$22 Per Hour?

Sep 8, 2022 | Ask "Z" Economist, No Bull Economics

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Executive Summary: California’s knee-jerk decision to raise the minimum wage (just for fast food workers) by 40% to $22/hr. defies financial reality. Here is a model of Jack in the Box’s unit economics with the base case representing the current pay structure with a $15 state minimum wage. Assuming some units already are paying above the minimum wage, we modeled a +20% to +40% increase in labor costs to analyze the impact on margins. Holding menu prices constant, a 14% EBITDA margin compresses to 3% (basically break-even) assuming a +40% increase in labor costs. Yes, operators can hike menu prices to try to compensate for this inflationary shock, but consumers are already struggling with prices where they are currently. The net effect of California’s ill-conceived action is to price out lower-income consumers from fast food. How is that looking out for the small guy? 

Jack in the Box Unit Economics
Labor Increase Graph

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