In the first week of December fast-food and retail-workers alike left their cash registers, spatulas, and brooms to protest the current minimum-wage standard of $7.25 an hour. Although the movement did not sway Congress to act, it seems it will pay-off at the state level.
Beginning January 1st the state-regulated minimum-wages will increase in Arizona, California, Colorado, Connecticut, Florida, Missouri, Montana, New Jersey, New York, Ohio, Oregon, Rhode Island, Vermont, and Washington, as well as other localities. Consumers may think, well, this is good for employees who do not make higher wage; they will come to work with smiles on their faces and more money in their pockets. Nonetheless, how will this really affect the consumer?
The Society for Human Resource Management reports that New Jersey will raise its minimum–wage from $7.25 to $8.25 an hour, which is an 11% increase. Since this is a new influx of payroll income going into market demand, from whom will the money come? Therein, lies the question to be answered.
Since many fast-food establishments are franchised, owners work on a very small margin and do not make the six and seven-figure incomes many would want to think. For the owner of a fast-food establishment, such as McDonald’s, to stay in business, they must maintain their current level of revenue flow. McDonald’s cannot change the price of the produce it buys and sells; the price of meat, buns, fries, and coffee grounds depends upon the law of supply and demand affecting the industries and all suppliers thereof. Consequently, the increased liquidity for payroll will fall to the franchisee. To do this, the price of the food on the menu must rise corresponding to the rise in the pay rate for the establishment’s employees.
The law of supply states that there is a positive relationship between the price of a product and quantity of it that a supplier will produce. Right now, the current market price of a McDouble is $1. Moreover, there is enough of a demand for McDonald’s to supply the consumer with a McDouble at only $1. Since the cost of raising the minimum wage with be, undoubtedly, off-set to the consumer, the price of a McDouble must rise with the increase in minimum wage – theoretically 11%.
While the idea of a $1.11 McDouble won’t sway the minds and stomachs of the average fast food-goer, the economic notion remains the same for all industries, which the increase in minimum-wage will effect. This affect will come to fruition through the law of demand, which states that there is a negative relationship between the price of a product and the quantity purchased. Over time, there will arise some consumers that won’t want to carry around a few extra nickels and dimes in their pockets and will settle for only a McDouble and a small fry and not order the sweet tea.
If fast-food and retail companies are burdened with increasing the prices of their products there is another alternative to battle consumer retention. Some companies will most likely lay-off employees to retain enough payroll income to fulfill the new needs of the state’s minimum-wage requirements. Because of the new requirements, unemployment will rise among those who depend upon low-skill, minimum-wage paying jobs. So, if people find themselves in fast-food restaurants standing in longer lines and paying more for burgers and fries, they shouldn’t be surprised.
By: Alex Lemieux