GDP Blog

Minimum Wage Increase: A Balloon Getting Squeezed

Posted by John Powter

Jun 12, 2014 8:23:00 AM

Sqeeze-the-Balloon-150x100Most employers in the United States are subject to the minimum wage provisions of the Federal Labor Standards Act (FLSA). These employers are required to pay their employees a wage rate of at least $7.25 per hour.

However, many states have adopted minimum wage rates that exceed the federal rate. When federal and state minimum wage rates are different, the one that most benefits the employee prevails.

As of May 1, 2014, four states (CA, DC, DE, and MN) have announced increases in their minimum wage rate for this summer. These rate increases will require affected employers to pay their employees wage rates higher than the federal rate.

What effect will raising the minimum wage have on business owners and consumers?

Recently on CNBC several prominent  franchisors came out and voiced their opinion. 

Subway CEO Fred DeLuca expressed his opinion during an interview with CNBC that he is “not concerned” about the federal minimum wage increasing. However, he did say it would cause prices to go up for the consumer.

When he “started in the business, the minimum wage was $1.25,” and he has “seen an enormous number of wage increases,” DeLuca told CNBC. He added that increasing the federal minimum wage “won’t have a negative impact, hopefully, and that’s what I tell my workers.” That is a bit of a change from 2013 when Deluca told CNBC that “doing a sharp raise all at once is a bad idea.” However, he added that “minimum-wage workers deserve to make more and a little bit of an increase makes sense to me.”

Diary Queen CEO, John Gainor, agreed in an interview with CNN earlier this month that, “People need to be paid a fair wage.” While he didn’t speak out in favor of raising the federal minimum wage to $10.10 an hour, he did say that low wages can encourage more turnover, and that is expensive for companies.

Are these out of touch billionaires? Let's look at the drivers of an average franchisee. Food and Labor are the majority of the cost and can account for over 50% of the total revenue. 


Food costs are largely driven by commodity prices, according to an interesting new NBER paper examining commodity prices over the very long run (from about 1850 to today). David Jacks has assembled real commodity price data for 30 commodities; spanning animal products, energy products, and industrial and precious metals. "Applying weights drawn from the value of production in 2011 suggests that real commodity prices have increased by 252.41% from 1900, 191.77% from 1950, and 46.23% from 1975."

Something will have to give, if the two largest cost drivers have increased.  Either prices will increase for the consumer, or companies will hire fewer employees and quality will decrease. Either way, you squeeze the balloon. It has to give somewhere lest it explode. 







Topics: Risk Management

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