This op-ed was published by Barron’s on March 17, 2021
Critics of minimum wage increases suggest they will raise costs, kill jobs, and put companies out of business.
Are they right? To find out, I looked for a company that employs a lot of minimum wage workers to see what impact a $ 15-an-hour wage would have on its bottom line. I chose Chipotle Mexican Grill.
I’m not trying to pick on Chipotle. But it’s a company that can tell you a lot about the way wage increases will ripple through a company, and the economy at large. It helps that Chipotle’s annual income statements are filed with the Securities and Exchange Commission and are audited. Chipotle, with some 88,000 employees is also one of the few chain restaurant companies with no franchisees, which can muddy the waters when you are taking apart an income statement.
Here’s what I found: With a $15 minimum wage, a chicken burrito that now costs $7.35 in many locations would cost about $7.86, or about 7% higher. The company would earn the same level of profits it made in 2020 under the current minimum wage structure.
Fifty-one cents is not a big ask. It’s really quite small if what it’s financing is the ability of workers on the lowest rung on the economic ladder to earn a living with what work their circumstances allow.
To calculate this price increase, I had to estimate what part of Chipotle’s labor costs go to minimum-wage workers. (This information isn’t public, and the company didn’t respond to my requests for comment.) The 80/20 rule explains a lot of business and economic phenomena, and based on what I saw at my local Chipotle, it seemed like a tenable place to start. With total labor costs of $1.6 billion in 2020, if 80% goes to workers who earn less than $15 an hour, that puts Chipotle’s minimum-wage labor cost at $1.3 billion.
Next, I estimated the prevailing wage to see what kind of cost increase Chipotle would suffer with a $15 wage standard. Employment websites suggest the starting wage at Chipotle is $11.28. Therefore, to pay everyone at least $15 an hour, Chipotle would have to raise those wages by about 33%.
So, taking into account the 33% increase, additional Social Security contributions Chipotle would need to pay on behalf of workers, and keeping the other 20% of the wage pool (about $319 million) constant, delivers a total labor cost of just a tad over $2 billion. In the end, labor costs would rise about $413 million. To keep operating profits the same, revenues, aka prices, would need to increase by 7%.
The absolute accuracy of this analysis is less important than what it reveals: An increase in the minimum wage that is very large in absolute terms is less significant within the context of a corporate cost structure.
If I can figure this out, surely Chipotle knows the impact of a $15 minimum wage.
In fact, Chipotle executives can discover a whole lot more. Thanks to modern, cloud-based enterprise software, they can know, down to the basis point, the profit per menu item, who is ordering, when they order, how they order, what they last ate at a Chipotle restaurant, and a lot of other things it’s probably too frightful to consider.
And because it knows so much, Chipotle has the wherewithal to raise prices strategically. Or it could shrink the product ever so slightly — which even old-line cereal companies figured how to do more than a decade ago — or squeeze suppliers or change prices dynamically by location or at times when they are more elastic.
It’s easy to drum up opposition to minimum wage increases by trotting out a 33% increase in wages, which, yes, in absolute value terms is large, but much smaller once it hits the top or bottom line. Ultimately, businesses have many levers to pull to control costs without touching their workers. But all this is a bit more nuanced than the current, pitched battle over the politics of wages seems ready to absorb.
And let’s not forget that given the nuances of accounting, net profits are not the same as the cash the company generates. Chipotle’s depreciation and amortization expense on its income statement is not a cash expenditure, but an accounting adjustment, which along with other adjustments showed there was nearly $130 million in cash sloshing around in Chipotle for 2020 that did not show up in reported profits. In 2019, this figure was more than $300 million. Much of the cash Chipotle needs to raise wages to $15 per hour is already on hand, meaning prices don’t necessarily need to rise even by 7%.
So, a $15 wage is not a social problem. It’s a business problem. No need to complicate things with politics or cultural divides. Instead, let’s have a little faith. American businesses have a pretty good track record for ingenuity.
Why, then, doesn’t Chipotle raise its prices 7% and do what many think is the right thing? Perhaps because it operates in a hypercompetitive business and does not want to be disadvantaged versus McDonald’s, Qdoba, or any other restaurant that would figuratively love to eat its lunch.
But lurking behind this argument is regressive thinking. It’s a belief that Chipotle’s ultimate net profit margin for 2020 of 5.9% sets the baseline for future profits, from which there can be no retreat, even if this profit margin is subsidized by low-wage workers who cannot live off their labors.
Further, this thinking ignores that things change, or in the case of minimum wages, should change. Someday, a $7.25 minimum wage in 2021 may seem as outdated and unfair as declaring women shouldn’t vote. Until then, let’s do the right thing by pulling the trigger on the minimum wage now, and let business owners sweat the details later.
Yes, sweat. That’s what they’re paid to do, and they are paid a lot more than minimum wage to do it.
