Minimum Wage: Cost basis

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I hear all the time, that McDonald’s can afford to pay a “livable wage” without raising costs, or "it’s just a few cents a burger", by people that don’t understand basic economics, or business.

Here’s some notables taken from the average McDonald's balance sheet:

  • The average McDonald's generate about $2.5 million in gross revenue, but then they have a lot of expenses like rent/mortgage, taxes, utilities, food, taxes, and labor (and their taxes).
  • The average McD's Employs 61 people in operations and restaurant management positions, and spend nearly $507,595 on wages (about $800K or 32% of gross revenue, when you factor in benefits, tax liability, and other costs around employment).
  • A McDonald's ends up with an average net profit after those expenses of 6%. Or about $150K/year in net revenue (for about $2M in initial investment/risk).
  • A jump from $7.25->$15/hour means $264K in increase wage costs, on profits of about $150K…. so they’re now losing $114,000.00 on each store per year. How many new McDonald’s will open with that as their forecast, how many will close because of it?

The store (and chain) must respond, or the average store will go out of business. They must: raise prices, trim staff, automate (or some balance of these), or shut down. The last two cost jobs, but so did the first one. If they raise prices, they passed the costs on to customers and if that has any impact on demand (as it usually does), that will hurt future growth (cost jobs) — lost future jobs are a hidden cost, but it’s still a lost opportunity. Either way, those claiming it will have nominal impacts on the business, don’t know business.

Cause and effect

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When places try raising the minimum wage, they get exactly what economists predict, a lowering of benefits, fewer jobs, higher costs, and more outsourcing and automation to replace higher costs of labor.

This isn’t just McDonald’s, this is most companies (especially restaurants). The public thinks companies are running on profit margins of about 36%, in truth, most businesses are running more like 6%. (McDonalds turns out to be average). If you raise their labor costs by nearly 30% or more, there goes those profits. They’re either out of business, or raising their costs to consumers — which hurts far more people than it helps.

Starbucks is in the same situation, if pay goes up, then automation becomes more affordable. Do I really need an army of idiots getting my orders and name wrong, when I can replace 8 people with one person whose job is to keep the robot loaded, and call if anything breaks? Do you really want all the barista’s turned into panhandlers?

NOTE: There are other options to defer the costs, but they’re all bad as well. You could lower quality to get costs down — but that impacts sales and isn’t good thing. You could cut back on profits — but that means less return to investors, which means less investment/reinvestment, and stores grow less, less jobs are made, and the more attractive OTHER investments are (ones that create fewer jobs or create jobs out of country). And so on. The balance sheet must balance, and when you raise the cost of labor, it’s going to come from somewhere.

References

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Minimum Wage

Minimum Wage : Does minimum wage impact employment?Livable WageMinimum Wage LawsMinimum Wage and AutomationMinimum Wage: Poverty
Main article: Minimum Wage

The Broken Window Fallacy

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The Broken Window Fallacy is a fundamental concept of economics (and logic) about seen advantages versus unseen costs. Henry Hazlitt summed up the art of economics as not merely looking at the immediate consequences but the longer effects of any act or policy, and tracing those consequences not merely for one group but for all groups