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Yes, $15 an hour would raise prices

Yes, $15 an hour would raise prices

This post is part of the Reporter’s Notebook blog.

Researchers at Purdue University in Indiana recently examined what would happen if limited-service restaurants increased their wages to $15 an hour, and came up with an unsurprising conclusion: Prices would go up.

On average, the study concluded, QSRs would have to raise menu prices by 4.3 percent. While that might not seem like much, it’s also a baseline. In an interview, Richard Ghiselli, professor and head of Purdue’s School of Hospitality and Tourism Management said that, nationwide, prices would increase 4.4 percent to 9.1 percent.

“It’s a conservative estimate,” Ghiselli said. “Expect the nationwide range to be in the 4.4-9.1 range, with certain locales more pronounced.”

In addition, the range of increases nationwide would be even greater than that, because wages in some areas are currently lower and would thus have to come up more to match that $15.

So a McDonald’s in West Lafayette, Ind., where workers are more likely to make the federal minimum of $7.25 an hour, would likely see price increases higher than 9.1 percent. A McDonald’s in, say, New York City, where wages are higher, would increase prices by a smaller amount and thus would have a smaller price hike.

Researchers looked at what would happen if limited-service restaurants nationwide raised wages to $15 an hour and started offering health insurance. It analyzed numbers from limited-service restaurants with fewer than 25 employees, using data from the National Restaurant Association. The study was co-authored by Jing Ma, a doctoral student and graduate teaching assistant.

Ghiselli was careful to note that he’s not analyzing what would happen to restaurants if the minimum wage were increased to that level.

The study makes price increase estimates while assuming that consumer demand would remain the same — something Ghiselli admits is unlikely. Higher prices usually impact consumers, some more than others.

Diners might eat out fewer times, or they might order different products. Or they could choose different restaurants. “Anytime you raise prices, people change behavior,” Ghiselli said.

Some concepts can more easily withstand price hikes, because their consumers have different expectations of the restaurant. Chains such as Shake Shack or Chipotle Mexican Grill, for instance, could more easily raise prices 4.3 or even 9.1 percent because consumers are willing to pay more for that food.

But for chains like McDonald’s Corp., Burger King or others, those higher prices would have an impact on traffic.

And at many of those chains, even a modest price hike could have an impact on traffic. While a typical fast-food meal might cost $7, Ghiselli said, for a family of four that’s $28, and then a modest price hike increases it to more than $29. “People might reduce the number of times they eat out,” he said. “They might change restaurants.”

In addition, menu price increases would not be the same across the board.

A Big Mac, for instance, would not go up by just 17 cents. Or by 19 cents in Minneapolis, where I am based.

That’s because restaurants don’t raise prices uniformly. Side items, desserts and drinks stay relatively steady because they’re add-on items. Price them too high, and consumers don’t order them. “If you increase fries and sodas, you’re dead,” said John Gordon, a restaurant consultant out of San Diego.

In addition, many QSRs have to keep a good portion of the menu at low prices. Combined, that eliminates 50 to 60 percent of a menu from price hikes, and so entrees bear the brunt of an increase.

Thus, that Big Mac would likely increase by a lot more than 4.3 percent — perhaps 44 cents or more in the case of the Minneapolis McDonald’s. If prices go up by 9.1 percent on average, then that Big Mac might cost another $1.

The study did not fully answer whether higher wages would reduce turnover, and reduce turnover-generated costs — a major problem in the industry that a competitive, $15-an-hour wage would help solve, at least in theory. But the authors do say in the study that turnover rates decline as pay is increased.

A stable and more skilled workforce could reduce poor service and could improve product consistency and quality because managers have to spend less of their time training new workers.

Raising wages to $15 an hour would fundamentally change the limited-service restaurant business, Ghiselli said.

“If we do that, we have changed the nature of the job, in my opinion,” he said. “We have taken it from an entry-level position in quick-service restaurants typically held by individuals who are just entering the workforce with few skills and low knowledge. And they’re trying to equate that to a permanent job. That’s what’s basically happening here.”

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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