A $15 Minimum Wage will Make your Big Mac $12!!!
What a headline.
And this is probably the headline that many media outlets love to share - especially if they're opponents to an increased minimum wage. You know the types:
Loud as a motorbike, but wouldn't bust a grape in a fruit fight.
If you're doing some quick math, raising salaries by a factor of 2, should increase the cost of a Big Mac by that same factor. And you could even do more complicated math, and get the same result. BUT this is a scenario of using Math to prove a point of view instead of using Math to find an answer. A subtle yet powerful distinction.
Using Math to Prove a POV (Count the Assumptions)
According to the BMI aka Big Mac Index, individuals pay about $5.66 every time they order the sandwich. By doing some Algebraic Scare Tactics (Trademark pending), I can "prove" an increase of wages to $15 will increase the BMI to $11.71, or $12 since that's a better headline.
First things first, we need to know how many crew members work on any given day. Luckily, I worked at a McDonald's in the early 2000's, so I'm familiar with a typical store's layout (Fallacy/Assumption #1). In a typical store, around 8 crew members can run the shop, see an example of the store layout below:
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| Assume, these 'X' are where a crew member works in Peak Hours |
Next we need to determine "What is a given day?" (Assumption #2). Freestanding stores could be opened 24 hours a day, but stores inside a Mall or Wal-Mart can't, so I'll go with something my store was known to do, get the store ready at 4am, open at 5am, stop food orders at midnight, and close at 1am*. By my math, the store is open 21 hours a day for 7 days a week...or 147 hours. However, a manager won't staff 8 people for 147 hours, it's more like 4 most of the time, and 8 during the peaks. So now I need to determine the "Peak Hours" (Assumption #3).
Side note: when I received my Driver's License, PA laws would not allow anyone under 18 to drive past 10pm, unless you had a job that required late hours. So yeah, I purposefully closed the store just so I had an excuse to drive at night.
As expected, Breakfast, Lunch, & Dinner rush are typically the peak times we need staff. I'm assuming 8.5 hours at Peak:
- 7a to 10:30a is peak Breakfast (can't tell you how many people roll to the drive-thru at 10:29 just to get an Egg McMuffin)
- 11:30a to 1:30p is peak Lunch
- 4:30p to 7:30p is peak Dinner
Now we need to update our total hours I need to staff a typical McDonald's: 8.5 hrs for 8 crew 7 days a week and 12.5 hrs for 4 crew 7 days a week (Assumption #4). That comes to 826 hours to pay someone. At the current minimum wage that means a store pays out $311k a year, and going to $15 the store would pay out $644k -- keep these numbers handy, because we're getting closer to the assertion: A $15 Minimum Wage will Make your Big Mac $12!!!
At this point, I've established the labor costs, but in order to understand the impacts to the BMI, I need to know the typical store's revenue (Assumption #5) in order to calculate the margin. Margin is basically the percentage of the cost it takes to earn revenue and that ties directly to the price a consumer pays for a Big Mac.
I pulled the 2020 Annual Report for McDonald's and found 2 numbers to help us understand the average revenue: Total Revenue Earned attributed to Stores and Total # of Stores. Revenue was $18.865 Billion and Total # of Stores was 39,198 for an average of $481k each year. At $5.66 a Big Mac, a store sells around 85,000 (Assumption #6).
With average store revenue identified, I can identify the labor margin - this image will do our math for us:
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| Assumption #7 |
Well shit, this is getting murky quick. How does any of this change with a $15 minimum wage? It's all in the details of tying cost of labor to the price of the sandwich (Assumption #8). Assuming a store would want to keep it's margin at 35%, we need to understand how to bring in more revenue. In its simplest form, a store can increase revenue by raising prices, increasing foot traffic, or introduce new products. Increasing foot traffic or introducing new products requires additional costs, so clearly we just need to raise prices...
In order to get the same 35% margin, a store needs to bring in nearly $1 million ($995,740.46 to be exact), and now we know how a Big Mac could cost $12:
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| Algebraic Scare Tactics at Work! |
You know what they say about Assuming...
Did you count 8 Assumptions? Did you count more? That's the point! Analysts use assumptions in order to explain their results, or process, in the event that data can't be found. Yet, assumptions are also used to "skip over" analysis due to a factor that's rarely discussed: time to market.
Time to market is typically used in manufacturing or software development to define the time it takes to deliver a feature. Whether it's a new car or the latest iOS update, Time to Market is a differentiator, and consumers want their products faster and faster. That same sentiment also works for analysis - many times a day I have to pull down data, make quick analysis, and deliver my results to my department. The faster an analyst can make a "decision" then the faster their department can which means the organization can separate themselves in the market.
In my case, I wanted to get this Blog Post out in 1 day. So I made assumptions on faulty logic - do we really believe my time at a McDonald's 20 years ago is the same as it is today? A full analysis, would have required me to walk into any of the 4 McDonald's nearby and collect their staffing charts. Who has time for that? So I'll use my knowledge to close that gap, but disclose it as an Assumption.
What about increasing revenue to a million dollars? I assumed that a store wanted to keep a 35% margin, but that also assumes the only cost is Labor...it isn't.
But that's "ok" because I called it out as an assumption...
None of my math was wrong, it's basic algebra. The amount of assumptions I used, just to meet a deadline, was wrong. I want everyone to embrace STEM and data analysis, it's the only way our country will continue economic growth (Assumption #9?). But that also means you need to understand that sometimes a headline was driven out of a deadline instead of completeness and/or correctness.
Full disclosure, at no point do I know what a $15 minimum wage will actually do to the cost of a Big Mac. I'm also concerned about the benefits of the $1,000 a month Freedom Dividend, and I could do some Algebraic Scare Tactics to say it too will raise the price of a Big Mac. But all that analysis will take a LOT of time and I don't know if it will be ready ahead of the next election.
The next headline we're going to discuss, Robots will Take your Job, or why I'm probably qualified to Embrace and Fear the T in STEM.