Each time a minimum wage hike is put on the table, the political debate spins on the question of whether such a move would cause business costs to increase so much that jobs are lost. To progress past this perennial debate, one key fact has to be pounded into the American psyche: Average minimum wage hikes impose small cost increases on businesses—so small that businesses can typically adjust by means other than closing their doors or laying off workers. Recent proposals to raise the $7.25 federal minimum present a welcome opportunity to take another whack at this.
Take, for example, the potential impact of a $10.50 federal minimum wage proposed by Florida Congressman Alan Grayson. My colleague Robert Pollin and I estimated that the average fast food restaurant could fully cover the costs of a $10.50 minimum by raising its prices 2.7 percent. This is equal to raising the price of a $4.50 Big Mac to $4.60. We presented this key finding in a petition supporting H.R. 1346, signed by over 100 professional economists. Why such a modest cost increase, even for fast food restaurants?
1) Workers will receive an average raise much smaller than 45 percent. Workers earning between $7.25 and $12.00 will likely get raises from a $10.50 minimum. (Employers give raises to workers earning a little above $10.50 in order to preserve their firms’ wage hierarchies.) But the lowest-wage workers, who get the largest raises, also work the fewest hours. As a result, a $10.50 minimum wage produces an average 16.4 percent raise per hour worked among workers earning between $7.25 and $12.
2) Lowest-paid workers take home a relatively small share of payroll. Because workers affected by minimum wage hikes get paid the least, work the fewest hours, and typically do not receive benefits, their overall share of the wage bill is smaller than their share of the total headcount of workers. Specifically, even though 84 percent of the 3.7 million fast food workers earn between $7.25 and $12 per hour, the $10.50 minimum will affect only 60 percent of the average fast food restaurant’s total payroll.
3) Payroll only represents 25 percent of total sales.
Now let’s do the math. The $10.50 minimum wage would generate an average per-hour raise of 16 percent for 60 percent of total payroll. Total payroll would therefore increase 10 percent (16 percent x 60 percent=10 percent). Since payroll represents only 25 percent of fast food restaurants’ total sales, a 10 percent payroll increase amounts to 2.5 percent of sales. Tacking on employers’ higher payroll taxes (7.65 percent) raises this figure to 2.7 percent (2.5 percent x 1.0765 = 2.7 percent).
Some of these costs are offset because higher wages cause workers to stay in their jobs longer. Employers can then spend less on recruiting and training workers, and their more experienced workers are more productive. The average fast food restaurant, therefore, could fully cover the costs of the $10.50 minimum wage by raising its prices less than 2.7 percent (Jeannette Wicks-Lim and Robert Pollin, “The Costs to Fast-Food Restaurants of a Minimum Wage Increase to $10.50 per Hour,” PERI Research Brief, September, 2013).
Let’s hope that the next round in the minimum wage debate can start here: Minimum wage hikes, in the range currently being debated, impose only modest cost increases to businesses, and therefore are unlikely to cause job losses.•
Dr. Jeannette Wicks-Lim is an assistant research professor with the Political Economy Research Institute at UMass-Amherst.