Economy

Here’s How Fast Food Could Handle A $15 Minimum Wage Without Cutting Jobs

CREDIT: AP

Fast food workers protest low wages in Chicago

Fast food workers have been staging strikes across the country for the last three years to demand a $15 minimum wage, among other things. Which begs the question: Would raising wages in the industry to that level force companies to lay off workers to reduce costs?

The answer in a new paper is a resounding no. Economists Robert Pollin and Jeannette Wicks-Lim of the University of Massachusetts-Amherst looked at a scenario in which the federal minimum wage gets increased to $10.50 in one year and to $15 three years after that, which in the end would mean a 107 percent increase over the current minimum wage of $7.25 an hour. They found that instead of having to cut jobs, fast food restaurants could cover the cost of the increase with savings from reducing turnover, higher prices, and greater economic growth.

To come to that conclusion, they estimate what it would cost these companies to increase not just wages for those at the bottom of their scales to $15 an hour, but also to slightly boost the workers above them to maintain current hierarchies. In the first part of the phase in, when the minimum wage would increase to $10.50 an hour, they estimate that 3.5 million fast food workers would get a raise, with a cost of $7.1 billion for the industry. In the next phase, when the wage goes up to $15, 3.8 million workers would get a raise, coming to a cost of $30.7 billion.

Given that the industry’s sales were $232 billion last year, the cost of a $10.50 minimum wage makes up just 3.3 percent of sales, while a $15 wage comes to 14.2 percent.

The researchers assume, however, that companies prefer nearly any option for covering these costs over reducing profits or pulling back on spending in other areas like buying new equipment. Cutting jobs is also likely a last resort, they note, because it “could impair the capacity of firms to sustain their existing level of operations and retain their customer base.”

Businesses wouldn’t have to resort to any of those measures, however. Pollin and Wicks-Lim note that the reductions in turnover that would likely come from paying higher wages would amount to 20 percent of the increase in costs. A previous study found that fast food restaurants experience a turnover rate of 120 percent, and it costs $4,700 for each worker who leaves. On the other hand, each 10 percent increase in the minimum wage reduces turnover by 2.2 percent. A $10.10 wage then means a savings from reduced turnover of $2.1 billion, or 28 percent of the cost of the raise, and a $15 wage means $5.2 billion in savings, or 17 percent of the costs.

The economists also note that fast food sales track pretty closely to GDP growth. Sales would likely be reduced a bit by price increases to cover the price of the raises — they estimate prices would rise by 3 percent a year in the final four years of the raise increase and reduce sales revenue by 1.5 percent. But sales would still track closely with economic growth and come to a 2.5 percent growth rate per year. The price increase would therefore bring in $3.5 billion in extra revenue while sales growth would bring in $6 billion, both of which could help cover the cost of the raises.

These measures can fully cover cost of higher wages, leaving the industry with $1.1 billion left over, the economists conclude.

Some research has warned of job losses with higher minimum wages, including an estimate from the non-partisan Congressional Budget Office. But other studies also found that rather than cutting jobs, businesses could very well see benefits from higher wages such as improved efficiency and lower turnover. The majority of fast food restaurants in Georgia and Alabama planned to respond to a minimum wage increase by raising performance standards for their workers, for example. A study that reviewed the available research on minimum wage impacts in 2009 found the impact on employment is close to zero and the most precise studies found no impact at all.

Real world evidence also plays out this way. When economists looked at state-level minimum wage increases over two decades, they didn’t find any evidence to support the idea that they hurt jobs, even during times of high unemployment. Five other studies did similar analyses and found the same thing. States with higher minimum wages have also experienced above-average job growth.

While the majority of states have higher minimum wages than the federal floor of $7.25, none has gone so far as to raise it to $15 an hour. Some cities, such as Seattle, are experimenting with wages at that level, and others could follow.