Final Argumentative Essay
silpac1850
reference_4.pdf
Robert Pollin is a distinguished professor of economics and co-director of the Political Economy Research Institute at the
University of Massachusetts, Amherst. Jeannette Wicks-Lim is an assistant research professor in the Political Economy
Research Institute at the University of Massachusetts, Amherst.
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©2016, Journal of Economic Issues / Association for Evolutionary Economics
JOURNAL OF ECONOMIC ISSUES
Vol. L No. 3 September 2016
DOI 10.1080/00213624.2016.1210382
A $15 U.S. Minimum Wage: How the Fast-Food Industry Could Adjust Without Shedding Jobs
Robert Pollin and Jeannette Wicks-Lim
Abstract: We consider the extent to which U.S. fast-food businesses could adjust to an increase in the federal minimum wage from its current level of $7.25 an hour
to $15 an hour without having to resort to reducing their workforce. We consider
this issue through a set of simple illustrative exercises, whereby the US raises the
federal minimum wage in two steps over four years, first to $10.50 within one year,
then to $15 after three more years. We conclude that the fast-food industry could
absorb the increase in its overall wage bill without resorting to cuts in their
employment levels at any point over this four-year adjustment period. We find that
the fast-food industry could fully absorb these wage bill increases through a
combination of turnover reductions, trend increases in sales growth, and modest
annual price increases over the four-year period. Working from the relevant
existing literature, our results are based on a set of reasonable assumptions on fast-
food turnover rates, the price elasticity of demand within the fast-food industry,
and the industry’s underlying trend for sales growth. We also show that fast-food
firms would not need to lower their average profit rate during this adjustment
period.
Keywords: fast food restaurants, low-wage workers, minimum wage
JEL Classification Codes: J38, L81
Over the past few years, there has been a growing movement in the United States to
substantially raise the federal minimum wage, which has been fixed at $7.25 an hour
since 2009. One widely embraced goal within this movement is to raise the federal
minimum to $15 an hour. This would constitute a 107-percent increase over the
current $7.25 minimum. The question we address in this article is whether it is
feasible to expect that the federal minimum wage could be raised to $15 an hour
without causing major negative unintended consequences, specifically as it would
affect the U.S. fast-food industry. The fast-food industry is an appropriate industry on
which to focus this discussion. This is because, along with other sectors within the
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A $15 U.S. Minimum Wage
restaurant and food preparation sector, it employs fully 47 percent of all workers who
earn at or below the federal minimum.1
The most straightforward possible negative consequence of a minimum wage
increase to $15 an hour would be that it would generate large-scale employment losses
within the fast-food industry and more broadly. Through such an outcome, the good
intentions that motivate the demand for a $15 federal minimum wage would result
instead in low-wage workers and their families being made worse off through the
contraction in job opportunities.
In addressing any such proposal along the lines of a $15 federal minimum wage,
it is critical to assess the relative likelihood that such a measure would generate its
intended consequence — i.e., raising incomes and living standards for low-wage
workers and their families — as opposed to its unintended consequence — i.e.,
reducing job opportunities and thereby worsening the life circumstances of low-wage
workers. To preview our findings, we show that the U.S. fast-food industry could
absorb the rise in its overall costs generated by an increase in the federal minimum
wage to $15 an hour without causing employment losses. More specifically, we present
a scenario through which the federal minimum wage rises in two steps over four years
— to $10.50 an hour within one year and to $15 an hour three years later. We show
that the cost increases resulting from these measures could be absorbed by the fast-
food industry not only without causing employment losses, but — crucially — without
business firms having to reduce their average rate of profitability. This is true
regardless of whether such redistribution from business owners to low-wage employees
is justified as one means of reducing inequality in the US.
Of course, whether or not minimum wage increases would lead to significant
employment losses for low-wage workers is a longstanding matter of contention within
the economics research literature. The current state of the literature to date coincides
with the conclusion reached by Richard Freeman in his review of the literature in
1995. Freeman’s (1995, 883, emphasis in original) conclusion as of 1995 was that the
“debate is over whether modest minimum wage increases have ‘no’ employment
effect, modest positive effects, or small negative effects. It is not about whether or not
there are large negative effects.”2
1 This figure comes from the U.S. Labor Department’s 2013 report on the “Characteristics of
Minimum Wage Workers” (available at www.bls.gov/cps/minwage2013.pdf, accessed December 2014). 2 Studies of minimum wage employment effects tend to focus on groups of workers particularly
affected by minimum wage laws, including restaurant workers and teenagers. The overall weight of
evidence for restaurant workers points to basically no effect. Studies on this sector that find negative
employment effects include David Neumark and William Wascher (2007) and Joseph J. Sabia (2009).
However, studies by Arindrajit Dube, T. William Lester, and Michael Reich (2013, forthcoming) and John
T. Addison, McKinley L. Blackburn, and Chad D. Cotti (2012) find no such impact once local labor
market trends are adequately accounted for. This debate over the appropriate methodology continues on
the question of how minimum wages affect teen employment. David Neumark, J.M. Ian Salas, and William
Wascher (2014) find significant, but small, negative effects on teenage employment from minimum wages.
As with the studies of restaurant employment, Sylvia Allegretto et al. (forthcoming) contradict these
findings when they account for geographic trends. (For a range of recent alternative perspectives on the
literature, see, for example, Neumark and Wascher 2008; Pollin et al. 2008; Doucouliagos and Stanley
2009; Belman and Wolfson 2014; and Schmitt 2015.)
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Robert Pollin and Jeannette Wicks-Lim
Nevertheless, Freeman is clear that his conclusion refers to the employment
effects of modest minimum wage increases. It is fair to say that an increase from today’s
$7.25 minimum to $15 would not be modest, even if this increase were phased in
over four years, as we consider in this article.
This is true despite the fact that, after correcting for inflation, today’s $7.25
federal minimum is about 33 percent lower than the $10.85 figure in 1968 — that is,
46 years ago. This long-term deterioration in the real value of the minimum wage is
even more dramatic after we recognize that average labor productivity has risen by
roughly 135 percent since 1968. This means that, if the federal minimum wage had
risen in step with both inflation and average labor productivity since 1968, the federal
minimum wage today would be $25.50 an hour.
There is one example within the U.S. experience in which the federal minimum
wage rose nearly as much as the 107-percent increase that would result at present from
raising the minimum to $15 an hour. In January 1950, the federal minimum wage
increased from $0.40 to $0.75 — an 88-percent increase. But this minimum wage hike
had no significant impact on the employment level in the national economy. Thus,
just prior to this hike, the national economy was at a business cycle trough, with the
unemployment rate peaking at 7.9 percent in October 1949. From that low point, the
unemployment rate declined continuously through the end of 1950 (i.e., both before
and after the minimum wage hike). This experience suggests that a minimum wage
increase on the order of 90-100 percent does not inevitably produce large-scale
employment losses.3
The debate over the employment effects of increases in the minimum wage has
mainly focused on whether these negative employment effects have, in fact, occurred.
Much less attention has been given to an equally important follow-up question: If,
indeed, no significant negative employment effects have resulted from minimum wage
increases, then why have they not occurred?4 The basic law of demand in economics is
clear that raising the price of anything will reduce demand for that thing, all else
being equal. Since nobody has proposed repealing this basic law of demand, it follows
that, for an increase in the minimum wage to not generate employment losses among
low-wage workers, it is necessary that the “all else being equal” provision of the law
has to be relaxed through some possible set of channels. We explicitly relax the “all
3 These unemployment figures are published by the Current Population Survey of the Bureau of
Labor Statistics. 4 Another neglected question is: Can a minimum wage hike improve worker welfare, even while
causing employment to fall? This could be the case if employment falls in terms of hours rather than jobs.
Thomas Michl (2000) finds that, in the case of the widely debated New Jersey minimum wage (see Card
and Krueger 1995; Neumark and Wascher 2000), the state’s increase improved workers’ pay rates
sufficiently to offset any negative impact on their annual earnings from working fewer hours. Michl (2000)
notes that these workers would also gain increased leisure time or to do unpaid work, such as maintaining
their household or rearing children.
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else being equal” proposition and take account of what may be changing in the
economy at the same time as the price of labor changes.5
Some researchers have examined what alternative adjustment options firms
have, in fact, pursued in response to minimum wage increases.6 There are four
primary ways for businesses to adjust to cost increases other than reducing
employment. First, a minimum wage hike could be paid for, in part, by cost savings
from reduced absenteeism, lower turnover and training costs, and higher productivity
more generally. Second, firms could possibly cover a share of their increased costs by
raising prices. Third, firms could allocate a share of the revenues generated by
economic growth to cover these increased costs. Finally, firms could redistribute
overall revenues within the firm — from profits to the wages of their lowest-paid
workers, from high-wage workers to low-wage workers, through investing in new
equipment to reduce their employment requirements relative to their overall level of
operation, or through cutting back on other business expenses to cover the increased
wage bill.
It is critical to recognize here that, all else being equal, for firms to be forced to
cut their workforce due to a minimum wage increase could impair their capacity to
sustain or improve their existing level of operations and retain or expand their
customer base. This is especially true for fast-food restaurants. Layoffs can directly
weaken their ability to deliver service quickly, which is obviously a critical component
of what fast-food restaurants are selling to customers. Quick service not only requires
adequate staffing, but also relatively high morale among workers so that they can work
effectively as a team in minimizing customers’ wait times. In addition, staff reductions
can work directly counter to the business’ ability to increase revenue as a means to
cover their higher costs. As such, reducing the workforce is not likely to be the
preferred adjustment option for most business firms that aspire to compete effectively
and expand.7
We also assume that the least desirable option for firms is to reduce their profit
rate. These are the reasons why firms are likely to be motivated to consider the
prospects of reducing turnover, raising prices, and drawing on a share of their
5 Our approach follows the institutionalist method of examining the impact of labor and
employment law. This approach encourages researchers to take better account of factors that can
significantly impact economic outcomes, such as institutions and transaction costs, rather than consider the
law of demand in isolation of these factors (for an in-depth discussion of the institutionalist approach to
studying the economic consequences of employment law, including the minimum wage, see Kaufman
2012). 6 John Schmitt (2015), as well as Barry Hirsch, Bruce Kaufman, and Tetyana Zelenska (2015) provide
valuable overviews of these issues. 7 Surveys of fast-food managers by Hirsch et al. (2015) document the reasons why reducing staff is
not their preferred channel of adjustment to minimum wage increases. Hirsch, Kaufman, and Zelenska
(2015) discuss these manager responses in the context of their finding that U.S. fast-food restaurants, for
the most part, did not adjust to the 2007/2009 federal minimum wage hikes through their employment
levels. They observe that “managers see employment cuts as a relatively costly and perhaps
counterproductive option, regarding them as a last resort” (Hirsch, Kaufman and Zelenska 2015, 235).
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Robert Pollin and Jeannette Wicks-Lim
increased revenues from growth to absorb their higher labor costs before they resort
to cutting their workforce or reducing profitability.
Our focus in this article is to consider the extent to which U.S. fast-food
businesses could adjust to a $15 minimum wage through some combination of these
alternative possibilities, as opposed to resorting to reducing their workforces. We
consider this issue through a set of simple illustrative exercises, whereby the US raises
the federal minimum wage in two steps over four years: first to $10.50 within one
year, then to $15 after three more years.8 In assessing the likely adjustments within the
fast-food industry of these minimum wage increases, we conclude that the fast-food
industry could indeed absorb the increase in its overall wage bill without resorting to
cuts in their employment levels at any point over the four-year adjustment period.
Rather, we find that the fast-food industry could fully absorb these wage bill increases
through a combination of turnover reductions, trend increases in sales growth, and
modest annual price increases over the four-year period. We also show that fast-food
firms would not need to lower their average profit rate during this adjustment period.
Nor would fast-food firms need to reallocate funds generated by revenues away from
any other area of their overall operations, such as marketing.
Precisely because the fast-food industry operates with such a high concentration
of low-wage workers, these findings specifically focused on the fast-food industry also
offer broader implications. Our findings show, more broadly, how business firms
within the U.S. economy could realistically adjust to a $15 federal minimum wage
without generating employment losses within any sector of the economy.9
We structure this article as follows: In the next section, we estimate the overall
cost increases that fast-food firms would incur through an increase in the federal
minimum wage to both $10.50 and $15 an hour. In section three, we then consider
the options other than layoffs that businesses can pursue for absorbing these
increased costs. In section four, we examine these options specifically as they apply to
the current U.S. fast-food industry. In section five, we present our scenario as to how
fast-food firms could absorb the increased costs generated by the two-step minimum
wage increase to $10.50 within one year and to $15 within four years without having
to reduce their workforce. In the final section, we offer some brief conclusions.
Costs to Fast-Food Firms of Minimum Wage Increases
To estimate cost figures for a minimum wage hike up to $15 per hour for fast-food
employers, we need to answer the following three questions: How many workers
would get raises from the increased minimum wage? How big would these raises be?
What is the overall impact on the wage bill?
8 Unless otherwise noted, all dollars expressed in this paper are in 2013 dollars. 9 This empirical exercise builds on other minimum-wage- and living-wage impact studies, including
Robert Pollin, Mark Brenner, and Stephanie Luce (2002), Robert Pollin, Mark Brenner and Jeannette
Wicks-Lim (2004), and Robert Pollin and Jeannette Wicks-Lim (2006). For a compilation of these studies,
see Robert Pollin et al. (2008).
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We answer these questions using publicly available labor market data published
by the U.S. Labor Department for the “Limited Service Eating Places” industry (we
use the terms “limited service eating places” and “fast-food industry” interchangeably).
These data sources include the Occupational Employment Statistics (OES), the
Current Population Survey (CPS), and the Quarterly Census of Employment and
Wages (QCEW). We include in our cost figure two distinct categories of raises: (i)
mandated raises — the raises that get all workers to at least the new minimum wage rate;
and (ii) ripple-effect raises — these are raises that would lift some workers above the
newly mandated minimum wage. Employers provide these ripple-effect raises in order
to maintain a wage hierarchy after the new minimum wage has been enacted. In
addition, we incorporate the rise in payroll taxes which employers will be mandated to
pay for all workers receiving raises.
Estimating which workers will receive ripple-effect raises, as well as the size of
these raises, is necessarily a more speculative exercise than estimating mandated raises
precisely because they are not legally mandated. To estimate the size and extent of
ripple-effect raises, we start with research findings on minimum wages since we have a
wealth of empirical data with which to measure ripple effects. At the same time, as
noted earlier, the increase to a $15 minimum wage is out of the range of past
minimum wage hikes. Such a steep increase in the minimum wage could produce
stronger ripple effects to prevent a severe compression in the wage distribution at the
low end. In other words, minimum wage ripple effects estimated from past minimum
wage hikes may underestimate the ripple effects from a $15 minimum wage.
Therefore, we will also use estimates from living wage ordinances implemented
at the municipal level. These municipal-level living wage mandates require much
larger minimum wage increases than the federal or state-level increases, better
approximating the rise in the minimum wage represented by the $15 proposal. Living
wage studies, however, are case studies with limited data. This makes it difficult to
isolate wage increases due to the living wage from wage increases due to other changes
occurring at the same time. As a result, these living wage case studies may
overestimate the ripple effects of a $15 minimum wage.
We begin with the results of Jeannette Wicks-Lim (2008). That study looks at
the impact, from 1983 to 2002, of federal and state-level minimum wage hikes on
wages across the full wage distribution. Its basic finding is that ripple effects strongly
compress wages at the low end. We apply this study’s estimates across the wage
distribution. Through this, we assume that the effect of a 107-percent minimum wage
hike can be expected to extend up to workers earning about $17.50 per hour, which
would be 17 percent above the new mandated minimum wage of $15 (see Appendix
for details).
Living wage studies provide evidence supporting the idea that ripple effects from
more substantial minimum wage increases, such as those that have resulted through
municipal living wage ordinances, are likely to extend further up the wage distribution
than those resulting from typical federal or state minimum wage increases. One such
case study examines the impact of the living wage increase that was implemented over
the period from 1998 to 2001 at the San Francisco Airport (Reich, Hall and Jacobs
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Robert Pollin and Jeannette Wicks-Lim
2005). As part of this study, the researchers surveyed businesses before and after the
wage floor increased from $5.75 to $10 per hour — a 74-percent increase. Based on
the changes in wage rates reported by these employers, ripple effects from this San
Francisco living wage measure appears to have extended to wages about 40 percent
above the new $10 floor — i.e., to workers earning up to $14. If we applied this
standard to a minimum wage increase from $7.25 to $15 minimum wage, it would
suggest that ripple effect raises would extend to workers earning up to $21, not
$17.50.
This more extensive ripple effect observed in the San Francisco study is
consistent with observations from two other studies on living wage ordinances
(Brenner and Luce 2008; Fairris et al. 2005). At the same time, Michael Reich, Peter
Hall, and Ken Jacobs’s wage survey did not adjust for wage increases that would have
occurred in the absence of the newly adopted living wage mandate and thus likely
reflect, in part, wage increases not caused by the living wage measure. Additionally,
many San Francisco Airport workers were unionized at the time that the living wage
ordinance was enacted. The collective bargaining process over their working
conditions likely enabled these workers to raise their wages in response to the living
wage ordinance more than would be normally the case among non-union workers. In
other words, the raises observed by Reich, Hall, and Jacobs likely reflect the influence
of more than the adoption of the living wage ordinance alone.
We view our two sets of ripple effect estimates (from Wicks-Lim (2008) on
federal and state-level minimum wage increases and from Reich, Hall, and Jacobs
(2005) on the San Francisco Airport living wage ordinance) as providing lower- and
upper-bound estimates, respectively, of the raises we expect to occur due to a
minimum wage increase from $7.25 to $15. For the purposes of our calculations, we
assume that ripple-effect raises extend throughout the entire wage distribution among
fast-food workers. This is because the Labor Department’s figures indicate that the
highest wage rate among fast-food workers is about $18.25. This is only 22 percent
above a $15 minimum wage level — i.e., roughly only half the 40 percent level
percentage-wise that Reich, Hall, and Jacobs observed for ripple effects resulting from
the San Francisco living wage ordinance. For our purposes, we assume that the ripple
effects will fall midway between the levels suggested by Wicks-Lim and Reich, Hall,
and Jacobs’s studies (see the Appendix for details on our estimations).
In Table 1.1 and Table 1.2, we present these average figures for determining the
costs of both mandated and ripple-effect raises from a $15 minimum. In the first
column of Table 1.1, we see that about 1.1 million fast-food workers earn wages at the
bottom of the wage scale — between $7.25 and $8.50. In row 6 of the same table, we
show that these workers can expect to get a raise that brings them up to the new $15
minimum, up from their current average of $7.74. This is an average raise of 94
percent.
The next group of fast-food workers earns between $8.50 and $9.50. We
estimate that these approximately 1.3 million workers would, on average, receive
raises that push their wages slightly higher than the new $15 minimum, to $15.60.
Their raises, however, are smaller than those of the lowest paid workers. The average
A $15 U.S. Minimum Wage
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wage increase is from $8.87 to $15.60, or 76 percent. These smaller raises result from
the fact that they began at higher wage rates. In other words, minimum wage increases
tend to compress — rather than simply shift — the wage distribution.
Table 1.1. Estimated Wage Increases from $15 Minimum Wage for U.S. Fast-Food
Restaurants (Figures Are for 2013)
Source: See Appendix.
Table 1.2. Estimated Wage Increases from $15 Minimum Wage for U.S. Fast-Food
Restaurants (Figures Are for 2013)
Source: See Appendix.
We assume that this pattern continues through the wage distribution, with each
set of workers receiving smaller proportional raises. These raises basically place
workers in a similar position before and after implementation of the $15 minimum
wage, but cause the wage distribution to compress at the lower end. The top wage
earners in the fast-food industry, currently earning between $17.50 and $18.50,
receive an average raise of only about 7.0 percent.
To calculate the total annual wage bill increase resulting from these raises (in
row 7 of Tables 1.1 and 1.2), we multiply for each group of affected workers: the
Wage group $7.25-$8.50 $8.50-$9.50 $9.50-$10.50 $10.50-$11.50 $11.50-$12.50 $12.50-$13.50
1. Number of workers
(% of workforce)
1,143,000
(30%)
1,258,000
(33%)
534,000
(14%)
191,000
(5.0%)
191,000
(5.0%)
114,000
(3.0%)
2. Average wage $7.74 $8.87 $9.92 $10.91 $11.92 $12.87
3. Average annual hours
1,026
(26 hrs/wk x
39 wks/year)
1,355
(30 hrs/wk x 45
wks/year)
1,476
(34 hrs/wk x
44 wks/year)
1,580
(36 hrs/wk x
45 wks/year)
1,727
(37 hrs/wk x
46 wks/year)
1,715
(40 hrs/wk x
43 wks/year)
4. Annual wage bill
before $15 minimum $9.1 billion $15.1 billion $7.8 billion $3.3 billion $3.9 billion $2.5 billion
5. Average wage after
$15 minimum $15.00 $15.60 $16.35 $16.60 $16.90 $17.05
6. Average raise 93.8% 75.9% 64.8% 52.2% 41.8% 32.5%
7. Annual cost of raises $8.5 billion $11.5 billion $5.1 billion $1.7 billion $1.6 billion $0.8 billion
8. Annual wage bill after
$15 $17.6 billion $26.6 billion $12.9 billion $5.0 billion $5.6 billion $3.3 billion
Wage group $13.50-$14.50 $14.50-$15.50 $15.50-$16.50 $16.50-$17.50 $17.50-$18.50
1. Number of workers
(% of workforce) 76,000 (2.0%) 76,000 (2.0%) 76,000 (2.0%) 76,000 (2.0%) 76,000 (2.0%)
2. Average wage $13.95 $14.98 $15.98 $16.99 $17.96
3. Average annual
hours
1,629
(39 hrs/wk x
42 wks/year)
1,782
(37 hrs/wk x
48 wks/year)
1,779
(40 hrs/wk x 44
wks/year)
1,706
(41 hrs/wk x 41
wks/year)
1,788
(41 hrs/wk x 44
wks/year)
4. Annual wage bill
before $15 minimum $1.7 billion $2.0 billion $2.2 billion $2.2 billion $2.4 billion
5. Average wage after
$15 minimum $17.35 $17.65 $18.10 $18.70 $19.15
6. Average raise 24.4% 17.8% 13.3% 10.1% 6.6%
7. Annual cost of raises $422 million $362 million $287 million $222 million $162 million
8. Annual wage bill
after $15 $2.1 billion $2.4 billion $2.5 billion $2.4 billion $2.6 billion
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Robert Pollin and Jeannette Wicks-Lim
number of workers (row 1) by their average annual hours (row 3) and their average
raise (row 2 x row 6). Table 2 provides summary figures of these costs. We estimate
that all 3.8 million fast-food workers, earning up to $18.25, would receive raises.
Table 2. Average Wage Increases Due to $15 Minimum Wage for All Affected U.S.
Fast-Food Restaurant Workers
Source: See Appendix.
Because workers at different points in the wage distribution work varying
numbers of hours, for our summary figures in Table 2, we convert the overall
employment and wage figures to reflect full-time equivalent (FTE) positions. As Table
1.1 and Table 1.2 show, workers at the lowest wage rates also tend to work the fewest
number of hours. The impact of these workers on the fast-food industry’s overall wage
bill will, therefore, be smaller than what their headcount number would suggest.
In row 2 of Table 2, we show that 2.5 million FTE positions should expect to
experience wage raises from a $15 minimum. The average raise (row 6) across these
FTE positions is 59 percent, which is roughly half the 107-percent increase in the
wage floor due to the minimum wage increase from $7.25 to $15. This lower average
percentage wage increase reflects the fact that workers, earning above the current
$7.25 minimum, will receive smaller mandated and ripple-effect raises. As we show in
row 7 of Table 2, total raises within the fast-food industry resulting from the increase
to a $15 minimum add up to $30.7 billion.
We can utilize this same methodology to estimate the overall set of raises and
the overall wage bill increase that would result through minimum wage increases to
other levels. In Table 3, we show our results for the case of minimum wage increases
from the current $7.25 per hour standard to $10.50 as the new mandate. As Table 3
shows, with the increase to a $10.50 minimum wage, we estimate that 3.5 million fast-
food workers, now earning between $7.25 and $14.50, would receive raises. These
workers work an equivalent of 2.2 million FTE positions (row 2). Across these FTE
positions, the increase to a $10.50 minimum wage would raise the average hourly pay
rate by 16 percent from $9.42 to $10.96. These raises add up to a total of a $7.1
billion increase in the fast-food industry’s wage bill.
Affected workers only Wage group: $7.25-$18.50
1. Number of workers 3.8 million
2. Number of FTE positions 2.5 million
3. Average wage per FTE job $10.16
4. Annual wage bill before $15 minimum
(row 3 x row 2 x 2080 annual hours/FTE position) $52.3 billion
5. Avg. wage per FTE job after $15.00 minimum $16.11
6. Avg. raise per FTE job (row 5/row 3) 58.6%
7. Annual cost of raises
(row 5 x row 2 x 2080 annual hours/FTE position) $30.7 billion
8. Annual wage bill after $15.00 minimum
(row 4 + row 7) $83.0 billion
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Table 3. Overall Wage Increases in U.S. Fast-Food Industry Due to Minimum
Wage Rise to $10.50
Source: See Appendix.
In Table 4, we scale the total fast-food industry wage bill increases relative to the
industry’s total sales in 2013 of $232 billion.10 We show the ratios of these wage-bill
increases relative to sales resulting through minimum wage increases from the current
$7.25 figure for both $10.50 and $15, respectively. As we see in the bottom row of
Table 4, the wage-bill increases represent 3.3 percent of sales at a $10.50 minimum
wage and 14.2 percent of sales at a $15 minimum wage. These ratios are critical in
providing a scale for measuring the extent of the adjustments that fast-food firms
would need to undertake in order to absorb the wage-bill increases associated with
significantly higher minimum wage standards.
Table 4. Total Wage Bill Increases Relative to 2013 Fast-Food Restaurant Sales
from Minimum Wage Increases to $10.50 and $15 Per Hour
Source: See Appendix.
How Businesses Adjust to Minimum Wage Cost Increases
There are four primary ways for businesses to adjust to cost increases other than
reducing employment. First, a minimum wage hike could be paid for, in part, by cost
savings from reduced absenteeism, lower turnover and training costs, and higher
productivity more generally. Second, firms could possibly cover a share of their
10 The figures on fast-food industry sales come from the 2012 U.S. Economic Census (see the
discussion in the Appendix as to how we updated these figures for 2013).
Minimum wage at: $10.50 $15.00
1. Total cost increase $7.6 billion $33.0 billion
a. Total wage increases $7.1 billion $30.7 billion
b. + Higher payroll taxes (7.65%) $0.5 billion $2.3 billion
2. Total cost increase of private firms
relative to $232 billion in sales 3.3% 14.2%
Affected Workers Only Wage group: $7.25-$14.50
1. Number of workers 3.5 million
2. Number of FTE positions 2.2 million
3. Avg. wage per FTE position $9.42
4. Annual wage bill before new minimum $43.5 billion
6. Avg. wage per FTE after new minimum $10.96
5. Avg. raise per FTE position 16.0%
7. Annual cost of raises $7.1 billion
8. Annual wage bill after new minimum $50.6 billion
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increased costs by raising prices. Third, firms could allocate a share of the revenues
generated by economic growth to cover these increased costs. Finally, firms could
redistribute overall revenues within the firm — from profits to the wages of their
lowest-paid workers; from high-wage workers to low-wage workers; through investing
in new equipment to reduce their employment requirements relative to their overall
level of operation; or through cutting back on other business expenses to cover the
increased wage bill. We briefly consider these alternatives in turn.
Raising Worker Productivity
There are good reasons to expect that firms will experience some labor-cost
savings due to greater worker productivity. This is because minimum wage hikes can
increase workers’ commitment to their job as their compensation increases. One
concrete way that these changes can be measured is through turnover rates. With
lower turnover, employers save on the costs of recruiting and training new employees
and achieve efficiency improvements through operating with more experienced
employees.11
At the same time, in assessing the prospects for such cost-saving channels, the
initial question that emerges is: If businesses could raise productivity and save on
labor costs through raising wages, why would they not raise wages independent of
changes in minimum wage mandates? The answer is that the cost savings from
productivity improvements induced by higher wages will almost certainly not offset
the cost of the higher wages in full. That is, in almost all circumstances, productivity
improvements will reduce, but not completely pay for the increased costs resulting
from higher wages.
Raising Prices
Firms can raise prices to generate more sales revenue that they can then use to
cover their higher labor costs. The crucial question here is: How much can a firm
raise prices without losing sales? That is, what is the price elasticity of demand that the
firms face? Businesses that operate in markets where demand is relatively inelastic
have more flexibility to raise their prices since their customers are less likely to change
how much they spend even as prices rise.
This point raises a question about firms’ price-setting behavior that parallels the
question about firms’ wage-setting behavior above. That is, why would firms, which
operate in markets where demand is relatively inelastic, not raise prices regardless of
whether there is a minimum wage increase? The answer in this case is that it can be
difficult for a single firm to pursue this strategy alone. If one firm among several
within a competitive market environment raises its prices, it risks losing customers to
its competitors which have not raised prices. Therefore, even if a firm would want to
11 David Fairris and Erik Jonasson (2008) also find suggestive evidence that employers use higher
starting wages in order to elicit greater work effort from employees in occupations that are hard to monitor.
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raise its prices to take advantage of a relatively inelastic market demand, it will be
reluctant to do so unless other firms also raise their prices concurrently. However, in
the case of a regional or federal minimum wage increase, the likelihood is that all
affected firms within a given area will raise their prices at about the same time. In this
case, no one firm is placed at a disadvantage relative to its competitors, and all firms
are able to enjoy the benefits of charging a higher price. In the absence of an area-wide
policy change like a minimum wage hike, firms will face difficulties in coordinating
with their competitors any such price increase. Among other factors, explicit efforts
for competitive businesses to coordinate their pricing policies constitute collusion.
Increased Revenues Through Economic Growth
The overall growth trajectory of any specific sector, and of the economy overall,
provides additional flexibility for firms that face cost increases resulting from higher
minimum wages or any other factor. In other words, on average, firms’ revenues will
increase as a result of overall economic growth. When faced with higher labor costs,
firms could allocate a share of their expanding revenues to cover their higher labor
costs.
Redistribution of Revenue Within Firms
Businesses can channel a higher proportion of any given level of revenue to
cover the increased labor costs resulting from a higher minimum wage. For example,
firms could lower their profit margins to cover their higher labor costs. They could
also reduce the rate of wage increases for their higher-paid workers. Finally, they could
reduce spending, or at least slow the growth in spending in other areas like marketing.
Alternative Adjustment Options in Practice
Taken together, the adjustment channels we have described above — raising
productivity, raising prices, drawing on a share of the revenue gains generated by
economic growth, or redistributing a given level of revenue — provide firms with
alternative ways to absorb the cost increases generated by a minimum wage hike rather
than resorting to reducing their overall employment levels. All else being equal,
cutting overall employment could impair the capacity of firms to sustain their existing
level of operations and retain their customer base. As such, it is not likely to be their
preferred adjustment option. The question we wish to consider now is the extent to
which fast-food firms could realistically deploy these alternative adjustment options
when faced with minimum wage increases up to both $10.50 and $15 per hour.
For the purposes of our exercise, we assume that the least desirable option for
firms is to reduce their profit rate. The other relatively undesirable option would be to
reduce costs in other areas of their operations, such as marketing or investments in
new equipment. It is possible that fast-food firms would channel an increased share of
their revenues to purchase new equipment that could enable them to rely less on
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employing low-wage workers to maintain their desired scale of operations. Daniel
Aaronson and Brian Phelan (2015) examine this prospect for the case of low-wage
workers across the economy, and also provide insights on what would likely occur
within the fast-food industry specifically. They have two main findings. First,
technological adjustments do take place as a result of a minimum wage increase, but
these adjustments are limited to occupations with a high level of routine cognitive
tasks. These adjustments do not occur among occupations with a high level of routine
manual work.
The primary low-wage fast-food occupations are among those that Aaronson and
Phelan identify as having a high level of routine manual work. Over 75 percent of fast-
food jobs are in four occupations: combined food preparation workers, fast-food
cooks, counter attendants, and first-line supervisors. Three of these four occupations
typically pay low wages (combined food prep and serving workers, fast-food cooks, and
counter attendants). These three occupations also have average or above-average
shares of routine manual tasks. In other words, the large majority of the low-wage jobs
in fast-food are in the types of occupations that do not show any evidence of
technological substitution in response to minimum wage hikes.
Aaronson and Phelan’s second main finding is that the net effect on
employment — across all low-wage occupations — is negligible. This is because
employment growth in low-wage occupations is sufficient to absorb workers moving
out of occupations with a high level of routine cognitive tasks. They note that part of
this growth results when the technological substitution for routine cognitive tasks,
such as self-service checkout lanes, require the addition of workers doing the non-
routine cognitive work of assisting customers in using such technology. Thus,
technological substitution has not, to date, been used as a major adjustment channel
to minimum wage hikes. More generally, the incentive for technological substitution
is weaker if other adjustment channels can sufficiently cover increased costs without
reducing profit margins.
Overall then, in considering minimum wage increases to both $10.50 and $15
per hour, we assume no adjustments through either a reduction in profitability or
through changes in spending levels within other areas of the firms’ operations. That
is, we assume both that profit rates will remain stable and that no other
redistributions of firms’ revenues will occur either. That leaves us with three
remaining adjustment options: raising productivity; raising prices; or channeling a
share of the revenue gains from economic growth to cover the rise in low-wage labor
costs.12
12 Especially with respect to productivity and price adjustments, we consider a range of evidence that
enables us to derive plausible, if conservative, assumptions as to what is possible. Of course, we do not
expect that our assumptions will necessarily apply to all fast-food firms, or to any single firm. Rather, they
are meant as realistic, if rough averages that would apply to the fast-food industry in the aggregate.
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Prospects for Productivity Improvements
We combine findings from two sets of research to estimate the degree to which
fast-food firms could experience productivity gains resulting from an increase to either
a $10.50 or $15 minimum wage. First, we consider research on the hospitality
industry that estimates costs which businesses incur through employee separations.
We then consider research findings that have estimated the extent to which higher
wage floors reduce labor turnover rates among low-wage workers. These two sets of
research will enable us to estimate the range of cost savings that fast-food firms are
capable of achieving through any given minimum wage increase.
The cost of turnover to employers depends both on the rate of worker turnover
as well as the costs associated with replacing workers. According to the U.S. Labor
Department, the accommodations and food service industry had an annual turnover
rate of 62.6 percent in 2013, well above the overall private industry rate of 42.2
percent.13 However, J. Bruce Tracey and Timothy Hinkin (2008) report that among
limited service restaurants specifically, turnover is substantially higher — at 120
percent.
Timothy Hinkin and J. Bruce Tracey (2000, 2006) also estimate the costs
associated with this high turnover rate within the hospitality sector. They develop a
comprehensive measure of the costs of turnover to assess its impact on business
operations. Their measure includes five major cost categories: (i) pre-departure (e.g.,
exit interviews, paperwork processing); (ii) recruitment (e.g., marketing, reviewing
applications); (iii) selection (e.g., interviews, background checks); (iv) orientation and
training; and (v) lost productivity (e.g., diminished productivity of departing
employee, lower productivity of yet-to-be-trained staff, as well as experienced workers
who must pick up the slack of new workers or position vacancies) (Tracey and Hinkin
2008, 14).
We use Tracey and Hinkin’s findings to gauge the turnover costs in the fast-food
industry. But we do make one important adjustment to their figures: We discount
their turnover cost estimate, based on hotel workers, to reflect the fact that lower-paid
fast-food workers likely have lower turnover costs.14 Based on this adjusted turnover
cost figure, we estimate that, on average, fast-food businesses experience a cost of
roughly $4,700 each time a fast-food worker separates from his/her job (see Appendix
for more details on these turnover cost estimates).
A study by Arindrajit Dube, T. William Lester, and Michael Reich (2013)
generates estimates of separation elasticities associated specifically with minimum
wage increases between 2000 and 2011 — that is, how much the separations rates fall
13 The turnover rate is defined as the total number of separations during the entire year as a percent
of total annual average employment (see http://data.bls.gov/cgi-bin/print.pl/news.release/archives/
jolts_03112014.htm, Table 16). 14 Timothy Hinkin and J. Bruce Tracey (2000) and J. Bruce Tracey and Timothy Hinkin (2008) find
higher turnover costs with higher complexity and higher wage jobs. According to 2011 BLS data on occupa-
tional wages — the most recent year that the BLS published occupational wages for “limited service eating
places” — the median fast-food worker earned $8.87 versus $10.63 for the average hotel worker.
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as a result of these minimum wage increases. They estimate an elasticity of –0.225.
This means that, for every 10-percent increase in minimum wage, the decline in the
turnover rate for fast-food workers would be –2.2 percent.
We can combine the respective findings of Hinkin and Tracey (2000, 2006) and
Dube, Lester, and Reich (2013) to estimate the amount of cost savings that are likely
to be generated through a rise in the minimum wage to $10.50 and $15 per hour.
Thus, a minimum wage increase to $10.50 per hour is an increase of 45 percent
relative to the current $7.25 minimum. Following from Dube, Lester, and Reich’s
(2013) separation elasticity figure, a 45-percent minimum wage increase should then
reduce turnover by 10 percent (45 percent x –0.225). This represents roughly a 12-
percent decline in what we have seen above from Hinkin and Tracey’s research as an
average turnover rate of 120 percent in the fast-food industry (i.e., 120 percent x
0.10). Given current employment levels within the fast-food industry, this level of
decline in turnover rates translates to 456,000 fewer worker separations. The cost
savings associated with this decline amounts to $2.1 billion, or roughly 28 percent of
the total wage bill increase for the fast-food industry that we report in Table 4.
Following the same set of steps and calculations for a minimum wage increase to
$15, we calculate that this minimum wage increase would generate a 24-percent
reduction in the turnover rate. This, in turn, would mean a 29-percent reduction
relative to what had been a 120-percent turnover rate within the fast-food industry.
This would then generate 1.1 million fewer separations per year among the 3.8
million workers employed in the industry, which translates into $5.2 billion in cost
savings. This equals to 17 percent of the total wage bill increase of $33 billion
generated by the minimum wage rise to $15 per hour.
The results we have derived through these exercises correspond closely with the
findings of three previous studies. Thus, a study by David Fairris et al. (2005) directly
asked employers, subject to the 1997 Los Angeles living wage ordinance, about
changes in their turnover rates resulting through establishing the municipal living
wage mandate. The employers estimated that the living wage ordinance reduced
turnover rates from 49 to 32 percent — i.e., a 17-percent decline. Fairris et al. (2005)
further found that, after taking account of the costs to find and train new employees,
this reduction in turnover produced cost savings equal to about 16 percent of the
wage bill increase generated by the 1997 Los Angeles living wage ordinance.
Two other studies estimated cost savings from lower turnover within the range
of 11 percent (Reich, Hall and Jacobs [2003] for the San Francisco City Airport) to 30
percent (Pollin et al. 2008, ch. 5, for Santa Fe, NM, restaurants). Overall, these studies
suggest that lower turnover rates may offset between 10 and 30 percent of the cost of
a minimum wage hike. Based on these results, we assume that the minimum wage
increases to $10.50 and $15 per hour, respectively, will generate reductions in worker
turnover that will offset 20 percent of the overall wage bill increase.
Prospects for Raising Prices
Two recent studies of price elasticities of demand within the U.S. fast-food
industry specifically were done by researchers at the U.S. Department of Agriculture
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731
(USDA). These are the studies conducted by Abigail Okrent and Julian Alstom
(2012), and by Abigail Okrent and Aylin Kumcu (2014). Both of these studies were
based on data from 1999 to 2010. Despite this, the two studies — with the same lead
author in both cases — generated a large difference in their estimated price elasticities
of demand. The elasticity estimate was –0.13 for the 2012 study and –0.9 for the 2014
study.
For the purposes of our discussion, it is critical to identify the source of this
large disparity. The key difference appears to be that, in the 2012 study, Okrent and
Alstom do not separate out the effects of household time constraints and advertising
on the demand for fast food, as against the pure effects of price on demand
independent of the impacts of household time constraints and advertising. For our
purposes, we are most interested in knowing the impact on demand of price changes
as they operate in combination with (i.e., their interactive effects) both household time
constraints and advertising. This is because we assume that the change in the
minimum wage will not affect trends in either household time constraints or the
advertising expenditures of fast-food firms. As such, we conclude that the price
elasticity of demand that is most relevant for our discussion would be much closer to
the –0.13 figure from Okrent and Alstrom’s (2012) study than the –0.9 estimate from
Okrent and Kumcu’s (2014) study, which does attempt to separate out pure price
effects from the effects of household time constraints and advertising expenditures.
We also note that assuming a price elasticity in the much higher range of –0.9 is
inconsistent with the body of evidence which finds that minimum wage increases do
typically generate price increases. This result emerges strongly, for example, from the
research of Daniel Aaronson and his co-authors over several studies (e.g., Aaronson
2001; Aaronson, French and MacDonald 2008; MacDonald and Aaronson 2006).
For example, in considering evidence from 1995 to 1997, covering a two-step federal
minimum wage hike, Daniel Aaronson, Eric French, and James MacDonald (2008)
report that fast-food prices rise by about 1.4 percent in response to a 10-percent
minimum wage increase. If it were the case that a rise in fast-food prices generated an
equivalent or near-equivalent decline in consumer demand — as suggested by a –0.9
elasticity — then there would be no reason for fast-food firms to raise prices to help
offset the increased wage bill resulting from a rise in the minimum wage.
Nevertheless, in order not to underestimate the potential fall in demand from a rise
in fast-food prices resulting from a minimum wage increase, we will assume a rough
midpoint figure between the two estimates, at –0.5, as our price elasticity in
considering both the $10.50 and $15 minimum wage increase scenarios.
Increased Revenue from Economic Growth
Figures from the U.S. Economic Census indicate that, from 1997 to 2012, sales
in limited service eating places, adjusted for overall inflation, grew at a 2.5-percent
average annual rate. This compares with the economy’s overall real GDP growth rate
over this period of 2.3 percent per year. In other words, sales in the fast-food industry
have grown slightly faster than the U.S. economy as a whole. This occurred even while
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the Census Bureau’s price index for the industry indicates that prices have risen
marginally faster than the overall consumer price index since 1998 (the first year for
which the Bureau of Labor Statistics [BLS] provides this data). The fast-food price
index rose at a pace of 2.9 percent annually compared to the overall Consumer Price
Index (CPI), which rose by 2.4 percent annually.
These observations suggest that overall sales in the U.S. fast-food industry tends
to grow at approximately the same rate as overall U.S. GDP, even after allowing that
fast-food prices are increasing at a slightly faster rate than the overall CPI. For the
purposes of our two scenarios — the minimum wage increase to $10.50 in one year
and to $15 over a four-year period — we assume that sales growth in the fast-food
industry will proceed at an average rate of 2.5 percent per year. We also assume that
this overall 2.5 percent increase in fast-food sales revenue will be available to help
cover the higher industry costs generated by the minimum wage increases.15
Scenario for a $15 Minimum Wage Within Four Years
In our scenario, the federal minimum wage rises from its current level (what we term
the “Year 1” level) of $7.25 to $10.50 after one year — i.e., by Year 2. The federal
minimum wage then rises to $15 after three more years — i.e., by Year 5. Therefore,
the U.S. economy operates with a $10.50 minimum wage for three years, from Years 2
-4, before rising to $15 per hour in Year 5.
The assumptions through which we develop this scenario are straightforward.
Again, we begin by assuming that the fast-food industry experiences no employment
losses over the full four-year adjustment period, from Years 2-5. Rather, we assume
that employment growth proceeds at an average rate of 1.0 percent per year. This is a
slower rate of employment growth than the 2.0-percent trend growth rate for the fast-
food industry.16 This is due to our anticipation that the growth in sales volume
(though not sales revenue) will slow modestly due to the price increases that we
assume the industry will enact as one of their adjustment mechanisms. In other
words, employment growth will slow from the trend 2.0-percent rate to 1.0 percent
through Years 2-5. This is because the growth in the total amount of food that the
industry will sell will also slow modestly. In any case, after the four-year adjustment
period to move the federal minimum to $15 per hour, employment growth should
then return to its trend rate of around 2.0 percent.
We want to highlight the large net gain in earnings for the overall fast-food
industry workforce, even while accounting for a slower rate of employment growth.
Recall our estimate from Table 2 that the average raise per FTE job from a $15
15 We do not attempt to analyze the general equilibrium effects that would operate within a more
fully specified time-series macro-model of the U.S. economy. If we were to develop such a fuller model that
would include longer-term effects, we would need to incorporate, as noted at the beginning of this article,
the fact that the federal minimum wage has declined by roughly a third in real dollars relative to its peak
level in 1968, even as the average labor productivity has risen by nearly 135 percent. 16 This trend employment growth rate is based on the change in employment levels in limited service
eating places between 1997 and 2012, as reported by the U.S. Economic Census.
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minimum would be 59 percent. As a result, even if the industry annually adds 1.0
percent more jobs instead of 2.0 percent over the four-year transition period, the net
earnings gain for the fast-food workforce would be 57 percent relative to what the case
would be without the $15 minimum.17
According to the October 2014 IBIS World Industry Report that focuses on the
U.S. fast-food industry, the profit rate in the fast-food industry for 2014 was 5.0
percent. IBIS is defining profitability here as profits as a share of total revenues. In
our scenario, we assume that profits as a share of sales revenues will be fixed at this
5.0 percent of sales ratio for all four years of our adjustment period. We also assume
that there are no other areas of the industry’s operations that experience reductions in
their revenue levels.
At the same time, we do need to account for the fact that some components of
fast-food firms’ spending will rise as their sales volume increases. These include
spending on inputs, such as wholesale food products, utilities, and, franchise royalties
paid by the franchisees. Based on IBIS’s 2014 report, these types of industry costs
currently make up approximately 60 percent of sales revenue.18
There are three further key assumptions, as derived from our literature review
above:
• Cost savings from turnover reductions: Turnover reductions will generate cost
savings for the fast-food firms that will amount to 20 percent of their wage bill
increases.
• Industry sales growth trend tied to overall economic growth: The fast-food industry’s
underlying growth trend will continue to roughly match that of the overall
economy, at around 2.5 percent per year. The actual rate of sales growth will be
reduced modestly due to industry-wide price increases, but will otherwise
correlate closely with overall GDP growth.
• Demand elasticity and price increases: We assume that the price elasticity of
demand within the fast-food industry is –0.5. We also allow that overall prices
17 This is derived by comparing the following two scenarios:
• No $15 minimum: Employment growth at 2.0 percent annually adds 8.0 percent more
jobs over four years. We assume no wage growth. Therefore, earnings for the fast-food
workforce rise by 8.0 percent over four years (1.08 x 1.00).
• $15 minimum wage: Employment growth at 1.0 percent annually adds 4.0 percent more
jobs over four years. Average wages rises by 59 percent. Therefore, earnings for the fast-
food workforce rise by 65 percent (1.04 x 1.59). This is a net gain of 57 percent more
than the no-$15-minimum scenario. 18 Specifically, on page 21, IBIS reports industry costs, as a percent of sales revenue, to be composed
of the following: profit (5.0 percent), wages (25.4 percent), purchases (35.5 percent), depreciation (3.0
percent), marketing (3.0 percent), rent and utilities (14 percent), and “other” (14.1 percent). IBIS describes
this “other” category as including such items as administrative costs, professional fees, and franchise
royalties. The 60-percent figure we use to describe spending on industry costs, which will rise with increases
in sales volume, includes purchases, depreciation, and utilities (7.0 percent), and “other” costs. How much
of the “other” category would actually increase with sales is unclear. Therefore, we simply assume that all of
the “other” category would increase.
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within the fast-food industry will rise by 3.0 percent per year over Years 2-5.
Given our –0.5 price elasticity assumption, the 3.0-percent annual price increase
will break down into: (i) a 1.5 percent decline in sales volume relative to what
sales would be otherwise along a 2.5-percent annual growth in sales volume; and
(ii) a 1.5-percent increase in sales revenues relative to what revenues would
otherwise be for a given volume of sales.
In Table 5 and Table 6, we show how the fast-food industry could realistically
adjust to a $15 minimum wage without resorting to either employment losses,
reductions in their profit rate, or other forms of revenue redistribution within the
industry. Specifically, Table 5 and Table 6 show the effects of the full set of
adjustments that the fast-food industry could make in response to the higher
minimum wage levels, working from our assumptions with respect to turnover, the
growth trend in industry sales, and the –0.5 price elasticity of demand combined with
a 3.0-percent annual increase in prices.19
In Table 5 we begin with the adjustment process from Years 1-2, from the $7.25
to the $10.50 per hour federal minimum wage. As Table 5 shows, based on our full
set of assumptions, the fast-food industry will face an $8.1 billion wage bill increase
resulting from the rise to a $10.50 minimum wage. This overall wage bill increase is
then absorbed through the combination of these three channels: (i) $1.5 billion in
cost savings generated by reduced turnover; (ii) $3.5 billion in increased revenues,
assuming a 3.0-percent price increase and a –0.5 price elasticity of demand; and (iii) a
$6 billion revenue increase generated by the 2.5-percent underlying sales growth
trend. Within this Year 2 adjustment framework, we also need to account for the
increase in other costs from our assumed 1.0-percent growth in sales volume. As
noted above, these other costs are equal to approximately 60 percent of the sales
revenue given current prices. Thus, we assume that a 1.0-percent increase in sales
volume will raise other costs by $1.4 billion (60 percent x 1.0 percent x $232 billion).
As we see in row 7 of Table 5, an additional $0.5 billion will need to be allocated to
firm profits in order to maintain the average industry profit rate at 5.0 percent of
overall sales.
Table 6 then presents figures on the second phase of the adjustment process for
the fast-food industry, in which the federal minimum wage rises from $10.50 per hour
in Year 4 to $15 by Year 5. In this case, we see that the overall wage bill will be $29
billion. This wage bill increase is then covered through these channels: (i) a $5.8
billion cost reduction generated by lower turnover; and (ii) a $30 billion revenue
increase in Year 5 relative to Year 2. This figure incorporates both (a) three years of
underlying sales growth at 2.5 percent and (b) three years of price increases at 3.0
percent per year, with a –0.5-percent price elasticity operating in all three years. In this
case, $1.5 billion out of total revenues will need to be allocated for profits to maintain
19 Of course, the results of our exercises depend on the assumptions we have made. As an additional
set of explorations, it would be useful to examine the extent to which the overall results might change
through altering our underlying assumptions. For our purposes here, we are focusing more narrowly on the
findings based on a reasonable set of assumptions that we have derived from the relevant literature.
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the industry profit rate at 5.0 percent of sales. Finally, we show in row 8 of Table 6
that $4.2 billion will go toward covering the cost increases that fast-food firms
experience due to increased sales volume. As we see in row 9 of Table 6, after all these
adjustments are accounted for, the industry will still be able to retain $1.1 billion in
revenues to be allocated for other purposes.20
Table 5. Fast-Food Industry Adjustment from $7.25 to $10.50 Minimum Wage
Between Years 1 and 2
Notes: *1.0% employment growth increases overall wage bill by 1.0%. The wage bill includes total wages (after $10.50
minimum wage) of $50.6 billion (see Table 3) plus a 7.65% payroll tax, for a total of $51.1 billion. Thus, the overall
wage bill increases by $0.5 billion due to 1.0% employment growth. ** A 3.0% price increase given a –0.5 price
elasticity of demand leads to a –1.5% decline in demand, i.e., decline in sales volume (3.0% x –0.5 = –1.5%).
Therefore, the 3.0% price increase raises sales revenue by 1.5%, instead of 3.0% (103% x (100%–1.5%) = 101.5%).
***5% profit on $241.0 billion in revenue equals $12.1 billion.****Recall that the 3.0% price increase (row 4) leads
to a 1.5% decrease in sales volume. However, the underlying trend in sales volume growth is 2.5% (row 5). The overall
growth in sales volume, therefore, equals 1.0% (–1.5% + 2.5% = 1.0%). The $1.4 billion figure equals 60% of $2.3
billion, the increase in revenue due to 1.0% growth in sales volume, assuming current prices (i.e., 1.0% x $232 billion).
Fast-food revenues in Year 1 = $232 billion
Profit margin in Year 1 = $11.6 billion (5.0% of revenue)
Assumptions:
� Fast-food employment growth at 1.0%
� Price elasticity of demand = –0.5%
1. Year 2 wage bill increase relative to $7.25 minimum
wage
$8.1 billion
(= $7.6 billion from Table 4 + $0.5
billion due to 1.0% employment growth*)
2. Cost savings from reduced turnover
$1.5 billion
(= 20% of wage bill increase)
3. Remaining wage bill increase to be covered from
revenue sources
$6.6 billion
(= rows 1-2)
4. Revenue increase from 3.0% price increases (with –0.5
price elasticity)**
$3.5 billion
(= $232 billion x 0.015)
5. Revenue increase from underlying 2.5% sales volume
growth
$6 billion
(= $232 billion x 0.025)
6. Revenue remaining after covering $6.6 billion in labor
cost increase $2.9 billion
7. Revenue increase necessary to retain 5.0% profit
margin
$0.5 billion
(= $12.1 – 11.6 billion)***
8. Revenue increase necessary to cover other costs due to
1.0% increase in sales volume $1.4 billion****
9. Revenue increase available for other uses $1.0 billion
(= rows 6-7-8)
20 Another possible cost increase that we did not explicitly take into account in our policy scenarios
is in the prices of purchased food inputs for the fast-food restaurants. This is because most other industries
— including wholesalers and manufacturers — experience significantly smaller cost increases from minimum
wage hikes and, therefore, are unlikely to pass any substantial costs to fast-food restaurants (e.g., Pollin,
Brenner and Wicks-Lim 2004; Pollin and Wicks-Lim 2006; Pollin et al. 2008, ch. 5). This question is also
complicated by the fact that we are aware of no empirical research that measures the extent to which cost
increases for food manufacturers or wholesalers, associated with a minimum wage hike, would be passed on
to restaurants (see the Appendix for a more detailed discussion).
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Robert Pollin and Jeannette Wicks-Lim
Table 6. Fast-Food Industry Adjustment from $10.50 to $15 Minimum Wage
Between Years 2 and 5
Notes: *This accounts for the increase in the wage bill, with a $15 minimum, due to a total of 4.0% employment
growth net of the wage bill increase due to employment growth accounted for in row 1 of Table 5. The total wage bill
includes wages of $83 billion (see Table 2, row 8) plus a 7.65% payroll tax, for a total of $89.3 billion. Thus, 4.0%
employment growth causes the overall wage bill to increase by $3.6 billion due to 4.0% employment growth (4.0% x
$89.3 billion). **As in Table 5, a 3.0% annual price increase causes annual sales revenue to grow by 1.5%. This
combined with the trend in annual sales volume growth of 2.5% results in an overall increase in sales revenue growth of
4.0% annually (1.5% + 2.5%=4.0%). ***As in Table 5 (row 8), sales volume grows by 1.0% each year. $4.2 billion
equals 60% of the $7.0 billion increase in revenue due to 3.0% growth in sales volume from Year 2 to Year 5,
assuming current prices (i.e., 3.0% x $234 billion=$7.0 billion).
Conclusion
We have presented a simple, stylized scenario through which we show how the federal
minimum wage in the US could be raised within four years to $15 an hour without
generating employment losses in the fast-food industry. We have also shown how this
adjustment to a $15 minimum wage could be accomplished without fast-food
businesses having to face declining profits. The set of assumptions underlying this
scenario are all realistic and derived from the existing relevant literature.
These results can help provide clarity on two sets of questions regarding the
impact of minimum wage laws in the United States: one is a purely analytical question
Fast-food revenues in Year 2 = $241 billion
Assumptions:
� Fast-food employment growth from Years 2-5 = 1.0% per year
� Underlying sales growth from Years 2-5 = 2.5% per year
� Price elasticity of demand = –0.5%
1. Wage bill increase relative to $10.50 minimum
wage
$29.0 billion
(= $25.4 billion from Table 4 + $3.6 billion
due to employment growth from years 2-5*)
2. Cost savings from reduced turnover
$5.8 billion
(= 20% of wage bill increase)
3. Remaining wage bill increase to be covered from
revenue sources
$23.2 billion
(= rows 1-2)
4. Revenues in Year 5 with underlying 2.5% annual
sales growth and 3.0% price increases (with –0.5
price elasticity)
$271 billion
(= $241 billion x 1.043)**
5. Revenue increase in Year 5 relative to Year 2 $30 billion
(= $271 – $241 billion)
6. Revenue increase remaining after covering $23.2
billion in labor cost increase
$6.8 billion
(= row 5-3)
7. Revenue increase necessary to retain 5.0% profit
margin
$1.5 billion
(= $13.6 – 12.1 billion)
8. Revenue increase necessary to cover other costs
due to 3.0% increase in sales volume $4.2 billion***
9. Revenue increase available for other uses $1.1 billion
(= rows 6-7-8)
A $15 U.S. Minimum Wage
737
737
and the other is more geared to ongoing policy debates. From an analytical
perspective, our illustrative exercises help explain how it is the case that minimum
wage increases can be implemented repeatedly without generating large-scale
employment losses among low-wage workers. The key point that our scenario
emphasizes — following from the literature we have discussed here — is that business
firms do have other options available to them besides cutting their workforce. These
other options, moreover, are likely to be more desirable under most circumstances,
especially for firms that aspire to compete successfully and grow.
In terms of policy implications, our results offer a straightforward conclusion:
Achieving a $15 federal minimum wage within the US, phased in over four years,
should be seen as a realistic prospect. This specifically means that the intended
consequence of the $15 minimum wage — to improve the living standards of low-wage
workers in the US and their families — can certainly prevail over the unintended
consequence that low-wage workers and their families would suffer from widespread
employment losses.
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Appendix
1. Estimating Wages and Employment Levels of Fast-Food Workers
The CPS does not distinguish fast-food workers from restaurant workers more generally. As a
result, to estimate the wage, hours, and employment characteristics of workers in this industry,
we combine data on the limited-service-eating-places industry wage structure from the May 2011
OES, and data on restaurant workers from the 2013 CPS. The OES provides the following
measures of the limited service restaurant industry’s wage structure: the 10th, 25th, 50th
(median), 75th, and 90th wage percentiles, as well as the mean.
Table 1A. Wage Distribution for Limited Service Restaurant Workers for 2013 (in 2013
Dollars)
Source: Occupational Employment Statistics from May 2011, adjusted to 2013 using average annual wage growth
among average fast-food cooks between 2011 and 2013, or 0.5 percent annually.
We used these summary wage measures, first, to construct a wage distribution for the
industry and, then, to approximate the proportions of workers that are likely to receive raises
from each of the higher minimum wage levels we consider (e.g., $10.50). The percentages of
fast-food workers for each of the wage intervals we analyze are contained in Tables 1.1 and 1.2.
We then estimated the average wage, average weekly hours, and weeks worked using the
2013 CPS data file, made publicly available by the Center for Economic and Policy Research
(CEPR), restricting the sample of workers to those working in food services specifically, and
using CEPR’s hours (uhoursi) and wage (rw) measures from the Outgoing Rotation Group data
files. Note that CEPR imputes usual weekly hours for workers who report that their usual hours
“vary” (for more information about CEPR’s adjustments to the hours and wage measures, see
http://ceprdata.org/wp-content/cps/CEPR_ORG_Wages.pdf).
For the highest wage category of workers earning between $17.50 and $18.50, we used as
the maximum wage $18.25 since assigning this upper limit produces an overall wage
distribution with a mean wage of $9.86, matching the mean wage for the limited-service-eating-
places industry from OES data. Without this limit, the maximum wage would be as high as
$200, possibly overestimating the pay of the highest paid fast-food workers.
We used the 2013 CPS ASEC file to estimate annual weeks worked for each wage
interval. There are two issues to note about using this data file. We can construct an hourly
10th percentile $7.90
25th percentile $8.36
50th percentile $9.03
75th percentile $9.92
90th percentile $13.07
Mean $9.86
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Robert Pollin and Jeannette Wicks-Lim
wage from this data file by doing the following: (annual wage and salary income)/(number of
weeks worked in the past year) x (number of hours worked per week). We can then use this
hourly wage to identify workers within each of our wage groups and get their average weeks
worked per year.
However, there is a higher amount of a reporting error in the CPS ASEC data file
compared to the hourly wage measure from the CPS ORG data file. This is because the hourly
wage estimate from the CPS ASEC depends on information from respondents on their
earnings and work schedule that they have to recall from over the entire past calendar year. The
CPS ORG wage measure, by contrast, is based on respondents’ reporting on their pay rate over
the past two weeks. As a result, the ASEC wage measure tends to have a problem of over-
reporting hours at the low end of the wage distribution. This is because workers who
overestimate the number of hours or weeks worked will tend to produce an underestimate of
their hourly wage and incorrectly place themselves toward the low end of the wage distribution.
To take these errors into account, we adjust downward the weeks worked for the lowest
wage workers ($7.25-$8.50) by the following factor: the ratio of hours worked as reported in the
CPS ORG file between the lowest two wage intervals (0.87), and apply it to average weeks
reported in the CPS ASEC file for the second to lowest wage interval ($8.50-$9.50). In other
words, we multiply our estimate of average weeks worked for the $8.50-$9.50 wage interval (45
weeks) and multiply this by 0.87 to get an average of 39 weeks worked. This adjustment creates
the familiar pattern of the lowest paid workers working the least and the highest paid workers
working the most.
2. Updating the 2012 Economic Census Measure of Overall Sales in the Limited-Service-
Eating-Places Industry to 2013
The 2012 Economic Census reports the overall sales for the limited services eating places to be
$223 billion in 2012. To estimate the figure for 2013, we simply take the average annual
nominal growth rate between 2007 and 2012 (4.0 percent), and apply it to 2012. Therefore,
our estimate for 2013 sales equals $232 billion.
2.1. Estimating Ripple Effects Raises from a Large Minimum Wage Hike
As stated in the main text, we use an average of the ripple effect raises suggested by the
estimates of two different studies: Wicks-Lim (2008) and Reich, Hall, and Jacobs (2005).
Starting with Wicks-Lim (2008), we take the following steps:
• We modeled each minimum wage hike to take place over multiple steps, so that each
step is no bigger than 15 percent. For example, we modeled a minimum wage increase
from $7.25 to $10.50 to occur in three steps.
• We then assume that raises in each step will conform to the same size and distribution as
those reported in Table 11.1 Panel B from Wicks-Lim (2008, 204). These raises are
largest for those who earn the current $7.25 rate and smallest for those who earn around
$10.50.
• Because these wages lead to a compression of the wage rates at the bottom of the
distribution, we require that the raises for workers at any particular point in the “old”
distribution (i.e., the wage distribution prior to a minimum wage increase) are at least
sufficient enough to place them at or above the wages of workers who sit below them in
the “old” distribution. In other words, we assume that ripple effect raises will preserve the
wage hierarchy.
A $15 U.S. Minimum Wage
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Second, as we explained in the main text, we use the wage rate observations of Reich,
Hall, and Jacobs (2005) before and after the San Francisco’s $10 living wage mandate for
covered workers at the San Francisco Airport to model a second set of ripple-effect raises. To do
this, we take the following steps.
• We assume that the extent of raises will be 40 percent past the new minimum wage level.
This is based on the observed impact of past living wage ordinances on wages, as for
example, in the Reich, Hall, and Jacobs’s (2005) study (see Table 2A).
• Reich, Hall, and Jacobs (2005) provide details about how much different wage rates
increased before and after a new living wage. We use their observations to determine how
large raises should be at different points in the wage distribution.
Specifically, we rescale the raises in Table 2A to estimate the size of raises that would
occur starting from those workers earning the lowest rates (i.e., around $7.25) to those workers
earning up to 40 percent over the new wage floor (e.g., for a new minimum at $15, the raises
would extend to workers earning up to $21). In order to estimate raises for workers earning
wages at all the points in the wage distribution up to 40 percent over the new wage floor, we
take an additional step. We fit a logarithmic trend line to a scatterplot of the various points in
the wage distribution represented by the observations in Table 2A, expressed as a percent of the
old wage floor (on the x-axis) against the size of the raises (on the y-axis). We then use the
equation of the trend line to interpolate the raises for each of the wage categories used in Table
1.1 and Table 1.2 of the main text. The raises are presented in detail in Table 1.1 and Table 1.2
for the $15 minimum wage.
Table 2A. Changes in Wage Rates Before and After $10 San Francisco Living Wage
Note: This is a reproduction of Table 2 in Reich, Hall, and Jacobs (2005, 110). Prior to the $10 living wage, the wage
floor (minimum wage) was $5.75. We excluded occupations where the minimum entry wage did not rise to a level near
the new $10 minimum.
2.2. Estimating Cost Savings from Lower Turnover Rates
We use Hinkin and Tracey’s (2000) estimates of turnover costs for employees in various
occupations in the hotel industry. Specifically, they estimated a range of turnover costs based
on surveys they conducted with hotel managers in Miami and New York. In Miami, they found
that turnover costs added up to roughly $6,000 per worker, among workers who earned $10 as
an entry wage. In New York, turnover costs added up to between $12,000 and $13,000 per
worker, among workers who earned $20 as an entry wage. The difference in costs between the
two locations reflects cost-of-living differences.
We take these figures and scale them down to reflect turnover costs of a worker in a fast-
food job with an entry wage of $7.90 — i.e., the 10th wage percentile for fast-food workers as
Occupation Minimum entry wage Average wage
Before After Before After
Customer service agent $5.75 $10.00 $10.15 $11.85
Administrative/clerical $7.40 $9.00 $10.90 $13.45
Baggage/ramp agents $6.95 $10.00 $10.50 $12.35
Cabin cleaners $6.00 $10.00 $9.95 $11.45
Screeners $5.75 $10.00 $6.50 10.05
Skycaps $5.75 $10.00 $6.35 $10.00
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Robert Pollin and Jeannette Wicks-Lim
shown above. Specifically, since turnover costs are strongly correlated with wage rates, we
estimate that if a $10 per hour job has turnover costs of about $6,000, then turnover costs of a
$7.90 per hour job can be approximated by $4,740 (i.e., $6,000/$10 x $7.90). According to
Hinkin and Tracey (2000), the majority of this cost is in lost productivity. As we noted in the
main text, productivity is lost due to (i) lower productivity of an employee about to leave or
with low tenure, (ii) a job’s learning curve, (iii) lost productivity among other workers due to
disruption that occurs when new employees need assistance, and (iv) opportunity costs
associated with the vacancy (e.g., lost sales). Aside from lost productivity, other costs include:
pre-departure, recruitment, selection, and orientation and training (for a more detailed
discussion of these categories, see Hinkin and Tracey 2000, 2006). Based on these calculations,
we approximate turnover costs of around $4,700 per worker.
This figure seems reasonable when we compare it to other estimates from Hinkin and
Tracey (2000). First, we consider preliminary estimates that they generated specifically for lower
wage hotel positions, such as line cooks and room-service wait staff. Their turnover cost
estimates for these occupations average at $2,300 (in 2013 dollars). This figure, however, is
based on a pilot survey that they launched prior to the survey that generated the figures in the
above paragraph. In the pilot survey, they “attempted … to be as conservative as possible to
prevent overstating the figures” (Hinkin and Tracey 2000, 18). Therefore, we view this as a low-
end estimate.
Later, Tracey and Hinkin (2005) developed a web-based survey tool to analyze turnover
costs, again in the hotel industry. For this study, they calculated turnover costs specifically for
“low complexity” jobs (jobs that require less training) in hotels located across the country. For
such jobs, turnover costs add up to $6,800 (in 2013 dollars, or as reported in their 2008 study,
$5,700 in 2005 dollars) per worker separation. Because Tracey and Hinkin only have two broad
categories of jobs — low- and high-complexity jobs — we view this figure as a high-end estimate.
Our turnover cost figure of $4,700 falls just about halfway between Tracey and Hinkin’s low-
end estimate of $2,300 and high-end estimate of $6,800.
As we noted in the main text, we use the following assumptions to determine the overall
cost savings due to lower turnover for each minimum wage level we examined:
• The separations elasticity, i.e., the change in the turnover rate with respect to a change in
the minimum wage equals –0.225 (see Dube, Lester and Reich forthcoming).
• The current turnover rate in fast food is approximately 120 percent.
• Current employment in fast food equals 3.8 million.
Table 3A presents our calculations, based on these figures, to determine the cost savings fast-
food employers would experience with a higher minimum wage due to a lower turnover rate
among their workers.
2.3. Estimating Possible Cost Pass-Throughs from Food and Beverage Manufacturers
to Fast-Food Restaurants
We are aware of no study that empirically observes the extent to which minimum wage
hikes cause price increases in the food purchases of restaurants. We did identify two studies
that simulate how much minimum wage hikes may raise the costs of the food inputs of
restaurants. We use the findings of these studies to gauge how large this cost increase may be
and whether this would affect in any significant way the policy scenarios we laid out in the
main text.
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Table 3A. Cost Savings Due to Lower Turnover Rate at $10.50 and $15 Minimum Wages
The first study is by Chinkook Lee and Brian O’Roarke (1999). Lee and O’Roarke
simulate how an increase in the federal minimum wage could raise the price of food and
kindred products, assuming that the producers would pass their cost increases fully to their
consumers. In other words, they assume that all cost increases experienced by producers will be
passed along to consumers, rather than absorbed in other ways. Thus, Lee and O’Roarke (1999,
2) note that their “analysis assumes a full-pass through and has to be interpreted as ‘upper
bounded’ estimates of the price effects of minimum wage increases.”
Lee and O’Roarke (1999) find that for a 12-percent minimum wage hike, again assuming
full cost pass-through and no other adjustments, consumer prices for food and kindred
products would increase by about 0.4 percent.21 What does this suggest about how fast-food
restaurants’ costs would increase? To get an idea of what this would look like, we extrapolate
from the relationship estimated by Lee and O’Roarke. If the relationship remains constant
across a wide range of minimum wage hikes, then we would expect that a 107-percent
minimum wage hike (from $7.25 to $15 over four years) would lead to a 3.6-percent price
increase among the food purchases of fast-food restaurants (0.4 percent/12 percent x 107
percent = 3.6 percent).22
The second study by Robert Pollin et al. (2008) similarly simulates how food and
beverage inputs costs would rise for restaurants due to a minimum wage hike. In this case, they
consider the effects of a 65-percent minimum wage hike in Santa Fe, NM, proposed for 2004,
from $5.15 to $8.50. As in the study of Lee and O’Roarke (1999), Pollin et al. (2008) assume
that the suppliers would pass their cost increases fully to restaurants. They estimate that the
potential cost increase among suppliers of food and alcohol inputs of restaurants due to the 65-
percent minimum wage hike would equal 0.9 percent of the suppliers’ sales revenue.
Extrapolating from this figure, a 107-percent minimum wage hike (from $7.25 to $15) would
1. Minimum wage: $10.50 $15.00
2. Percent minimum wage increase 45% 107%
3. Percent change in turnover rate (row
2 x –0.225) –10% –24%
4. Percent change in industry turnover
rate (row 3 x 120%) –12% –29%
5. Number of fewer worker separations
based on 3.8 million workers 456,000 1.1 million
6. Cost savings (row 5 x $4,700) $2.1 billion $5.2 billion
As percentage of wage bill increase due
to higher minimum wage 28% (=$2.1 b./$7.6 b.) 16% (=$5.2 b./$33.0 b.)
21 The Department of Labor defines this industry as including “establishments manufacturing or
processing foods and beverages for human consumption, and certain related products, such as
manufactured ice, chewing gum, vegetable and animal fats and oils, and prepared feeds for animals and
fowls” (see www.osha.gov/pls/imis/sic_manual.display?id=13&tab=group). 22 This seems like a reasonable assumption since the relationship that they estimate for restaurants
(eating and drinking places) indicate that a 107-percent minimum wage hike would raise restaurant prices
by about 12.5 percent — not far from our overall estimated figure of a 14.2-percent cost increase for fast-
food restaurants.
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Robert Pollin and Jeannette Wicks-Lim
result in a cost increase for suppliers equal to 1.5 percent of their sales revenue. This is less than
half of the 3.6 percent figure implied by Lee and O’Roarke’s (1999) findings.
For this exercise, we are simply trying to gauge how large the cost increase would be for
fast-food restaurants due to higher-priced inputs and whether this would affect in any
significant way the policy scenarios we laid out in the main text. Therefore, we use an average of
these two figures: 1.5 percent and 3.6 percent (or 2.6 percent) to approximate a high-end figure
of how much the price of food inputs for fast-food restaurants would rise. Recall that this is a
high-end estimate because both studies assume full cost pass-throughs.
To estimate the total impact of this food-input cost increase on fast-food restaurants due
to the $15 minimum wage, we need to take two more steps. First, we apply this average increase
(2.6 percent) to the share of total costs made up by food purchases — 35.5 percent, according to
IBIS (2014). A 2.6-percent price increase among food inputs would increase fast-food
restaurants’ costs by 0.9 percent of their total sales (2.6 percent x 35.5 percent = 0.9 percent).
Finally, recall that over the four-year period to implement the $15 minimum wage, we
assume that the sales volume will grow at a pace of 1.0 percent annually. This means that the
0.9-percent cost increase due to food purchases by fast-food restaurants will apply to a larger
volume of sales by Year 5 (4.0 percent larger, to be precise). The cost increase of these food
purchases, now taking into account full cost pass-throughs and the larger sales volume will add
up to about $2.2 billion ($232 billion x 1.04 percent x 0.9 percent = $2.2 billion). This estimate
— again representing the upper-limit — is close to the $2 billion in revenue that we estimated
would be available for other uses (see row 9 of Table 5 and Table 6). Therefore, the results of
this exercise suggest that the cost increase of food purchases will not significantly change the
policy scenarios we describe in the main text.
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