Chipotle: minimum wages and extra guacamole

The arguments for and against the push in the US for a $15-per-hour minimum wage are well trodden. Critics argue that it harms either labour, as businesses would hire fewer workers, or consumers, who would see the costs of the higher wage bill passed onto them. Either way, someone loses.

On the issue of costs being passed on, they might have a point. Here’s Chipotle’s chief financial officer John Hartung, on its first quarter earnings call Wednesday evening, responding to a question about potential wage inflation (transcript via Sentieo):

In the last 5 years, we’ve seen inflation in kind of the mid-single-digit range. And with some of the dislocations going on with COVID, actually, the labor inflation dropped to the low single digits. But we expect — I think most people expect that’s going to tick back up. And — but let me just give you an example because the other thing that you might be thinking about is what if we have a national minimum wage that over time, approaches $15.

Now the way to think about this is our minimum wage — or our average wage right now is $12 for our crew, it’s $13 for all of our hourly employees. We’re not that far off of, like, for example, a $15 number. But let’s say, for example, that there’s going to be an across-the-board 10% increase in our wages, that would have an impact on our margins of, call it, 150 to 200 basis points. And that would — to offset that with menu pricing, that would take a 2% to 3% price increase. So all of that is very, very manageable. And we feel like if there is going to be significant increased inflation because of market-driven or because of federal minimum wage, we think everybody in the restaurant industry is going to have to pass those costs along to the customer, and we think we’re in a much, much better position to do that than other companies out there.

So a 1.5 to 2 percentage point drop in margins, which will be made up by a similar rise in prices. On a micro level, 1 point to the critics.

The question is though: on a macro level, does this criticism still hold true?

One of the more technical points made by proponents of a higher minimum wage is that, in aggregate, a rise in the price of labour should not move the needle on profits.

Let us explain.

If you pay a worker $15 an hour instead of, say, $12. That’s a 25 per cent rise in spending power for a worker who is likely to splash most of their monthly cash. Excluding potential drags from taxes and saving, that should mean they spend roughly that amount more per month on goods and services. In other words, aggregate business revenues should rise as wages do.

The question is whether they spend that income on ordering extra guacamole at Chipotle, or another service. If the direction of the spending stays roughly the same (which is a big assumption), then businesses should see a similar rise in revenue relative to labour costs meaning, in aggregate, profits don’t move. In effect, price rises become unnecessary.

In fact, just look at what Hartung is saying: if wages go up 10 per cent, then prices will only rise 2-3 per cent. That’s a whole bunch of extra spending for a worker per month, including even those price rises.

Who knows, if a higher minimum wage does come into force, America’s low wage workers might even order the queso blanco alongside extra guacamole next time they visit a Chipotle .