Just How Much Will a Fast Food Wage Increase Cost?

Stephen Herzenberg |

Big MacIn The State of Working Pennsylvania 2013, we said that substantially raising the wages of fast food workers — to roughly $15 per hour — could put Pennsylvania and the nation back on the path to shared prosperity. Capitolwire suggested in an August 29 Under the Dome brief (subscription required) that people would end up paying “a lot more” for their Big Macs and eating out at other restaurants. Yes, it would cost a bit more initially but not nearly as much as Capitolwire suggested. And it could lower costs in the long run. Let me explain.

For starters, there are immediate offsetting economic benefits for an employer like McDonalds taking a high road approach on wages. Experience shows that employers get back a substantial portion of a wage increase in the form of higher worker productivity and savings from lower staff turnover. Employers such as Lion’s Choice in the fast-food industry and Costco in retail demonstrate the practicality of this high road model.

Secondly, wages are not all that we are paying for when we buy that Big Mac. Workers’ wages account for only about one-third of the expenses of a typical fast food restaurant, even according to the Employment Policies Institute (EPI), a think tank affiliated with the restaurant industry. A big share of total wages also go to people who already make well above $15 per hour, and these wages would not increase.

Third, as Capitolwire acknowledges, a chain like McDonalds — with $5.5 billion in profits last year and a CEO paid $13.8 million — could easily absorb some of the costs of a wage increase before raising prices.

Taking these factors into account, Dean Baker, co-director of the Center for Economic Policy Research, estimates that a wage increase to $15 per hour would translate into a price increase of about 5 percent — about 20 cents on the cost of a $4.00 Big Mac.

Longer-term, the cost increase would be smaller, and there could even be savings, because wage increases spur automation. The conservative EPI made this point nicely when it ran a full-page ad in The Wall Street Journal showing a robot with the phrase “Why Robots Could Soon Replace Fast Food Workers Demanding a Higher Minimum Wage.” Meant to be a threat, this ad actually shows the promise of a higher minimum wage — higher productivity growth, no downside for consumers, a revitalized middle class.

In sum, a big wage increase for fast food workers and other low-wage employees is a win all around.