Two years ago California raised its minimum wage, worrying Bill Phelps and his investors. Phelps is CEO of Wetzel’s Pretzels, a fast food company, which has nearly a hundred locations in the state.
“Like most business people I was concerned about it,” he said.
The minimum wage hike began in the middle of 2014 and has continued on to as recent as January of 2017. Now companies with over twenty-five employees have a minimum pay obligation of $10.50 per hour. Smaller companies will be allowed to delay their implementation, but the state plans for to reach $15 per hour for all companies by 2022.
Phelps, along with many other fast food businessmen, had concerns that wage hikes would cut into profits, forcing them to raise prices, which may drive away customers. Two years ago, as Phelps braced himself for a financial hit, something unexpected happened instead. Sales in all his California locations increased almost immediately.
“I was shocked,” Phelps said. “I was stunned by the business.”
When the minimum wage was raised again in 2016, Phelps saw a similar financial reaction. As wages increased sales across the state also increased, holding for most of the year.
Phelps now believes that minimum wage hikes aren’t bad for business, and he’s not alone. David Card, a UC Berkeley economist, has made a study of the minimum wage for decades. In the early 1990s he published a case study on the minimum wage in fast food restaurants in Pennsylvania and New Jersey. He found that an increase to the minimum wage didn’t reduce employment, as many economists and businesses feared.
Card, as well as colleagues, have long held a suspicion that raising the minimum wage could actually increase the sale of food in the United States. This idea has been tricky to make a case for, as many fast food companies are loath to give out detailed sales data, and rarely do.
Card believes that sales data, like the kind Phelps has provided for Wetzel’s Pretzels, would be the missing piece to test his theory.
“Everyone knows it has been a gap,” Card said. “There has been a lot of speculation, but no one has figured out how to obtain the data.”
If Bill Phelps is correct that rising wages will also raise profits, Card believes that many misconceptions about the minimum wage and its effect on the economy could be more clearly understood.
As it stands, conventional business wisdom within the fast food industry is that a minimum wage increase will negatively affect profits. Before he saw the increase in sales after the wage hike, Phelps believed it. President-elect Donald Trump’s incoming Secretary of Labor, fast food executive Andy Puzder, still believes it. Many economists believe and perpetuate it, though Card has said that there is no definitive data to back it up. He believes that such stances are based more on politics than the scientific method.
“Economists unfortunately have, within the crowd, quite a few people who are ideologically committed to the idea that any kind of price regulation is always bad,” said Card.
Some people, however, don’t need a case study to tell them they are doing well. Mike Jacobs, a Wetzel’s Pretzels franchise owner, has seen firsthand how increasing the minimum wage will increase his profits.
“By my looking at it, the minimum wage increase has just been a godsend,” Jacobs said. “My income this year will be double what it was in 2013.”
Jacobs, like many of his employees, has been busy putting his increased revenue back into the local economy. He plays and collects guitars, and has used some if his extra earnings to purchase new ones.
Jacobs believes that increasing the minimum wage means everyone wins. His employees get a raise. His company increase their profits. His customers buy more pretzels. And he can buy a few more guitars.