Raising fast-food hourly wages to $15 would raise prices by 4%, study finds

By Sally French, Market Watch—

Raising wages for fast-food workers to $15 an hour would lead to a noticeable but not substantial increase in food prices, according to a new study by Purdue University’s School of Hospitality and Tourism Management.

According to the Bureau of Labor Statistics, 1.54 million people working in food preparation and serving related occupations make at or below the federal minimum wage of $7.25 per hour. Raising their hourly wages to $15 — a 107% increase — would cause prices to rise an estimated 4.3%. That means your $3.99 Big Mac would wind up costing $4.16, and an average fast-food meal costing $7.00 would go up in price to $7.31.

If fast-food workers received $22 per hour (a massive 203% pay raise) — which is the average wage for Americans in the private industry, according to the Bureau of Labor Statistics — restaurant prices would rise 25%.

“There were no surprises. We thought prices would go up,” said Dr. Richard Ghiselli, Head of the School of Hospitality & Tourism Management at Purdue University. “We just wanted to know how much they would go up if you raise pay.”

To calculate the data, the study used median data from the National Restaurant Association and Deloitte & Touche, finding limited-service restaurants employ a median of 9 employees. The data also assumes the median amount of sales generated per employee was $69,644 to generate $626,796 in sales.

A 4% price increase would be needed to make up the difference in salary if employees were paid $15 an hour. The following chart shows how the math works out:

The study was prompted by questions over how high turnover rates negatively impact the food-service industry.

“Turnover has been one of the more troublesome problems to manage in the food-service industry. In 2013, franchised establishments experienced a turnover rate of 93%,” Ghiselli said.

Purdue’s study suggests that the cost to hire an hourly line position is $1,500 — a cost that covers recruitment, selection, training and vacancy costs, which may entail overtime pay.

Los Angeles Mayor Eric Garcetti suggested that his city’s recent decision to increase the minimum wage to $15 an hour over the next five years will lift 600,000 L.A.-area wage earners out of poverty, according to a MarketWatch article.

McDonald’s in April announced plans to give its U.S. restaurant workers a more than 10% raise, paying at least $1 an hour more than the local minimum wage.

The federal minimum wage of $7.25 was last raised in 2009. Over three million people (2.4% of U.S. workers) in 2013 earned at or below the federal minimum wage. Of those, 1.01 million work full time, and 1.64 million workers (49.6% of all minimum wage earners) are 25 or older, according to BLS data.

“Raising wages to competitive levels may be too costly, but increasing wages to $15 may be achievable,” Ghiselli said. “Assuming that paying employees a competitive rate is a desired end, the question becomes can higher wages lead to greater consistency, develop brand loyalty to the extent that higher prices can be charged and deliver customer satisfaction.”

Sally French is a social media editor for MarketWatch in San Francisco. You can follow her on Twitter @SAFMedia.