The arguments for and against the push in the US for a $15-per-hour minimum wage are well trodden. Critics argue that it harms either labour, as businesses would hire fewer workers, or consumers, who would see the costs of the higher wage bill passed onto them. Either way, someone loses.
On the issue of costs being passed on, they might have a point. Here’s Chipotle’s chief financial officer John Hartung, on its first quarter earnings call Wednesday evening, responding to a question about potential wage inflation (transcript via Sentieo):
So a 1.5 to 2 percentage point drop in margins, which will be made up by a similar rise in prices. On a micro level, 1 point to the critics.
The question is though: on a macro level, does this criticism still hold true?
One of the more technical points made by proponents of a higher minimum wage is that, in aggregate, a rise in the price of labour should not move the needle on profits.
Let us explain.
If you pay a worker $15 an hour instead of, say, $12. That’s a 25 per cent rise in spending power for a worker who is likely to splash most of their monthly cash. Excluding potential drags from taxes and saving, that should mean they spend roughly that amount more per month on goods and services. In other words, aggregate business revenues should rise as wages do.
The question is whether they spend that income on ordering extra guacamole at Chipotle, or another service. If the direction of the spending stays roughly the same (which is a big assumption), then businesses should see a similar rise in revenue relative to labour costs meaning, in aggregate, profits don’t move. In effect, price rises become unnecessary.
In fact, just look at what Hartung is saying: if wages go up 10 per cent, then prices will only rise 2-3 per cent. That’s a whole bunch of extra spending for a worker per month, including even those price rises.
Who knows, if a higher minimum wage does come into force, America’s low wage workers might even order the queso blanco alongside extra guacamole next time they visit a Chipotle .