Minimum Wage study claiming insignificant price hike effect felled by data problems

Two economists at Purdue University – Richard Ghiselli and Jing Ma – recently published a report that claimed an increase in the minimum wage to $15/hour would only raise fast food prices by about 4%. James Sherk of the Heritage Foundation took a look at the study and found a serious flaw (National Review Online).

The Purdue researchers got their data from the National Restaurant Association’s (NRA) 2014 operations report. The report surveys restaurants and shows how much the median restaurant spends on various expenses, such as payroll, food, marketing, etc. The Purdue researchers added those figures to derive the balance sheet of the typical fast-food restaurant.

Mathematically, however, medians do not work that way. Average values will add to the overall sum, but medians typically do not.

…

Consequently, their derived restaurant-balance-sheet profits and costs sum to 92 percent of total sales. Fully 8 percent of fast-food restaurant expenses disappear.

Whoops.

Ghiselli and Ma do two other things Sherk finds odd: they use a higher average wage rate than the Bureau of Labor Statistics (which means the hike would be less, and thus have less impact, in this study than if BLS figures were used), and they don’t take into account “price sensitivity” (although Sherk may overestimate the impact of that).

Sherk did his own analysis for Heritage, and found prices would actually rise 38% in total (again, though, that might be too high, see above) after an initial increase of 15%, while labor hours would fall 36% (which would actually underestimate the effect of cost-cutting if, as I suspect, Sherk overestimated the price hike).

To be fair, this is hardly a Reinhardt-Rogoff, but the Purdue error will likely have impact as the latest piece of “evidence” the left will use to pretend raising the minimum wage has no real consequences. There are consequences (higher prices and fewer labor hours), consequences which can be avoided by expanding the Earned Income Tax Credit instead.

@deejaymcguire | facebook.com/people/Dj-McGuire | DJ’s posts