The Homa Files

Relax, we’re just speculating … it’ll only happen if the fast-food workers get the $15 per hour that they were clamoring for last week

Economists at the Heritage Foundation have observed that fast-food joints operate on very slim profit margins (about 3% on average) so they’d have no choice but to bump up prices. to stay even.

The Heritage economists estimate that a $15 minimum wage for hamburger flippers would force restaurants to raise average menu prices about 40% in order to hold the current level of profitability.

Here’s the essence of their analysis …

On average, a fast-food cook currently earns about $9 … so, $15 would be a 66% bump.

Labor costs are about 25% of total costs … so, for openers, prices would have to be increased by about 15% to keep the bottom line even.

But, due to the old price elasticity dynamic, the economists estimate that the 15% price increase would drive down sales by 14 percent.

This would force restaurants to raise prices again, pushing sales down further.

In equilibrium the average fast-food restaurant would have to raise prices 38 percent.

It gets worse.

The 38% price increase would apply to the average check, not each individual item.

Heritage economists say that consumers would probably respond to the price increases by substituting cheaper items, for instance, McDonald’s dollar menu.

These substitutions would mean that prices of less expensive items would have to rise by more than the average amount in order for the price of the average check to rise by “only” 38 percent.

Ergo, a McDouble for $1.50 … ouch!

Click for full Heritage Report

=====

#HomaFiles

Follow on Twitter @KenHoma            >> Latest Posts

This entry was posted on September 9, 2014 at 6:50 am and is filed under Food & Drink, Minimum Wage - Living Wage, Price elasticity, Prices, Restaurants. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.