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Increase In Minimum Wage Could Rocket Fast Food Prices Higher By 25%

What will happen if the minimum wage paid by companies which offer fast food moves to $15? Food prices charged by these companies to customers would rise modestly. If that wage goes to $22, the prices charged would soar as much as 25%, as portions dropped by as much as 70%. Logically, the number of workers employed by these firms will drop as well, as companies fight to increase margins. Along with that, higher price might cause a drop in store traffic

According to a study by the Purdue University’s School of Hospitality and Tourism Management, the math gets ugly:

Raising wages to $15 an hour for limited-service restaurant employees would lead to an estimated 4.3 percent increase in prices at those restaurants….

And, at “limited service” restaurants, the researcher found:

… the effect that higher wages and health-care benefits have on costs and prices in limited-service restaurants. In order to compensate for higher wages, prices would have to increase between 4% and 25% and/or product size would have to be scaled back between 12% and 70%.

The odds that the minimum was might go to $22 seems absurd. However, the odds that the figure would go to $15 were counted as absurd just a few years ago.

What the study does not tell is what the wage increases might do, financially, to the “limited service” restaurants. Their P&Ls would suffer devastating effects. The first deep trouble from this would be labor costs. Since the largest fast food chains have tens of million employees, profits would plunge. One of the ways to offset this, at least if economic history is an indication, is layoffs, some of which might be sizable. Advancements in automation already threatens many of these jobs.

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The other effect may be a sharp decrease in store traffic. Increased prices and smaller portions will not be ignored by customers, who have the option of, say, eating at home

Among the debates over minimum wage increase is whether they will harm the economy on balance. If the Purdue University’s School of Hospitality and Tourism Management study is right, on balance, the results could be devastating for both workers and the companies which employ them

By Douglas A. McIntyre