More Warfare Against the Min Wage

In a previous post I argued that the minimum wage argument needs to be recast. Partially that was because the arguments typically given for and against are full of hyperbole. For example an editorial in my local paper had this to say about the $15 min wage for fast food restaurant workers: “. . . (the) fight isn’t with management — it’s with price-conscious consumers. A $15 minimum wage will only hasten the service-industry trend toward automation and self-service. . . .” Later the editorial writer, Michael Saltsman, went on to say “Price hikes aren’t an option — picture your response if McDonald’s Dollar Menu became the Three-Dollar Menu — so robots instead lead the way.”

Currently MacDonald’s are booming but as one source put it it is from an expanded menu and longer hours being open: “More hours of operations and a greater selection of menu items necessitate a larger staff and, accordingly, higher labor costs.” So, MacDonald’s restaurants aren’t raking it in right now. The average profit of a restaurant is about 5.7%.

But let’s look at the “if McDonald’s Dollar Menu became the Three-Dollar Menu” bit of hyperbole. Here are the average restaurant’s labor costs (as percents of net sales):

20% Crew
04% Manager
02% Payroll Taxes

Obviously the manager’s salary and payroll taxes shouldn’t be included, so the “crew’s” labor cost including taxes is 21.6%.

Now the increase in min wage in my state, using the largest min wage request ($15/hr), from the current $8.25, constitutes an increase in labor costs of 82%. So, instead of labor costing 21.6% of net sales, it would now cost 39.3% of net sales. Thus net sales income would have to increase by 17.7% to maintain the same profit level. That is the Dollar Menu would have to be raised from $1.00 per item to $1.18 per item and that’s if the entire increase in labor costs is born by price increases. Not $3 . . . $1.18. So, price hikes are an option. One, I suspect of many. What if MacDonald’s voluntarily went to a higher min wage? Can you imagine the goodwill an advertising campiagn focused on that would bring?

And the robot scare . . . “the robots are coming, the robots are coming,” MacDonald’s is already investing heavily in touch screen menu selection and other automations as “labor saving devices.” The only labor they want is what can’t be automated, but even MacDonald’s doesn’t want a “faceless” restaurant. The touch screen “innovation” threatens to do away with cashiers, the editorial claims. Uh, not unless you want to stop accepting cash. Sure a swipe of a debit/credit card could pay your bill without a cashier, but cash has to be counted, change given, etc. The amount of time you might spend at a counter will hardly change if you are pouring over a menu and pressing buttons rather than a clerk doing it for you. Also people don’t like machines up selling them, but it is okay for people to do so “(Do you want fries with that?”). Then there is a the cost of the automation, the servicing of the automation, the off putting of the automation, and if it doesn’t increase throughput (sales per day) will it be worth it? And the off putting factor of touch screens . . . associated with serving food? If you approach one and it is dirty, the normal reaction is to walk away. Look at the grocers who are providing hand wipes at their shopping cart stations.

There are many dimensions to this problem. It is complex. But hyperbole doesn’t help. What about experiments? What about trying something to see if it works? In San Francisco in 2003 voters approved a local ordinance tying the minimum wage to the regional rate of inflation. The minimum wage has thus increased annually from $8.50 an hour in 2004 to $10.55 as of January 1. Let’s see what happens there. Let’s look at all of the historical evidence of what did happen when the min wage was increased the last time, and the time before that.

And let’s not make up numbers in the process, okay?