Posted on 08/05/2015 6:35:24 AM PDT by SeekAndFind
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.
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.
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.
— James Sherk is a research fellow in labor economics at the Heritage Foundation.
Sacrificing four percent of all of our wages "to help (some of) the poor" is just another tax on the middle class, and yet another anchor slowing down the economy... and intentionally so. NOTHING the Left does ever helps the economy.
Why are we surprised liberals can’t do 8th grade math?
So this is the new game plan....put them right out of business.
No doubt, by the same people who claimed that Obama-care would lower consumer health care costs AND reduce the deficit?
A study like this is certain to be flawed.
It’s already 8 bucks to get a crappy value meal prepared by some pierced, tattooed kid who displays overt disrespect for me.
#FactsDon’tMatter
#AdvanceTheNarrativeAtAllCosts
Years ago, when we had a manufacturing sector that hired unskilled workers and paid them a decent wage, burger-flipping jobs were mostly teen jobs. Now, unskilled workers have no place to go but fast food, Walmart etc. Hence the push to pay these people more. Until and/or unless we return a large, labor intensive manufacturing sector to the USA (hopefully this might happen when the Chinese bubble finally bursts), we’re stuck with this problem.
Another text book example of Paul Krugman economics.
One thing that has not been mentioned is that the gross the employer pays the worker directly is not the total paid. There are additional taxes and fees that are paid to the government in the form of the Employer’s side of Social Security and some unemployement/insurance costs. Some of these additional taxes are wage-dependent. All in all, bad news for the consumer.
We have had many fast food restaurants closing in our area already. Probably not a bad thing for people’s health, but there are people who depend on those kinds of jobs.
When some smart-ass kid gives me attitude at any store I immediately ask for the manager, and if it is ANOTHER smart ass kid I go up the ranks until I speak to an owner.
I don’t even acknowledge the dumba$$ any more up until and unless he begs for forgiveness
It actually does work
McDonald’s Apple Pie, which was once 2 for $1 is now 1 for $1.
That is 50c more than I am willing to pay for some dough, sugar, and an apple slice or two.
The coffee is still $1.00 for any size, but the price varies from franchise to franchise.
Yup, skip the $15 and go directly to automation
Looks like these Purdue ... uh .. “economists” must have studied mathematics & statistics from the same textbooks as the global warming alarmists.
Fast food prep is not that labor intensive. I think 4% is low but it is not that for off the mark. Most of the cost of fast food is overhead, taxes, food supplies, marketing and maintenance. Labor is one of the smaller components of the fast food industry.
Automation is good and has nothing to do with a $15 min wage.
This won’t affect inflation.
The al-gore-rhythm will simply be adjusted to remove fast food costs from the e-kway-shun...
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