Study: Raising wages to $15 an hour for limited-service restaurant employees would raise prices 4.3 percent

WEST LAFAYETTE, Ind. - Raising wages to $15 an hour for limited-service restaurant employees would lead to an estimated 4.3 percent increase in prices at those restaurants, according to a recent study.

Researchers from Purdue University's School of Hospitality and Tourism Management also examined the impact of limited-service restaurants offering health-care benefits and found that, due to current tax credits in the Affordable Care Act, there would be a minimal effect on prices at limited-service restaurants with fewer than 25 full-time employees.

Limited-service restaurants are what many consumers refer to as "fast-food restaurants," where there usually is no tableside service and no tipping.

The study says increasing wages to $22 an hour, which the Bureau of Labor Statistics says is what the average American private industry employee makes, would cause a 25 percent increase in prices.

The current federal minimum wage is $7.25 an hour, which also is the standard in Indiana. Some states and cities across the United States, including Illinois, Michigan and Ohio, have raised the minimum wage to more than $8 an hour. In the past two years, fast-food workers across the nation have gone on strike or had demonstrations calling for (living) wages to be increased to $15 per hour, the study says.

"We wanted to find out what happens if food-service employees' wages go up to $15 an hour and what happens if you take it to $22 an hour," said Richard Ghiselli, professor and head of the School of Hospitality and Tourism Management. "Health-care benefits are a little more complex. We did an analysis based on information at the time we started the study (2013). There were tax credits available then. With those tax credits available, giving full-time employees health insurance shouldn't affect businesses that much. When those tax credits expire, then it changes."

Employee turnover in the foodservice industry led to the study, Ghiselli said.

"Turnover has been one of the more troublesome problems to manage in the foodservice industry. In 2013, franchised establishments experienced a turnover rate of 93 percent," he said. "People often hypothesize that if you raise pay and offer benefits, turnover will go down. I don't think we answered the question of whether that reduces turnover, but the study showed that if you raise pay and offer health insurance, prices will go up."

Ghiselli said the study's results were close to what he expected and that there could potentially be other effects of raising wages and offering health benefits.

"There were no surprises. We thought prices would go up. We just wanted to know how much they would go up if you raise pay and offer health insurance," he said. "The other way to look at this if you don't want to raise the prices is to examine the impact on product size. As expected, a hamburger would be much smaller."

Data from the National Restaurant Association, taken from across the United States, was used in the study to determine the impact of higher wages on prices. To determine the price impact of offering health-care insurance to limited-service restaurant employees, Ghiselli said researchers obtained information from HealthCare.gov, based on the typical portrait of food-service employees in Indiana.

The study, which was co-authored by Jing Ma, a doctoral student and graduate teaching assistant in the School of Hospitality and Tourism Management, was published recently in the Journal of Foodservice Business Research. 

Writer: Greg McClure, 765-496-9711, gmcclure@purdue.edu 

Source: Richard Ghiselli, 765-496-2636, ghiselli@purdue.edu

The purpose of this paper was to examine the effect that higher wages and health-care benefits have on costs and prices in limited-service restaurants. In order to compensate for higher wages, prices would have to increase between 4% and 25% and/or product size would have to be scaled back between 12% and 70%. With tax credits that are available in the next few years, the Affordable Care Act will have minimal effect on limited-service restaurants with few than 25 FTEs. The extent to which higher wages and more benefits will help ameliorate turnover must be balanced with the cost of turnover and the potential effect on sales.