McDonald's Can Afford to Pay More
The restaurant industry, which employs one in 10 Americans, many of them earning low wages, says it can't afford an increase in the federal minimum wage. On closer inspection, that argument isn't as strong as it might seem.
While President Barack Obama's proposal to raise the federal minimum wage to $10.10 an hour would increase costs for restaurants, it's not clear how much. Labor makes up about one-third of restaurants' total costs, but only 5 percent of restaurant workers earn the federal minimum wage, according to the National Restaurant Association. The average wage for non-supervisory restaurant workers is $9, which isn't much below the president's proposed level.
Association executives speaking at a Bloomberg Government breakfast yesterday said the real concern with a higher minimum wage is what they call the cascade effect: Workers higher up the wage scale will see their lower-paid colleagues making more, and demand higher pay as a result.
That seems like a flimsy argument; after all, if restaurants raised people's wages just because workers demand it, then we wouldn't be having this conversation. But let's assume it's true, and that a higher minimum wage would raise labor costs not just for the lowest-paid workers but across the board, pushing up prices. The better question is: What happens next?
The restaurant association says its customers are price-sensitive, and that even a small increase will drive them away. The data say otherwise. Customers' reaction to price changes (what economists call the price elasticity of demand) is a measurable phenomenon, and the research shows that for restaurants in general, a 10 percent increase in price leads to an average drop in demand of between 6 percent and 11 percent. In other words, a higher price might mean restaurants will sell fewer meals, but in most cases it doesn't mean less revenue.
That's especially true for fast-food restaurants, which are particularly likely to be affected by a higher minimum wage. A 2011 study by Timothy Richards at Arizona State University and Lisa Mancino at the U.S. Department of Agriculture found that while demand for fine dining reacts strongly to price, the demand for fast food doesn't change nearly as much.
In fact, Richards and Mancino's data show that one of the restaurant associations' main arguments against a higher minimum wage -- that the higher costs will cause people to eat at home -- isn't supported by the evidence. "Cross-price elasticities of demand show little willingness to substitute between FAH [food at home] and any type of FAFH [food away from home]." Translation: "When prices are rising, consumers prefer to change the type of restaurant they visit, rather than forego the experience entirely."
(I e-mailed those studies to the association, and asked whether it disagreed with that research or had any contradictory research that it wanted to show me. I haven't heard back.)
The takeaway here isn't that a higher minimum wage won't increase costs for restaurants, though it's likely the association is exaggerating the magnitude of that effect. It's that even if a higher minimum wage pushes up prices by a few percentage points, the data show that most restaurants -- and fast-food restaurants in particular -- can pass those increases onto consumers without cutting into their revenue.
There may be good arguments against raising the minimum wage. But the objections by restaurants don't seem to be among them.
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To contact the author on this story:
Christopher Flavelle at email@example.com