Jeff Opdyke Blog | Minimum Wage Is Dooming The American Worker | Talkmarkets

Globally minded investment analyst who has traveled to more than 60 countries to put geo-political and geo-economic events into an investment perspective. I serve as global investment consultant to 1291 Group of the Americas, a Bermuda-based asset-manager and wealth-consulting firm. My focus is ... more

Minimum Wage Is Dooming The American Worker

Date: Friday, April 15, 2016 2:51 PM EDT

We begin today with some McDonald’s math.

We do so because of recent votes to raise the minimum wage to $15 per hour in California and New York. It is a boneheaded idea. It shows the degree to which labor and its political supporters do not understand simple economics nor the knock-on effects a radically higher minimum wage has on the very people it’s supposed to help.

But first the math…

The service sector runs on thin profit margins. Consider that a typical McDonald’s generates about $2.5 million a year in sales, and labor costs eat up roughly 20% of that, according to a San Diego consultant who has worked with Mickey D’s franchisees. Subtract all the other costs — utilities, food commodities, rent, insurance, etc. — and those franchisees typically see a net profit of about 6% when all is said and done.

Here’s the math:

  • Sales: $2,500,000
  • Labor: $500,000
  • All the other stuff: $1,850,000
  • Net Profit: $150,000

Now, let’s see what happens when wages rise by 67%, which is what a $15 hourly wage represents in New York:

  • Sales: $2,500,000
  • Labor: $835,000
  • All the other stuff: $1,850,000
  • Net profit: -$185,000 (That’s a negative.)

When your profit margin is 6%, a 67% increase in labor means a $335,000 increase in a commodity cost. More than enough to wipe out your profit as a restaurant owner and thrust you deeply into the red.

Honestly, why stay in business?

Well, because you need a job, of course. But you won’t have a job very long if your eatery is hemorrhaging money. So, what do you do?

No Matter What … Workers Lose

Let me digress for a moment to address a school of thought that claims higher wages do not reduce employment — a school of thought hanging its belief on a 1992 study by Princeton econ professor Alan Krueger. He examined the impacts on fast-food employment when New Jersey raised its minimum wage, and found that the rate of employment growth did not differ from neighboring Pennsylvania, which had not raised the minimum wage.

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