Friday, July 10, 2015

We Are Seeing The Effects Of The Minimum Wage Rise In San Francisco

By Tim Worstall. Excerpts:
"And in San Francisco, where the minimum wage was recently raised we did indeed see that comic book shop insisting that it just couldn’t survive. And now we’ve another tale, this time from Chipotle. Beef prices have been rising around the country so they’ve raised the prices, around the country, of their beef products. Wages in San Francisco have been rising strongly so they’ve raised the prices of all their products in San Francisco strongly. There really is no free lunch. A rise in wages will come out of either less labor being employed, lower profit margins (and fast food doesn’t have those wide enough to take the strain) or price increases to consumers."

"A rough guide to the finances of the fast food industry is as follows. 30% goes on wages, 30% of revenues goes on ingredients and the other 40% is everything else. Rents, advertising, capital costs and, of course, profits. Those profits are pretty low. 5% of revenues isn’t an out of order estimation of the net profit margins in the business (and, of course, that’s an average, as some locations and some whole chains lose money).

So, if we by legislative fiat raise the price of one of those inputs then something, somewhere, has to give. Those profit margins are already pretty thin and so they’re not going to be where that extra cost comes from. More than that if we reduce the returns to capital in a particular line of business then less capital will be invested in that line of business in the future. This means fewer jobs in that line of business: This is one of the ways that a rise in the minimum wage destroys jobs. Fewer will be created in the future than would have been in the absence of the rise in the minimum wage."

"It’s possible that employers will be encouraged to deploy their labor in a more productive manner as a result of the price increase. This is the same statement as fewer jobs will be created. For if I go and raise labor productivity then by definition I need less labor for any given level of output. Or of course employers could just automate the process a little more and that also means fewer jobs.
So, if employers either economize on labor or profits, there will be job losses: the minimum wage rise does reduce employment.

Or there is this final method: raise prices. Which also causes job losses: for the more money that consumers are spending on reasonably priced Mexican food (although now less reasonably priced Mexican food than it used to be) the less they have available to spend on other things."

"And just to head off at the pass one of the more insane points that people try to make. That if the workers at Chipotle are now making more money then they’ll spend more at Chipotle, and the company’s profits will rise! This doesn’t even pass the basic math test, let alone any economic one. For note above the split in revenues. About 30% of revenue is spent upon labor. The other 70% is spent upon other things, including that 30% or so on food ingredients. So, if Chipotle raises wages by $100 (just as an example) and all of those wages are then spent in the same store, it is impossible for profits to rise."

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