Materials(ingredients) – 40% of Sales

Labor – 30% of Sales

Non-Labor(hairnets, packaging material, plastic gloves, cleaning supplies etc.) – 5% of Sales


= Contribution Margin – 25%


(Fixed Costs)

Overhead/Benefits etc. – 15% of Sales

SG&A(Sales, General and Advertising) – 5% of Sales


= Gross Margin – 5%

Food industry pretty much requires a 60% cap on food plus labor costs to make a profit.

 

[Aegon_Targaryen]

Food industry pretty much requires a 60% cap on food plus labor costs to make a profit.

Yup, but let the pussy liberals who don't now what they are talking about, bitch about it regardless.

 

[Old_wrestling_fan]

So . . . game it out for us.

How many worker hours per day?
How much would wages go up?
How many burgers, fries, drinks, etc. sold each day?

Let's really oversimplify and say you sell 500 "meals" a day and the increased wages cost you an extra $500 per day. That's a buck a meal increase, assuming you make no other changes.

Now we just need to plug in more accurate numbers.

The post that was made right after yours above, by TexMichFan, and shares a story written by James Sherk pretty much nails it IMO. I honestly did not know of the Sherk article until I read in TexMichFan's post...but I don't think much more needs to be said frankly. I LOL'ed as I read that...since I had essentially hit on several of the major errors of that study...without the benefit of having all of that information. Sometimes things just smell wrong, because they are wrong, right off the bat and this was one of those times.

Purdue looks stupid here, the professors look idiotic and the WashPo should be scheduling a staff meeting ASAP to talk about journalism 101...but...in lib land, all is probably well, and the mean GOP's are just trying to smudge the truth out and keep the little guy down, etc. I would be impressed if any one of the above named entities actually revisits the subject and proceeds to ferret the truth and some real understanding of what they are writing about...but I am not holding my breath.

Journalism sucks these days, even from name brand institutions like the WashPo and university studies, even from well established centers of higher learning like Purdue mean absolutely nothing on their face.

 

[ANYCHawk]

Flawed study by our most hated rival should be tossed out.

 

[naturalmwa]

My personal opinion is that there does need to be some sort of minimum wage, but they need to be set at the local/county level; not federal, not even state. In Illinois $15.00/hour in Lake County is much different than $15.00/hour in Hardin County.

This, I don't understand why they can't use a more sophisticated algorithm to take cost of living into account.

 

[hawkeye54545]

Flawed study by our most hated rival should be tossed out.

I'm so glad Jim Delaney understands our deep and bitter hatred for those SOB's.

 

[Titanhawk2]

The #1 thing fast food places look at is their "labor rate". At least back in the day, it was something the manager looked at hourly - sending people home because traffic was down and their labor rate was way up. Sure, a higher wage will result in higher prices but it will most definitely lead to fewer people working. It's a no-brainer. Fast food isn't so fast anymore

 

[Hawk-A-Doodle-Doo]

Lots of good information and debate (as usual) in this thread and some interesting points made in the study as well. However, what Ol' Doodle must have missed in the whole deliberation on this issue, is the stipulation by $15/hr Minimum Wage proponents that it only applies to fast food workers.

 

[MN.HAWK]

P&L for dummies. I wish I could copy in a spread sheet with formula's to make this easier.

You have to think in terms of total sales and everything else as a % of your sales. Fill out the info below. I started in the ball park of where I think a fast-food P&L would be.

Put in any sales figure you like. Change the % any way you like so long as the sum of variable + fixed + gross = 100% of sales.

When you get it the way you think it should be, go back and double your labor % and see where you want to take that increase out of the rest of your business. Remember you have to have costs and Gross margin = 100% when you're done.


Sales – (Insert any $$ you want here)


(Variable Costs)

Materials(ingredients) – 40% of Sales

Labor – 30% of Sales

Non-Labor(hairnets, packaging material, plastic gloves, cleaning supplies etc.) – 5% of Sales


= Contribution Margin – 25%


(Fixed Costs)

Overhead/Benefits etc. – 15% of Sales

SG&A(Sales, General and Advertising) – 5% of Sales


= Gross Margin – 5%

If your food cost is 40% your dead in the water. At least for restaurants COG cant' be 40% 25% with another 5% ish for paper/supply cost.

As someone else said, 60% for the "big two" is about the cap a restaurant can have.

 

[MN.HAWK]

Very good summary for those interested.

http://www.bakertilly.com/uploads/restaurant-benchmarking.pdf

 

[What Would Jesus Do?]

The post that was made right after yours above, by TexMichFan, and shares a story written by James Sherk pretty much nails it IMO. I honestly did not know of the Sherk article until I read in TexMichFan's post...but I don't think much more needs to be said frankly. I LOL'ed as I read that...since I had essentially hit on several of the major errors of that study...without the benefit of having all of that information. Sometimes things just smell wrong, because they are wrong, right off the bat and this was one of those times.

Purdue looks stupid here, the professors look idiotic and the WashPo should be scheduling a staff meeting ASAP to talk about journalism 101...but...in lib land, all is probably well, and the mean GOP's are just trying to smudge the truth out and keep the little guy down, etc. I would be impressed if any one of the above named entities actually revisits the subject and proceeds to ferret the truth and some real understanding of what they are writing about...but I am not holding my breath.

Journalism sucks these days, even from name brand institutions like the WashPo and university studies, even from well established centers of higher learning like Purdue mean absolutely nothing on their face.

Even though my back of the envelope speculations also suggest the Perdue number was probably low, I feel I have to point out that neither your objections nor those cited by TexMich actually look at the variables that have to be looked at, which I addressed,. Or maybe they do and didn't show their work. Plus Sherk makes some dubious assumptions of his own, such as "Prices would have to rise by at least one-sixth (50 percent multiplied by one third) to cover the base-wage increases." Where did he get that number? Might be true for some operations, but certain wouldn't be true across the board.

Very simply, for ANY cost increase, you have to know how much product you sell before you know how much the cost increase will add to the price of the product. And NEITHER of those reports addressed that. Again, maybe if we drill deep into the reports we'd find those numbers. BUT . . . I followed the links and took a look. And those numbers are not presented. So unless someone links deeper research, I'd say both are drawing unsupported conclusions.

It remains an interesting question. So I hope someone will look at it properly.

I should also mention that everybody is focusing on the 4% number. What the Purdue study actually said is that the price increase would range from 4-25%. If you use the higher number, they and Shrek are within the same order of magnitude. But, as I said, neither has really proved their case.

 

[TexMichFan]

Even though my back of the envelope speculations also suggest the Perdue number was probably low, I feel I have to point out that neither your objections nor those cited by TexMich actually look at the variables that have to be looked at, which I addressed,. Or maybe they do and didn't show their work. Plus Sherk makes some dubious assumptions of his own, such as "Prices would have to rise by at least one-sixth (50 percent multiplied by one third) to cover the base-wage increases." Where did he get that number? Might be true for some operations, but certain wouldn't be true across the board.

Very simply, for ANY cost increase, you have to know how much product you sell before you know how much the cost increase will add to the price of the product. And NEITHER of those reports addressed that. Again, maybe if we drill deep into the reports we'd find those numbers. BUT . . . I followed the links and took a look. And those numbers are not presented. So unless someone links deeper research, I'd say both are drawing unsupported conclusions.

It remains an interesting question. So I hope someone will look at it properly.

I should also mention that everybody is focusing on the 4% number. What the Purdue study actually said is that the price increase would range from 4-25%. If you use the higher number, they and Shrek are within the same order of magnitude. But, as I said, neither has really proved their case.

The 4% to 25% range was looking at a wage from $15-$22. When I first read the abstract I had the same thought and it looked like the headline was a little disingenuous but in the article the 25% is for a $22 wage.

I agree with you and as I stated my article does not make the OP wrong. I do think that the number is north of 4% for an over 50% jump in labor costs. You also have to account for the increases that would need to be considered for a current employee making less than $15 but more than the new hire wage. I do have some experience in dealing with this issue on a local level and the net result was we ended up reducing the hours we were open. We had a 16% labor budget for wages including the manager and that number was not going to change. We also went to more self serve items but service still suffered and it became a very tough balancing act.

It will be interesting to see exactly what happens to the cities that have gone to $15 but are not there yet.

 

[Old_wrestling_fan]

Even though my back of the envelope speculations also suggest the Perdue number was probably low, I feel I have to point out that neither your objections nor those cited by TexMich actually look at the variables that have to be looked at, which I addressed,. Or maybe they do and didn't show their work. Plus Sherk makes some dubious assumptions of his own, such as "Prices would have to rise by at least one-sixth (50 percent multiplied by one third) to cover the base-wage increases." Where did he get that number? Might be true for some operations, but certain wouldn't be true across the board.

Very simply, for ANY cost increase, you have to know how much product you sell before you know how much the cost increase will add to the price of the product. And NEITHER of those reports addressed that. Again, maybe if we drill deep into the reports we'd find those numbers. BUT . . . I followed the links and took a look. And those numbers are not presented. So unless someone links deeper research, I'd say both are drawing unsupported conclusions.

It remains an interesting question. So I hope someone will look at it properly.

I should also mention that everybody is focusing on the 4% number. What the Purdue study actually said is that the price increase would range from 4-25%. If you use the higher number, they and Shrek are within the same order of magnitude. But, as I said, neither has really proved their case.

I am tight on time right now...but real quickly...if you essentially double the labor component of your cost and that component is in the 30'ish% range of your total cost...you are right in the 1/6 price increase range. Sherk's math makes sense...Purdue's doesn't even come close.

Yes, every business is going to differ...but those ranges are pretty close to what is common for most and there is no stinking way you are going to double the labor and only raise prices 4'ish% at the register.

 

[What Would Jesus Do?]

The 4% to 25% range was looking at a wage from $15-$22. When I first read the abstract I had the same thought and it looked like the headline was a little disingenuous but in the article the 25% is for a $22 wage.

I agree with you and as I stated my article does not make the OP wrong. I do think that the number is north of 4% for an over 50% jump in labor costs. You also have to account for the increases that would need to be considered for a current employee making less than $15 but more than the new hire wage. I do have some experience in dealing with this issue on a local level and the net result was we ended up reducing the hours we were open. We had a 16% labor budget for wages including the manager and that number was not going to change. We also went to more self serve items but service still suffered and it became a very tough balancing act.

It will be interesting to see exactly what happens to the cities that have gone to $15 but are not there yet.

Thanks for the clarification. I saw that yesterday and didn't recheck.

What some who oppose the MW increase seem to miss is that a gently-phased-in rise in the MW to $15 produces a lot of benefits which, for many of us, would justify paying another 50 cents for a burger, if that increase were also phased in gently. They seem to think that if prices go up, that alone means there should be no MW increase. Or they think that if a very small number of businesses can't compete in the new competitive climate of a higher MW, then that means there should be no MW increase.

 

[What Would Jesus Do?]

Not that it matters - since his arguments either work on their merits or they don't - but I see from his previous work that Sherk is a dedicated neoliberal cheerleader.

 

[cidhawkeye]

Please share more...including what the current "living wage" is that is being paid in Seattle...now...not what is intended down the road.

The service industry is starting to see a couple of things happening. Tipping is down because people feel if the server is getting$11 an hour they don't need to tip as much or at all. Servers aren't a big fan of reduced tips and more of their income being taxed like the rest of society. There have been some instances where due to the new 'living wage' people are seeing their income go up which is causing them to not qualify for all of the social programs they are accustomed to, ex rent subsidy, food stamps, utility support etc. The early job loss reports in the service industry are going against the trend in Seattle. So those are some things that are being seen at this version of the living wage. It will be interesting to watch as that continues to climb to the final goal. My guess is the threshold to receive benefits will be the next battleground.