The balancing act: Free money

By From page A4 | October 16, 2013

Jerry Brown thinks green is free so he just signed a new California minimum wage bill that raises the minimum wage from $8 an hour to $10 an hour instead of allowing the best arbiter of labor’s worth, the free market, to operate. Without going into a lengthy economic discussion of why wage and price controls never work (minimum  wage is a wage control), suffice it to say minimum wage laws violate the basic law of supply and demand and you will find fewer jobs are available at arbitrarily set higher wages. It is simply government interfering with a private contract.

Most minimum wage jobs are in the unskilled service industry, such as workers at fast food restaurants. It doesn’t take much skill to take an order for a Big Mac, fries and a Diet Coke, especially with the order automation now entering the workplace. Supermarkets now have self-checkouts. Why not have it for ordering fast food? When the cost of labor exceeds the automated system, goodbye labor and the jobs high school teenagers so want and need.

As this law goes into effect how will it affect the consumer? Someone will have to pay the cost of the higher wages and it won’t be the owner of the business that employs the minimum wage worker. It will be the consumer and it will be expensive, a new tax on the public who purchases the product. The reason it is a tax is that the product will be exactly the same, no improvement or added value. Wage increases are supposed to be based on the same principle, more productivity or improved quality, otherwise they are simply inflationary. If workers are let go to cover the increased wages, fast food may become slow food.

By examining the average McDonalds franchise, we can get a snapshot of exactly how this 25 percent wage increase on the minimum wage will affect their business. The numbers that will be used were developed by financial restaurant analysts based on financial data filed by McDonalds in their operating statements and is for an “average” U.S. store.

The “average store” has about 575,000 transactions a year which is about 1,584 customers a day. The average purchase totals $4.75 cents. No need to calculate: The average store does about $2.7 million in total sales. The big question is how much labor is involved in producing that revenue. Crew payroll, which is mostly minimum wage in California, is $540,000. Manager payroll is another $108,000. Based on a $2 increase in minimum wage that would increase the crew (minimum wage) payroll by $135,000 and payroll taxes by $13,500 for a total of $148,500 or 5.4 percent of total sales. That is a huge number when you learn that the operating income of the average store is $153,000. In other words, the minimum wage increase will virtually wipe out the profit of a store, a store that costs a minimum investment of about $1.5 million and whose value after several years may be double or triple that investment. So the real current return on investment is only about 2.5 percent, if real value is double the investment. You could double that return in tax free municipal bonds.

The average store’s answer to this minimum wage increase will be to raise prices. How much is the question? To remain at a 5.7 percent profit margin, prices would have to go up about 6 percent, meaning the average meal of $4.75 would now cost $5.02, but there is more.

Because so many costs like workers comp insurance are based on total salaries that would go up too. The franchise fee paid to McDonalds would also go up and that is substantial at a 12.5 percent royalty on gross sales. So if prices are raised by 7 percent to cover all the other smaller costs and the wage increase, the franchise fee will add almost another 1 percent. But there is one more cost that has to be considered and that is the cost food and supplies (34 percent of gross sales) which will also increase, depending upon the number of employees at minimum wage in those industries. If they are half of the fast food industry that would be a 2.7 percent increase and add another 1 percent to the overall costs of operation of the average McDonalds.

The bottom line based on these “average store” numbers would be about a 9 percent increase in retail prices of the current menu. That is a huge number. That $4.75 average transaction will now be about $5.20, your dollar menu items will be a $1.09 and a $4.19 Big Mac would be $4.57.  This minimum wage increase will effectively be a doubling of the current California sales tax. You think voters would pass a doubling of the California sales? And who is this price increase going to negatively affect the worst? That’s right, the minimum wage worker. And not just in an increase in living costs, but in less jobs and higher unemployment. Jerry Brown must have really thought this through. There is no such thing as free lunch, especially at McDonalds.

Larry Weitzman is a resident of Rescue.

Larry Weitzman

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