Monthly Archives: November 2013

A Little Math and Economics – Doubling Fast Food Wages, and so on

Fast Food Labor Costs

Labor costs are generally 30% of gross income.

Average Income Percentage Spent on Food

Average family spends 11% of their income on food. 45% of that is on eating out. We’ll generalize that to fast food.

11% x 45% = 5%

Typical family seen inflation: 5% x 30% = 1.5%

So, according to the math going around, the average family would see 1.5% inflation do to a doubling of fast food workers’ wages.

But, that’s not how things work. (supply is ultimately related directly to labor), but he is somewhat right. Costs would probably go up, but not by 30%. First, sudden dramatic hikes in price can have a negative marketing affect, and restaurants would be hurt more by families compensating by eating out less, than seeing profit margins shrink. So, price increases and, perhaps, portion size reduction will gradually take place, but initially at the lowest rate owners can afford. The other gradual change will be expectations in higher productivity, ie, reduction in the work force. Which, will only take place at the rate that new equipment and greater workplace discipline can be implemented.

So, let’s say that restraunt X has a 20% profit margin, and requires 5% to make the owner feel happy enough (actual productivity increases will be financed). So…
(0.3+0.8)/0.95 – 1.0 = 16% increase in cost (perhaps offset by other measures as well.
Now that 1.5% becomes 0.8%. Which is likely too optimistic. Nevertheless, the point being, owners will temporarily compensate with lower margins (or even negative).

But, there are other affects. McDonalds just became more desirable employment than Starbucks. That, of course, doesn’t stand. Most jobs that payed more than fast food, and had higher labor standards, will necessarily raise their wages. The wages of the next guy up the chain will be similarly affected. And so on. With each iteration the change being smaller. Likewise causing inflation elsewhere, but small in comparison to wage increases for the average wage earner, non-owner.

The main point being, such an action would, in effect, be a massive downward redistribution of wealth. Those at the bottom would see their income increase dramatically. Not double, since they will class out of some income assistance programs, but dramatic still. The impact would be a net positive, not just in social justice terms, but in real economic terms in an economic climate drug down by lack in aggregate demand. By either doubling fast food wages, or better yet, doubling minimum wage, wealth distribution would shift in the direction of the economic classes that spend the entirety of their paychecks (and much of that on goods and services), and away from the class that has been creating bubble economies by massive shifts of excess capital (or, sitting on massive reserves). Which, in turn, would have a greater impact on increasing employment than higher wages will have on decreasing employment (household consumption makes up the lion’s share of the US economy).

Of course that all would be whittled away with time. Which is why minimum wage has never been tied to inflation (or better, productivity).

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