San Francisco Increases Minimum Wage 14%, Local Chipotles Respond By Raising Prices 10-14%

Price rises, greater unemployment simple economic laws

In government, if they want to raise revenue, they simply raise taxes and the taxpayer is forced to “buy” their product, no matter what the “price.” But in Realityville, several things happen if costs go up. Employers of businesses like fast food restaurants work on a very thin profit margin. If their prices go up for things like food costs, they must pass those costs along to the customer or find a way to decrease costs in a different area. When prices rise, customers will buy less of the product offered.

In order to contain or minimize the price increase, the business owner will look for other areas to decrease their costs, and labor is the logical place to start. The owner will hire fewer workers and have them work fewer hours. And because the logical response to higher prices is for customers to buy less of the products offered, there will also be less labor needed to provide those products.

This scenario is being played out now in San Francisco at the Chipotle restaurants, and it is interesting to watch.

From an equity research report issued to investors by global investment banking and wealth management firm William Blair on Chipotle Mexican Grill, Inc. (NYSE: CMG) – “Price Increases Have Begun Early in Third Quarter” (received privately):

• In our weekly survey of ten of Chipotle’s markets, we found the company implemented price increases in half of the surveyed markets this week—San Francisco, Denver, Minneapolis, Chicago, and Orlando. In most markets, the price increases have been limited to beef and average about 4% on barbacoa and steak, toward the lower end of management’s expectation for a 4% to 6% price increase on beef.

• San Francisco, however, saw across-the-board price increases averaging over 10%, including 10% increases on chicken, carnitas (pork), sofritas (tofu), and vegetarian entrees along with a 14% increase on steak and barbacoa.We believe the outsized San Francisco price hike was likely because of increased minimum wages (which rose by 14% from $10.74 per hour to $12.25 on May 1) as well as scheduled minimum wage increases in future years (to $13 next year, $14 in 2017, and $15 in 2018).

So customers will pay more and get less service until Chipotle can figure out how to control costs, including the increasing cost of labor. That will undoubtedly include a move to other forms of labor such as robotic mechanisms that will obviate the need for most human labor in the restaurant. That will lead to much wider unemployment as low-skilled workers are no longer needed for these entry-level jobs. Costs will still go up, so demand will go down, with inflation increasing even as the economy slows. And demand for other products will also decrease as more money will be required for the same burrito bowl, and the money to pay for the increase will not be available for other purchases.

The minimum wage has always been an economists nightmare since it distorts the entire concept of supply and demand and naturally derived labor pricing for value received. Rather than employers paying a wage that reflects the value added by the employee in an open market, liberal politicians always want to demand that workers be paid what they deem is “fair.” The problem is that economics can only reflect “what is,” not what is fair. In that sense, the entire disruption of the market and unrealistic minimum wage rules is just beginning. But the result is inevitable. Higher prices, higher unemployment, fewer entry-level jobs, greater inflation, lower business profits, and damage to the economy. Thanks, liberals, your work here is done.

Source: aei.org