Pizza and the Minimum Wage

Marc Stier |

Originally published at Penn-Live on April 09, 2019

Spend a little time talking to Republican (and some Democratic) legislators about raising the minimum wage, and they will eventually tell you about their friend who owns a pizza shop and opposes an increase.

This is the story the pizza shop owners appear to tell our legislators: If the minimum wage goes up by two-thirds from $7.25 to $12 per hour, I’d have to raise the price of my 12-inch pizza by two-thirds from $9.49 to $15.75. No one will buy a pizza for $15.74 and I’ll go out of business.

We decided to test this claim in two ways.

Every state surrounding Pennsylvania has raised its minimum wage, and two have raised it substantially.

The minimum wage in New York is $11.10, 53% more than in Pennsylvania. In Maryland, it is $10.10, 39% more. If the pizza shop owners who talk to our legislators were right in their economic analysis, pizza shops would be slowly disappearing in most of our surrounding states. And there would be a real shortage of pizza in New York and Maryland.

It’s difficult to get a good count of pizza shops per state. But we asked our affiliates in surrounding states if pizza shops were disappearing and empty stores taking over downtowns and strip malls.

Pizza, it appears, is still easy to find.

We also searched Google for “pizza shortage in New York” and “pizza shortage in Maryland” and similar phrases and found nothing.

You can try this yourself. If you cross the border to New York or Maryland, do you have a problem finding pizza? Do your friends from New York or Maryland come visit you because pizza is scarce in their states?

We also decided to do a more sophisticated analysis. Pizza shops vary in quality, but Domino’s makes the same pizza everywhere. So we decided to investigate the cost of Domino’s pizza in the capitals of neighboring states and compare it to the cost in Harrisburg. The table below shows what we found.

Pizza is barely more expensive in the states that have a minimum wage that’s between 18% and 22% higher than in Pennsylvania. And in Annapolis and Albany, where the minimum wage is 39% and 55% higher than in Harrisburg, the cost of pizza is only 11% higher.
How is this possible? There are five things these worried pizza shop owners are failing to consider:
First, they forget that labor is only part of the cost of making pizza. There is also the cost of flour, tomatoes, and cheese; rent; ovens and the electricity to run them; and cardboard boxes for takeout. An increase in the price of labor doesn’t translate to a proportional increase in the price of pizza.
Second, they worry that if they have to raise their prices by 11%, they might lose business to another pizza shop. They do not realize that if all pizza shops have to raise their prices, none will be hurt.
Third, they don’t recognize that if the minimum wage went to $15 in Pennsylvania by 2027 27% of working people in Pennsylvania, over 1.6 million in total, would get a raise. So more people could afford to buy pizza. It’s possible that pizza shop owners in our neighboring states make a little less per pizza. But it’s also likely that they are making more money because they are selling more pizza.
Fourth, they aren’t thinking about how higher wages and higher (and more consistent) demand for pizza will reduce employee turnover which means employees will become more productive and training costs will be reduced. That will offset the costs of paying them more.