Restaurants for months have said menu prices in California would rise as the state raised the minimum wage for fast-food workers. Now they are following through.
....Since September, when California moved to require large fast-food chains to bump up their minimum hourly pay to $20 in April, fast-food and fast-casual restaurants in California have increased prices by 10% overall, outpacing all other states.
Just stop it. California may have "moved" to increase the minimum wage in September, but:
- Nothing actually happened until April. Price increases before then have nothing to do with the minimum wage increase.
- The actual average wage for fast food workers before the new law was about $18 per hour. So the real-life increase is only around 11% or so.
- If you figure that labor costs are roughly a quarter of sales revenue, you only need a retail price increase of 4% to keep profit margins the same.
California's minimum wage increase is nowhere near the big deal that fast food chains are making it out to be. They're mostly just using it as a smokescreen for whatever the real reason is for raising prices.
If "labor costs are roughly a quarter of sales revenue"...so .25 of $1.00. They incease 11% to .2775. A four percent increase to keep margins the same. So, $1.04.
But, .2775 is 26.68% of $1.04.
Prices have to go up 11% to maintain the same profit margins. .2775 is 25% of $1.11.
If you're in business, the actual numbers are not without meaning, but if you are serious about staying in business you mind the percentages.
Good point.
I don’t understand Kevin’s original claim. He says, “If you figure that labor costs are roughly a quarter of sales revenue, you only need a retail price increase of 4% to keep profit margins the same.”
My quick initial assumption was that he divided the 11% increase in pay by a quarter and that this is 4%. But .11 x .25 = ,0275. So that logic would entail that a 3% price increase — not 4% — would suffice to keep sales-revenue-minus-labor-costs at least as much as before. So where does Kevin’s figure of 4% come from?
(That said, I agree with you that “profit margins” are not the same thing as “sales revenue minus labor costs.”)
"Prices have to go up 11% to maintain the same profit margins. .2775 is 25% of $1.11."
This is wrong as the businesses have other expenses besides labor. Suppose that labor was 25% of sales and profit was 10%. Labor increases to .2775. So what price increase do we need to keep profits 10% of sales? We want .10*(1+x)=.10+(x-.0275) or .9*x=.0275 or x=,0275/.09 = .0306. So prices need to rise by 3.06%.
The math there is, sadly, over my head, but at the same time, I understand the point.
I stand (well, sit) corrected.
Upvoted for correct math.
By how much?
"Whatever the real reason is for raising prices." A mystery that will never be solved.
"Nothing actually happened until April. Price increases before then have nothing to do with the minimum wage increase."
Once again Drum fails to understand that changes that everybody knows are coming can affect things before they actually take effect.
Obviously the question is not whether it CAN affect prices, the question is whether it DID affect prices.
You are simply assuming, without evidence, that a small cost increase coming in the future caused a price increase and that the price would not have increased except for the future cost increase.
This assumption doesnt really make any sense, but we can always assume anything we want.
Okay, even I know that when a business knows a law is changing several months in advance, they don't just sit around for several months until things happen to adjust their business plans.
Adjusting business plans in advance is not the same as automatically increasing prices to pass through increased costs.
If it was this easy, the business would have just planned to increase prices every quarter, or every week. Why wait for cost increases if you can just raise prices at will?
Absent some kind of regulatory mechanism, insensitivity to prices and protection from competition, prices just dont work this way.
Can ≠ must.
This concludes today's episode of Short Responses to Silly Statements. Tune in soon for another exciting episode!
FWIW, I owned a small business, and neither we (my wife and I) not our competitors priced in wage increases before they happened. Because that would be suicidally stupid in a competitive environment.
They can, but you can’t construe the increase as a pass-through.
If the claim is that prices started rising n September, and here we are in April, it would be trivially easy to assess the impact.
Are consumers resisting the price increases? Restaurants failing? Mass hysteria, dogs and cats living together?
Until fast food restaurants start vanishing from the California landscape, there isn’t much here to worry about. Wages went up. Prices allegedly went up to cover the wages. But customers still show up to gorge themselves on food. All of which suggests that everything is fine. (Well it’s not fine from a public health perspective - fast food is terrible for you and we should be wanting to use any mechanism we can to discourage consuming it, including price signals - but from a macroeconomics standpoint it’s great if policies are changed so that employees get a higher living standard and consumers can still apparently afford to consume at similar levels as before.)
The only “problem” here is social. A lot of people are invested in the idea that, goddammit, fast food workers should have a shitty existence because they’re unworthy of a better life for whatever reason. (“The Invisible Hand”/God/other employers who don’t want to raise their own wages to keep up/bitter Boomers and Gen Xers remember working for shitty wages and think it’s a right of passage for millennials and Gen Z want it that way.) They can all go fuck themselves, as far as I’m concerned: access to cheap labor isn’t a god-given right or macroeconomic necessity.
"The actual average wage for fast food workers before the new law was about $18 per hour. So the real-life increase is only around 11% or so."
I would call that statement likely true (so far), but perhaps misleading over a time horizon.
You are treating California as a single entity. For example, the per capita income in Marin county is $58,000 while the per capita income in Madera county is $18,000.
In poorer parts of California, this minimum wage increase is likely a material change.
https://en.wikipedia.org/wiki/List_of_California_locations_by_income
No, the "real-life" increase won't be from $18 to $20, or 11 percent.
If the average wage was $18 an hour when the minimum wage was $16, then the average wage after the minimum wage goes up to $20 will surely be more than $20. More like $22, would be a good guess.