Min Wage vs. Big Mac

mc donaldsThis meme is courtesy of Occupy Democrats.  The “just 17 cent” increase comes from a Purdue Study which claimed that a $15 minimum wage for fast food workers would result in price increases of just 4.3%.  The current price of a Big Mac is $3.99, so the math checks out initially.  However, the study was flawed, as was quickly pointed out around the internet (check out this for a good critique).

First, the data itself was inaccurate.  The study used an average salary of $10.60/hr for the average fast food worker, vs. the BLS reported average of $9.60.  This significantly alters the increased labor costs associated with a minimum wage of $15/hr (42% increase vs. 56%). Second, the study got their data from a National Restaurant Association report, but confused median expenses with mean expenses.  This, in effect, meant they underestimated the expenses restaurants have, and only counted 92% of actual costs.  Combined, these errors make the 4.3% price increase wrong, as it would be much higher, even if taken on the study’s own terms.

The problem is that the study’s terms are wrong.  The study didn’t take into account the effects of supply and demand.  If prices go up, demand goes down.  A restaurant doesn’t just get to increase prices and automatically get the same amount of customers.  A related study found that an increase in fast food prices by 10% results in a sales decrease of 9.5%, meaning that a restaurant has to almost double the price increase to make the same profit.  Supply and demand is also at play in the labor market.  If you increase the price of labor by 50%, you are going to have much less demand for that labor (and a greater supply of workers willing to work for those wages).  Employment in fast food will likely decline, and/or be replaced by alternatives like electronic kiosks and robots, meaning many workers will actually be harmed and never get this “living wage”.

A different study done by the Heritage Foundation, which did use the BLS statistics, and attempted to adjust for economic effects, found a minimum wage increase to $15/hr would result in a 38% price increase.  This would mean a Big Mac would increase $1.51, from $3.99 to $5.50, and a value meal would go from $5.69 to $7.85, a significant increase that would affect poorer customers the most.  However, any study that makes economic predictions is just an educated guess at best.  There are so many economic variables that no study could take all into account accurately, but since this study had flaws in both data and correcting for economic effects, the 17 cent claim is almost certainly false.

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