Minimum Wage hikes, predictably, increase the cost of fast food

If you have taken your kids to McDonalds (or indulged yourself) in the last 6 months, you will have noticed the prices have increased substantially. Washington is not the only state where prices are going up, and it’s partially because of increases to minimum wage.

Zerohedge is reporting another price increase, driven primarily by increases to the minimum wage, that is going to hit California in April this year. California minimum wage is set to increase to $20 an hour for fast food workers, a 25% increase. Industry estimates indicate an increase of $250,000 per year in costs for the average fast food restaurant owner.

For many service industries, such as restaurants, retail and hospitality services, profit margins can be as low as 3%. Minimum wage mandates wipe out that profit and can put a business into negative fiscal territory. Businesses are forced to choose between laying staff off, adding automation or increasing prices. Sometimes the only option is to increase prices.

By raising the minimum wage, in the short term, workers will see an increase in wages, but long-term costs will increase negating the additional money received from the higher minimum wage. Sometimes, instead of a salary bump, many workers instead find their work hours cut or their jobs eliminated completely. For some employees, if they fall below a minimum hour threshold required for benefits, they lose benefits too.

For unionized workers, the problem is more acute. Labor contracts that prevent staffing changes or reductions, leave companies with few options; to either increase prices or go out of business. An increase in prices negates any benefit to the employee as the new higher wage the employee is receiving no longer buys as much as it used to.

There is no way around the effects of minimum wage increases – your favorite fast food (and many others things) are going to cost more, and in Washington and California, both states with high minimum wages, even higher prices.

–– Mark Harmsworth is the Director, Small Business Center, Washington Policy Center.