Increase in minimum wage could hurt businesses?

[khwaidee1 196]

Was in San Francisco a few weeks ago. At the Airport bought some food. In addition paying airport prices, the menu board had a little asterisk at the bottom that said something to the effect of:

4% will be added to your bill for the employee health plan

Thought it a bit sneaky but I guess it beats raising your prices on the board by 4%.

Then I saw this today in Forbes:

Tim Worstall

Economics & Finance 7/07/2015 @ 6:25AM 390,200 views

We Are Seeing The Effects Of The Minimum Wage Rise In San Francisco

As we keep trying to point out to people there really isnt anything even remotely resembling a free lunch when it comes to the discussion of wages and labor. Meaning that just because well meaning liberals wave their magic wand and decree that wages will rise there will indeed be countervailing effects. And in San Francisco, where the minimum wage was recently raised we did indeed see that comic book shop insisting that it just couldnt survive. And now weve another tale, this time from Chipotle. Beef prices have been rising around the country so theyve raised the prices, around the country, of their beef products. Wages in San Francisco have been rising strongly so theyve raised the prices of all their products in San Francisco strongly. There really is no free lunch. A rise in wages will come out of either less labor being employed, lower profit margins (and fast food doesnt have those wide enough to take the strain) or price increases to consumers.

And its that last which is happening as Mark Perry points out:

In our weekly survey of ten of Chipotles markets, we found the company implemented price increases in half of the surveyed markets this weekSan Francisco, Denver, Minneapolis, Chicago, and Orlando. In most markets, the price increases have been limited to beef and average about 4% on barbacoa and steak, toward the lower end of managements expectation for a 4% to 6% price increase on beef.

San Francisco, however, saw across-the-board price increases averaging over 10%, including 10% increases on chicken, carnitas (pork), sofritas (tofu), and vegetarian entrees along with a 14% increase on steak and barbacoa. We believe the outsized San Francisco price hike was likely because of increased minimum wages (which rose by 14% from $10.74 per hour to $12.25 on May 1) as well as scheduled minimum wage increases in future years (to $13 next year, $14 in 2017, and $15 in 2018).

A rough guide to the finances of the fast food industry is as follows. 30% goes on wages, 30% of revenues goes on ingredients and the other 40% is everything else. Rents, advertising, capital costs and, of course, profits. Those profits are pretty low. 5% of revenues isnt an out of order estimation of the net profit margins in the business (and, of course, thats an average, as some locations and some whole chains lose money).

So, if we by legislative fiat raise the price of one of those inputs then something, somewhere, has to give. Those profit margins are already pretty thin and so theyre not going to be where that extra cost comes from. More than that if we reduce the returns to capital in a particular line of business then less capital will be invested in that line of business in the future. This means fewer jobs in that line of business: This is one of the ways that a rise in the minimum wage destroys jobs. Fewer will be created in the future than would have been in the absence of the rise in the minimum wage.

Its possible that employers will be encouraged to deploy their labor in a more productive manner as a result of the price increase. This is the same statement as fewer jobs will be created. For if I go and raise labor productivity then by definition I need less labor for any given level of output. Or of course employers could just automate the process a little more and that also means fewer jobs.

So, if employers either economize on labor or profits, there will be job losses: the minimum wage rise does reduce employment.

Or there is this final method: raise prices. Which also causes job losses: for the more money that consumers are spending on reasonably priced Mexican food (although now less reasonably priced Mexican food than it used to be) the less they have available to spend on other things. We might think that there could be an interesting overlap between those who consume reasonably priced Mexican food and those who frequent comic book shops for example. If the food now costs more then there might well be less being spent in the comic book shop: again, we see reductions in the number of jobs.

And just to head off at the pass one of the more insane points that people try to make. That if the workers at Chipotle are now making more money then theyll spend more at Chipotle, and the companys profits will rise! This doesnt even pass the basic math test, let alone any economic one. For note above the split in revenues. About 30% of revenue is spent upon labor. The other 70% is spent upon other things, including that 30% or so on food ingredients. So, if Chipotle raises wages by $100 (just as an example) and all of those wages are then spent in the same store, it is impossible for profits to rise. Think about it for a moment: the wage bill has just gone up by $100. Revenues have just gone up by $100. But the food bill has also gone up by $30. So, the increase in costs is $130 (even in the very best, best, case) while revenues have gone up by $100. This is known to the cognoscenti as a loss, not an increase in profit.

There really is no such thing as a free lunch. Only lunches of variable cost. And if we increase the cost of one of the major inputs into such lunches then something else will give. Here, as a result of the rise in the minimum wage Chipotle has raised prices in that specific location where the minimum wage rise occurred.

This doesnt help minimum wage earners: some unknown but knowable reduction in sales of reasonably priced Mexican food will take place as a result of this price rise. Demand curves really do slope downwards. Thus some unknown but knowable number of people will not be employed to produce said food.

As weve been saying all along: a rise in the minimum wage really does destroy jobs.

[Dashinka 23,242]

The heck with the effects, it is the good intentions that matter.

[Sousuke 1,214]

The healthcare 4% has been around for over a decade. Its mostly died out.

[Sousuke 1,214]

Lets also make something else clear about San Francisco. No middle class can survive there anyway. You have to be making 200k to live in the city proper (or inherit property).

[Not a Tailor 1,370]

The thing that these math equations always conveniently leave out is that when a majority of businesses increase wages in a region, the residents have more money and they therefore can make more money with a minimal price increase (often the price increase is a matter of a couple of pennies). In many more cases, a significant price increase is, much more accurately, a matter of corporate greed than a matter of necessity.

[Boiler 43,433]

Chipot!e actually has a lower wage cost than say a pizza place so is in a better position.

Obviously there will be a move to different styles that are more easily automated.

[Darnell 8,478]

Chipotle is not Mexican Food. Don't believe me? ask any Mexican.

[Póg mo 1,749]

Was in San Francisco a few weeks ago. At the Airport bought some food. In addition paying airport prices, the menu board had a little asterisk at the bottom that said something to the effect of:

4% will be added to your bill for the employee health plan

Thought it a bit sneaky but I guess it beats raising your prices on the board by 4%.

Then I saw this today in Forbes:

Tim Worstall

Economics & Finance 7/07/2015 @ 6:25AM 390,200 views

We Are Seeing The Effects Of The Minimum Wage Rise In San Francisco

As we keep trying to point out to people there really isnt anything even remotely resembling a free lunch when it comes to the discussion of wages and labor. Meaning that just because well meaning liberals wave their magic wand and decree that wages will rise there will indeed be countervailing effects. And in San Francisco, where the minimum wage was recently raised we did indeed see that comic book shop insisting that it just couldnt survive. And now weve another tale, this time from Chipotle. Beef prices have been rising around the country so theyve raised the prices, around the country, of their beef products. Wages in San Francisco have been rising strongly so theyve raised the prices of all their products in San Francisco strongly. There really is no free lunch. A rise in wages will come out of either less labor being employed, lower profit margins (and fast food doesnt have those wide enough to take the strain) or price increases to consumers.

And its that last which is happening as Mark Perry points out:

In our weekly survey of ten of Chipotles markets, we found the company implemented price increases in half of the surveyed markets this weekSan Francisco, Denver, Minneapolis, Chicago, and Orlando. In most markets, the price increases have been limited to beef and average about 4% on barbacoa and steak, toward the lower end of managements expectation for a 4% to 6% price increase on beef.

San Francisco, however, saw across-the-board price increases averaging over 10%, including 10% increases on chicken, carnitas (pork), sofritas (tofu), and vegetarian entrees along with a 14% increase on steak and barbacoa. We believe the outsized San Francisco price hike was likely because of increased minimum wages (which rose by 14% from $10.74 per hour to $12.25 on May 1) as well as scheduled minimum wage increases in future years (to $13 next year, $14 in 2017, and $15 in 2018).

A rough guide to the finances of the fast food industry is as follows. 30% goes on wages, 30% of revenues goes on ingredients and the other 40% is everything else. Rents, advertising, capital costs and, of course, profits. Those profits are pretty low. 5% of revenues isnt an out of order estimation of the net profit margins in the business (and, of course, thats an average, as some locations and some whole chains lose money).

So, if we by legislative fiat raise the price of one of those inputs then something, somewhere, has to give. Those profit margins are already pretty thin and so theyre not going to be where that extra cost comes from. More than that if we reduce the returns to capital in a particular line of business then less capital will be invested in that line of business in the future. This means fewer jobs in that line of business: This is one of the ways that a rise in the minimum wage destroys jobs. Fewer will be created in the future than would have been in the absence of the rise in the minimum wage.

Its possible that employers will be encouraged to deploy their labor in a more productive manner as a result of the price increase. This is the same statement as fewer jobs will be created. For if I go and raise labor productivity then by definition I need less labor for any given level of output. Or of course employers could just automate the process a little more and that also means fewer jobs.

So, if employers either economize on labor or profits, there will be job losses: the minimum wage rise does reduce employment.

Or there is this final method: raise prices. Which also causes job losses: for the more money that consumers are spending on reasonably priced Mexican food (although now less reasonably priced Mexican food than it used to be) the less they have available to spend on other things. We might think that there could be an interesting overlap between those who consume reasonably priced Mexican food and those who frequent comic book shops for example. If the food now costs more then there might well be less being spent in the comic book shop: again, we see reductions in the number of jobs.

And just to head off at the pass one of the more insane points that people try to make. That if the workers at Chipotle are now making more money then theyll spend more at Chipotle, and the companys profits will rise! This doesnt even pass the basic math test, let alone any economic one. For note above the split in revenues. About 30% of revenue is spent upon labor. The other 70% is spent upon other things, including that 30% or so on food ingredients. So, if Chipotle raises wages by $100 (just as an example) and all of those wages are then spent in the same store, it is impossible for profits to rise. Think about it for a moment: the wage bill has just gone up by $100. Revenues have just gone up by $100. But the food bill has also gone up by $30. So, the increase in costs is $130 (even in the very best, best, case) while revenues have gone up by $100. This is known to the cognoscenti as a loss, not an increase in profit.

There really is no such thing as a free lunch. Only lunches of variable cost. And if we increase the cost of one of the major inputs into such lunches then something else will give. Here, as a result of the rise in the minimum wage Chipotle has raised prices in that specific location where the minimum wage rise occurred.

This doesnt help minimum wage earners: some unknown but knowable reduction in sales of reasonably priced Mexican food will take place as a result of this price rise. Demand curves really do slope downwards. Thus some unknown but knowable number of people will not be employed to produce said food.

As weve been saying all along: a rise in the minimum wage really does destroy jobs.

What is the point of a job that doesn't pay enough to survive on?

[OnMyWayID 1,489]

While I agree that liberals don't really understand the full consequences of waving a wand and dispersing money I think they are absolutely right on this one. Looking at the minimum wages of other western-style countries and also compared to average wages in the country we are a bit behind.. A raise to 10.00 would be about where we should be. Germany is missing from all the graphs. The minimum wage there is 9.35 (8.50 in Euros)

[Póg mo 1,749]

Was in San Francisco a few weeks ago. At the Airport bought some food. In addition paying airport prices, the menu board had a little asterisk at the bottom that said something to the effect of:

4% will be added to your bill for the employee health plan

Thought it a bit sneaky but I guess it beats raising your prices on the board by 4%.

Then I saw this today in Forbes:

Tim Worstall

Economics & Finance 7/07/2015 @ 6:25AM 390,200 views

We Are Seeing The Effects Of The Minimum Wage Rise In San Francisco

As we keep trying to point out to people there really isnt anything even remotely resembling a free lunch when it comes to the discussion of wages and labor. Meaning that just because well meaning liberals wave their magic wand and decree that wages will rise there will indeed be countervailing effects. And in San Francisco, where the minimum wage was recently raised we did indeed see that comic book shop insisting that it just couldnt survive. And now weve another tale, this time from Chipotle. Beef prices have been rising around the country so theyve raised the prices, around the country, of their beef products. Wages in San Francisco have been rising strongly so theyve raised the prices of all their products in San Francisco strongly. There really is no free lunch. A rise in wages will come out of either less labor being employed, lower profit margins (and fast food doesnt have those wide enough to take the strain) or price increases to consumers.

And its that last which is happening as Mark Perry points out:

In our weekly survey of ten of Chipotles markets, we found the company implemented price increases in half of the surveyed markets this weekSan Francisco, Denver, Minneapolis, Chicago, and Orlando. In most markets, the price increases have been limited to beef and average about 4% on barbacoa and steak, toward the lower end of managements expectation for a 4% to 6% price increase on beef.

San Francisco, however, saw across-the-board price increases averaging over 10%, including 10% increases on chicken, carnitas (pork), sofritas (tofu), and vegetarian entrees along with a 14% increase on steak and barbacoa. We believe the outsized San Francisco price hike was likely because of increased minimum wages (which rose by 14% from $10.74 per hour to $12.25 on May 1) as well as scheduled minimum wage increases in future years (to $13 next year, $14 in 2017, and $15 in 2018).

A rough guide to the finances of the fast food industry is as follows. 30% goes on wages, 30% of revenues goes on ingredients and the other 40% is everything else. Rents, advertising, capital costs and, of course, profits. Those profits are pretty low. 5% of revenues isnt an out of order estimation of the net profit margins in the business (and, of course, thats an average, as some locations and some whole chains lose money).

So, if we by legislative fiat raise the price of one of those inputs then something, somewhere, has to give. Those profit margins are already pretty thin and so theyre not going to be where that extra cost comes from. More than that if we reduce the returns to capital in a particular line of business then less capital will be invested in that line of business in the future. This means fewer jobs in that line of business: This is one of the ways that a rise in the minimum wage destroys jobs. Fewer will be created in the future than would have been in the absence of the rise in the minimum wage.

Its possible that employers will be encouraged to deploy their labor in a more productive manner as a result of the price increase. This is the same statement as fewer jobs will be created. For if I go and raise labor productivity then by definition I need less labor for any given level of output. Or of course employers could just automate the process a little more and that also means fewer jobs.

So, if employers either economize on labor or profits, there will be job losses: the minimum wage rise does reduce employment.

Or there is this final method: raise prices. Which also causes job losses: for the more money that consumers are spending on reasonably priced Mexican food (although now less reasonably priced Mexican food than it used to be) the less they have available to spend on other things. We might think that there could be an interesting overlap between those who consume reasonably priced Mexican food and those who frequent comic book shops for example. If the food now costs more then there might well be less being spent in the comic book shop: again, we see reductions in the number of jobs.

And just to head off at the pass one of the more insane points that people try to make. That if the workers at Chipotle are now making more money then theyll spend more at Chipotle, and the companys profits will rise! This doesnt even pass the basic math test, let alone any economic one. For note above the split in revenues. About 30% of revenue is spent upon labor. The other 70% is spent upon other things, including that 30% or so on food ingredients. So, if Chipotle raises wages by $100 (just as an example) and all of those wages are then spent in the same store, it is impossible for profits to rise. Think about it for a moment: the wage bill has just gone up by $100. Revenues have just gone up by $100. But the food bill has also gone up by $30. So, the increase in costs is $130 (even in the very best, best, case) while revenues have gone up by $100. This is known to the cognoscenti as a loss, not an increase in profit.

There really is no such thing as a free lunch. Only lunches of variable cost. And if we increase the cost of one of the major inputs into such lunches then something else will give. Here, as a result of the rise in the minimum wage Chipotle has raised prices in that specific location where the minimum wage rise occurred.

This doesnt help minimum wage earners: some unknown but knowable reduction in sales of reasonably priced Mexican food will take place as a result of this price rise. Demand curves really do slope downwards. Thus some unknown but knowable number of people will not be employed to produce said food.

As weve been saying all along: a rise in the minimum wage really does destroy jobs.

Rent keeps on rising, so why don't you focus on that instead? How about getting rid of tax deductions on mortgages?

[khwaidee1 196]

What is the point of a job that doesn't pay enough to survive on?

To learn job skills, discipline and how the job market operate. There are some jobs that are "entry level", jobs that provide training and allow you to develop other skill sets and move into jobs that do pay enough to survive. To think otherwise would be naïve. A job at a fast food restaurant was always kind of a summer job or job for college students to have extra money, it was never meant to support a family of four. When I was in college I bagged groceries full time and bussed tables full time. Yes, two jobs and full school was hard but, I had my own apartment, relatively new car, and did ok. Then I got a degree and moved on.

[OnMyWayID 1,489]

What is the point of a job that doesn't pay enough to survive on?

Maybe a spouse works.. or a teenager... or a student living at home.

[OnMyWayID 1,489]

Rent keeps on rising, so why don't you focus on that instead? How about getting rid of tax deductions on mortgages?

A good idea - or at least put a cap on the mortgage deduction so we are not subsidizing million dollar homes.

That would not help workers at the bottom much - unless the plan was to use the money from the mortgage deduction removal to lower the tax rate at the bottom.

[Not a Tailor 1,370]

To learn job skills, discipline and how the job market operate. There are some jobs that are "entry level", jobs that provide training and allow you to develop other skill sets and move into jobs that do pay enough to survive. To think otherwise would be naïve. A job at a fast food restaurant was always kind of a summer job or job for college students to have extra money, it was never meant to support a family of four. When I was in college I bagged groceries full time and bussed tables full time. Yes, two jobs and full school was hard but, I had my own apartment, relatively new car, and did ok. Then I got a degree and moved on.

So you bagged groceries 40 hours and bussed tables 40 hours. That's 80 hours out of a 168 hour week. Factor in 6 hours a night for sleeping for 42 hours a week. 122 hours in a week are then covered. Add in an hour a day for cooking/eating, that's 129 hours covered. Add in a half hour a day for daily commute (assuming you live near where you work and go to school, which probably isn't the case. 132 hours covered. That leaves just 36 hours for school and school related things and rest/entertainment.

And in today's economy/school system, even doing that much working won't get you a car, an apartment and pay for school.

[khwaidee1 196]

So you bagged groceries 40 hours and bussed tables 40 hours. That's 80 hours out of a 168 hour week. Factor in 6 hours a night for sleeping for 42 hours a week. 122 hours in a week are then covered. Add in an hour a day for cooking/eating, that's 129 hours covered. Add in a half hour a day for daily commute (assuming you live near where you work and go to school, which probably isn't the case. 132 hours covered. That leaves just 36 hours for school and school related things and rest/entertainment.

And in today's economy/school system, even doing that much working won't get you a car, an apartment and pay for school.

The market job was a union job so they were pretty good wages and got health care too. The bussing job paid tips in addition to minimum wage. Worked MWFSS, school all day on TTh. Actually did ok. Figured it was about $2,700 a month in mid 80s dollars. The GF I lived also worked and shared expenses. Also got free meals at the restaurant gig. Only did that schedule for two years, it was tough for sure.

Edited July 7, 2015 by khwaidee1