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>> 4% price increase to get to a living wage. Not $15 sandwiches, just $7.28 instead of $7 That only works if the price elasticity is 0 - meaning that a 4% pri

>> 4% price increase to get to a living wage. Not $15 sandwiches, just $7.28 instead of $7 That only works if the price elasticity is 0 - meaning that a 4% price increase doesn't lead to a decrease in sales. The price elasticity isn't 0. It's close to 1. A 4% price increase leads to close to a 4% drop in sales. Fixed costs stay the same. Do the math under those assumptions.

sudosysgen 5y ago
They're not actually making a prediction. This is what actually happened. The prices increased by 4% and, including elasticity, this allowed for a 15$ minimum wage. It's empirical.
- rufus_foreman 5y ago
  Those numbers don't contain enough information to calculate a price elasticity. Even sales numbers don't contain enough information to calculate a price elasticity, because you don't just need to know the change in sales after a price change, you need to know what percentage of that change was due to the price change instead of other changing factors - slowing of the pandemic, changing menu, advertising, growth in customer base that was happening anyway, etc. Those numbers are hard to get. But people who have done studies have estimated that in the restaurant industry, the number is close to 1. I mean think about what you are saying if you are claiming that the price elasticity is 0. You are saying that even before the wage increases, they could have raised prices by 4% and returned that money to their investors as pure profit, in an industry where profit margins are single digit and not usually high single digit. Not a chance.
  - sudosysgen 5y ago
    That's completely besides the point. No, that is not all what I meant, and at this point I don't really understand how I can make it clearer. The 4% increase in prices leading to a 15% minimum wage is a FACTUAL DATAPOINT. It is EMPIRICAL REALITY. No theorem, model, or anything, can change that, because that's what ACTUALLY HAPPENED. It's not theoretical. After all was said and done, prices were increased by 4%, and wages were increased to 15$/hour. It's completely useless to talk about elasticity, and try to estimate it, in this context. You are trying to apply a model, to reality, and arguing that the model is correct, but reality is not correct.
    - rufus_foreman 5y ago
      Here's the conversation I responded to: Article: The money’s gotta come from somewhere. People seem to forget that part. Response: 4% price increase to get to a living wage. Not $15 sandwiches, just $7.28 instead of $7. Pay your employees. It's that simple. The clear implication of the response, clear to me at least, is that where the money comes from to raise the employees' wages is revenue due to the price increase. Let me know if you understand it differently. That only works if the price elasticity is 0. They sell the same amount of food at higher prices and use the money to pay higher wages. If price elasticity is 1, they raise prices by 4%, they sell 4% less food, and the money for wages needs to come from somewhere else. Could be less profit for the restaurant, could be hiring fewer workers or giving them fewer hours, could be smaller portions or cheaper ingredients, could be the money comes from the bondholders who don't get repaid when the company goes bankrupt. If price elasticity is infinite, they raise prices and demand goes to 0 and they eventually go bankrupt. No restaurant would intentionally be operating with prices set in a range where the price elasticity is 0. They would raise prices until it wasn't in that range. The money for wages can't (only) come from increased revenue from a price increase. That was my point.
kbelder 5y ago
That's the biggest flaw I see in these discussions. People think that they can tweak one variable and hold everything else flat. It doesn't work; everything is related. Raise your price 4% and... Competitors may do the same, or less, or more, driving business to you or away from you. Suppliers may increase product cost. Employees may be taxed more. Employees may lose benefits. Demand will fall by an unpredictable amount. Demographics of employees and customers will shift. Inflation may hit, temporarily/geographically localized or not. labor cost increases may need to ripple up through the entire labor pool, not just bottom-tier. Employee's cost of buying food just went up, diluting their gains. And so on. Many of those effects are miniscule. Some are good, some bad. But there's an endless amount of them. It's a chaotic system, it's not just some simple equations.
mbfg 5y ago
As you increase the wages of people making little, you gain more customers from those same people. Of course this may not apply to restaurants service 30 dollar meals, but more people will buy a $5 sandwich when their wages go up.
- drewcoo 5y ago
  Oh, Henry Ford, you socialist!
- gruez 5y ago
  >As you increase the wages of people making little, you gain more customers from those same people. presumably that's already factored into the price elasticity calculations. also that logic only slightly offsets it. At the end of the day you're paying your workers more, and only a small fraction of that increase goes into your pockets. All in all it's still a net negative.
  - lotsofpulp 5y ago
    The net negative is the point, to help close some of the gap on page 12: https://crsreports.congress.gov/product/pdf/R/R44705/6 https://crsreports.congress.gov/product/pdf/R/R44705/6
- lytrplytprytr 5y ago
  Why not increase min wage to $100/hr so they can afford those 30 dollar meals?

sudosysgen 5y ago

They're not actually making a prediction. This is what actually happened. The prices increased by 4% and, including elasticity, this allowed for a 15$ minimum wage. It's empirical.

rufus_foreman 5y ago
Those numbers don't contain enough information to calculate a price elasticity. Even sales numbers don't contain enough information to calculate a price elasticity, because you don't just need to know the change in sales after a price change, you need to know what percentage of that change was due to the price change instead of other changing factors - slowing of the pandemic, changing menu, advertising, growth in customer base that was happening anyway, etc. Those numbers are hard to get. But people who have done studies have estimated that in the restaurant industry, the number is close to 1. I mean think about what you are saying if you are claiming that the price elasticity is 0. You are saying that even before the wage increases, they could have raised prices by 4% and returned that money to their investors as pure profit, in an industry where profit margins are single digit and not usually high single digit. Not a chance.
- sudosysgen 5y ago
  That's completely besides the point. No, that is not all what I meant, and at this point I don't really understand how I can make it clearer. The 4% increase in prices leading to a 15% minimum wage is a FACTUAL DATAPOINT. It is EMPIRICAL REALITY. No theorem, model, or anything, can change that, because that's what ACTUALLY HAPPENED. It's not theoretical. After all was said and done, prices were increased by 4%, and wages were increased to 15$/hour. It's completely useless to talk about elasticity, and try to estimate it, in this context. You are trying to apply a model, to reality, and arguing that the model is correct, but reality is not correct.
  - rufus_foreman 5y ago
    Here's the conversation I responded to: Article: The money’s gotta come from somewhere. People seem to forget that part. Response: 4% price increase to get to a living wage. Not $15 sandwiches, just $7.28 instead of $7. Pay your employees. It's that simple. The clear implication of the response, clear to me at least, is that where the money comes from to raise the employees' wages is revenue due to the price increase. Let me know if you understand it differently. That only works if the price elasticity is 0. They sell the same amount of food at higher prices and use the money to pay higher wages. If price elasticity is 1, they raise prices by 4%, they sell 4% less food, and the money for wages needs to come from somewhere else. Could be less profit for the restaurant, could be hiring fewer workers or giving them fewer hours, could be smaller portions or cheaper ingredients, could be the money comes from the bondholders who don't get repaid when the company goes bankrupt. If price elasticity is infinite, they raise prices and demand goes to 0 and they eventually go bankrupt. No restaurant would intentionally be operating with prices set in a range where the price elasticity is 0. They would raise prices until it wasn't in that range. The money for wages can't (only) come from increased revenue from a price increase. That was my point.

kbelder 5y ago

That's the biggest flaw I see in these discussions. People think that they can tweak one variable and hold everything else flat. It doesn't work; everything is related. Raise your price 4% and... Competitors may do the same, or less, or more, driving business to you or away from you. Suppliers may increase product cost. Employees may be taxed more. Employees may lose benefits. Demand will fall by an unpredictable amount. Demographics of employees and customers will shift. Inflation may hit, temporarily/geographically localized or not. labor cost increases may need to ripple up through the entire labor pool, not just bottom-tier. Employee's cost of buying food just went up, diluting their gains. And so on. Many of those effects are miniscule. Some are good, some bad. But there's an endless amount of them. It's a chaotic system, it's not just some simple equations.

mbfg 5y ago

As you increase the wages of people making little, you gain more customers from those same people. Of course this may not apply to restaurants service 30 dollar meals, but more people will buy a $5 sandwich when their wages go up.

drewcoo 5y ago
Oh, Henry Ford, you socialist!
gruez 5y ago
>As you increase the wages of people making little, you gain more customers from those same people. presumably that's already factored into the price elasticity calculations. also that logic only slightly offsets it. At the end of the day you're paying your workers more, and only a small fraction of that increase goes into your pockets. All in all it's still a net negative.
- lotsofpulp 5y ago
  The net negative is the point, to help close some of the gap on page 12: https://crsreports.congress.gov/product/pdf/R/R44705/6 https://crsreports.congress.gov/product/pdf/R/R44705/6
lytrplytprytr 5y ago
Why not increase min wage to $100/hr so they can afford those 30 dollar meals?