Solvency – Advocate

Robert Pollin & Jeannette Wicks-Lim 15 (professor of economics at the University of Massachusetts Amherst, founding co-director of its Political Economy Research Institute, and member of the Scientific Advisory Committee of the European Commission project on Financialization, Economy, Society, and Sustainable Development (FESSUD) & visiting professor at Marlboro College, in Marlboro, Vermont, research assistant for Economic Policy Institute, research associate for Monitoring the Future at the Institute for Social Research at the University of Michigan, Ann Arbor), “A $15 U.S. Minimum Wage: How the Fast-Food Industry Could Adjust Without Shedding Jobs ,” January 2015, Political Economy Research Institute 373, https://peri.umass.edu/publication/item/602-a-15-u-s-minimum-wage-how-the-fast-food-industry-could-adjust-without-shedding-jobs

In our scenario, the federal minimum wage rises from its current level (what we term the “Year 1” level) of $7.25 to $10.50 after one year, i.e. by Year 2. The federal minimum then rises to $15 after three more years, i.e. by Year 5. Therefore, the U.S. economy operates with an $10.50 minimum wage for three years, from Years 2 – 4, before rising to $15 per hour in Year 5.

The assumptions through which we develop this scenario are straightforward. That is, again, we begin by assuming that the fast-food industry experiences no employment losses over the full four-year adjustment period, from Years 2 – 5. We rather assume that employment growth proceeds at an average rate of one percent per year. This is a slower rate of employment growth than the two percent trend growth rate for the fast-food industry.8 But, as we discuss more below, we are also anticipating that the growth in sales volume (though not sales revenues) will also slow modestly due to the price increases that we assume the industry will enact as one of their adjustment mechanisms. In other words, employment growth will slow from the trend 2 percent rate to 1 percent through Years 2 – 5. This is because the growth in the total amount of food that the industry will sell will also slow modestly. In any case, after the four-year adjustment period to move the federal minimum to $15 per hour, employment growth should then return to its trend rate of around 2 percent.

According to the October 2014 IBIS World Industry Report that focuses on the U.S. fast-food industry, the profit rate in the fast-food industry for 2014 was 5 percent. IBIS is defining profitability here as profits as a share of total revenues. In our scenario, we assume that profits as a share sales revenues will be fixed at this 5 percent of sales ratio for all four years of our adjustment period. We also, again, assume that there are no other areas of the industry’s operations which experience reductions in their revenue levels.

At the same time, we do need to account for the fact that some components of fast food firms’ spending will rise as their sales volume rises. These include spending on inputs such as wholesale food products, utilities, and, franchise royalties paid by the franchisees. Based on IBIS’s 2014 report, these types of industry costs currently make up approximately 60 percent of sales revenue.9

There are three further key assumptions, as derived from our literature review above:

1) Cost savings from turnover reductions. Turnover reductions will generate cost savings for the fast-food firms that will amount to 20 percent of their wage bill increases.

2) Industry sales growth trend tied to overall economic growth. The fast-food industry’s underlying growth trend will continue to roughly match that of the overall economy, at around 2.5 percent per year. The actual rate of sales growth will be reduced modestly due to industry-wide price increases, but will still otherwise correlate closely with overall GDP growth.

3) Demand elasticity and price increases. We assume that the price elasticity of demand within the fast-food industry is -0.5. We also allow that overall prices within the fast-food industry will rise by 3 percent per year over Years 2 – 5. Given our -0.5 price elasticity assumption, the 3 percent annual price increase will break down into: 1) a 1.5 percent decline in sales revenue relative to what sales would be otherwise along a 2.5 percent annual sales growth trend; and 2) a 1.5 percent increase in revenues relative to what revenues would be otherwise for a given volume of sales.

In Tables 5 and 6, we now show how the fast-food industry could realistically adjust to a $15 minimum wage without resorting to either employment losses, reductions in their profit rate, or other forms of revenue redistribution within the industry. Specifically, Tables 5 and 6 show the effects of the full set of adjustments that the fastfood industry could make in response to the higher minimum wage levels, working from our assumptions with respect to turnover; the growth trend in industry sales; and the -0.5 price elasticity of demand combined with a 3 percent annual increase in prices.10

We begin in Table 5 with the adjustment process from Years 1 to 2, from the $7.25 to the $10.50 per hour federal minimum wage. As Table 5 shows, based on our full set of assumptions, the fast-food industry will face a $8.2 billion wage bill increase resulting from the rise to an $10.50 minimum wage. This overall wage bill increase is then absorbed through the combination of these three channels: 1) $1.5 billion in cost savings generated by reduced turnover; 2) $3.5 billion in increased revenues, assuming a 3 percent price increase and a -0.5 price elasticity of demand; and 3) a $6 billion revenue increase generated by the 2.5 percent underlying sales growth trend. Within this Year 2 adjustment framework, we also need to account for the increase in other costs from our assumed one percent growth in sales volume. As noted above, these other costs are equal to approximately 60 percent of the sale revenue given current prices. Thus, we assume that a one percent increase in sales volume will raise other costs by $1.4 billion (60 percent x 1.0 percent x $232 billion). As we see in row 7 of Table 5, an additional 0.5 billion will need to be allocated to firm profits in order to maintain the average industry profit rate at 5 percent of overall sales.

Table 6 then presents figures on the second phase of the adjustment process for the fast-food industry, in which the federal minimum wage rises from $10.50 per hour in Year 4 to $15 as of Year 5. In this case, we see that the overall wage bill will be $28.4 billion. This wage bill increase is then covered through these channels: 1) A $5.2 billion cost reduction generated by lower turnover; and 2) a $30 billion revenue increase in Year 5 relative to Year 2. This figure incorporates both a) three years of underlying sales growth at 2.5 percent; and b) three years of price increases at 3 percent per year, with a -0.5 percent price elasticity operating in all three years. In this case, $1.5 billion out of total revenues will need to be allocated for profits to maintain the industry profit rate at 5 percent of sales. Finally, we show in row 8 that $4.2 billion will go towards covering the cost increases fast food firms experience due to increased sales volume. As we see in row 9 of Table 6, after all of these adjustments are accounted for, the industry will still be able to retain $1.1 billion in revenues to be allocated for other purposes.

6. CONCLUSION

We have presented a simple, stylized scenario through which we show how the federal minimum wage in the U.S. could be raised within four years to $15 an hour without generating employment losses in the fast-food industry. We also show how this adjustment to a $15 minimum wage could be accomplished without fast-food business firms having to face a decline in profitability. The set of assumptions underlying this scenario are all realistic and derived from the existing relevant literature.

These results can help provide clarity on two sets of questions regarding the impact of minimum wage laws in the United States, one a purely analytic question and the other more geared to ongoing policy debates. From an analytic perspective, our illustrative exercises help to explain how it is the case that minimum wage increases can be implemented repeatedly without generating large-scale employment losses among low-wage workers. The key point that our scenario emphasizes—following from the literature we have discussed here—is that business firms do have other options available to them besides cutting their workforce. These other options, moreover, are likely to be more desirable under most circumstances, especially for firms that aspire to compete successfully and grow.

In terms of policy implications, our results offer a straightforward conclusion. Achieving a $15 federal minimum wage within the U.S., phased in over four years, should be seen as a realistic prospect. This specifically means that the intended consequence of the $15 minimum wage—to improve the living standards of low-wage workers in the U.S. and their families—can certainly prevail over the unintended consequence that low-wage workers and their families would suffer from widespread employment losses.

Raising the minimum wage results in a smooth transition and fiscal relief for families---consideration of part-time workers is key

Jennifer Romich & Heather D. Hill 18 (s associate professor of social welfare in the School of Social Work at the University of Washington and director of the West Coast Poverty Center & associate professor in the Daniel J. Evans School of Public Policy and Governance at the University of Washington), “Coupling a Federal Minimum Wage Hike with Public Investments to Make Work Pay and Reduce Poverty,” 2018, The Russell Sage Foundation Journal of the Social Sciences 4(3), pg. 22–43

We propose raising the federal minimum wage to $12 per hour, with a two-year phase-in, and to index it to inflation moving forward. As our simulations show, at this wage level, a full-time worker with a spouse and two children will earn enough to be above the poverty line (the same is true if both spouses work part-time hours that sum to full-time work). When combined with SNAP and federal tax credits net of payroll taxes, a half-time single worker with three or fewer children will be nonpoor as well. We believe that half-time work is an appropriate expectation for low-wage workers whose jobs disproportionately feature irregular and unpredictable hours (Tilly 1991; Lambert, Fugiel, and Henly 2014), particularly parents who must balance market work and family caregiving. Indeed, Luke Shaefer estimates that 36 percent of all part-time workers are primary earners for their families (2009).

Indexing the federal minimum wage to the cost of living is critical to its success. In fact, the decline in the real value of the minimum wage over time has greatly exacerbated concerns about disemployment. With a minimum wage designed to increase proportionally with changing costs or wages in this country, we would not face the need to increase the wage by such a large amount in future years. Several states have recently passed laws or voter initiatives that index the state minimum wage to inflation.

We recommend that the increase from $7.25 to $12 take effect over two years without mandated steps. This time and flexibility will maximize employers’ ability to make decisions about when and how much to increase wages as to best absorb the increased personnel costs. Some recent local and state laws mandate structured steps across many years, but we worry that this approach is overly complicated and might make enforcement more difficult.7

The size of this increase relative to current minimum wages would vary considerably by state and even city. By our calculation, the increase would be below some city-level wage mandates but up to 60 percent above the current laws across the country. The larger increases in places that adhere to the federal minimum wage are beyond any recent experience or evidence. As we describe in the following section, some of the public investments that accompany the minimum wage increase could be targeted directly to states and localities facing particularly large increases.