When California began raising its minimum wage two years ago, Bill Phelps and his investors were worried. Phelps is CEO of a fast food company called Wetzel’s Pretzels, which has almost 100 outlets in California.
“Like most business people I was concerned about it,” he said.
The state increased the minimum wage in mid-2014 and just raised it again on Jan. 1 to $10.50 per hour for companies that employ more than 25 people. Smaller businesses will have a delay in implementation, but will follow suit as California moves along on its schedule to reach $15 per hour by 2022.
Phelps and a lot of other fast food CEOs have been worried that wage increases will cut into profits, and that if they raise prices to compensate, fewer people will come eat. So two years ago, Phelps prepared to take a hit. But something else happened entirely. Sales at his California stores immediately shot up.
“I was shocked,” Phelps says. “I was stunned by the business.”
The same exact pattern took place again in 2016, when the minimum wage rose again, Phelps said. There was a wage increase, and then boom, a bump in same-store sales across the state that held for most of the year.
Phelps is now convinced minimum wage increases aren’t bad for the fast food business; in fact, he says, they’re great. Phelps said you can see why if you visit the Wetzel’s Pretzels franchise in Concord’s Sunvalley Shopping Center.
Making Dough and Dough
At the mall you can smell the pretzels from far away. As you get close, you hear the sound of a mixer banging dough. It has to run constantly to keep up with the demand for pretzels. Business has been good the last few years, said franchise owner Mike Jacobs.
“My overall sales were something like 15 percent ahead after the first minimum wage bump, and now they’re about 12 percent ahead this year,” Jacobs said. “It isn’t because I’m such a great manager or smart guy, but the buying public has more money in their pocket.”
Jacobs says not only are more people coming to shop, but they’re buying more. Sure enough, as Jacobs and I talk, a mall employee stops in to buy a pretzel. He ends up also paying for a dipping sauce and a drink. Jacobs says sales like this are happening all the time.
Maybe this is all just coincidence. Maybe California’s economy happened to jump at the same exact times the state raised minimum wages. Maybe the franchise owners all started doing something to increase sales. Even if minimum wage increases are also increasing sales for Wetzel’s Pretzels, who knows if a similar trend would happen at all fast food companies. Most Wetzel’s outlets are in places like malls, where there are lots of low-wage workers around to shop.
No economist has pored over the company’s data to do a proper case study. But there are at least a couple who would love to.
UC Berkeley economist David Card has studied the minimum wage for over two decades. In the early 1990s, he published this influential case study that showed increasing the minimum wage did not reduce employment, as critics feared.
Card said colleagues have long suspected that rising minimum wages could actually increase fast food sales in the U.S., but no one could prove it — because American fast food companies rarely give out detailed sales data.
To test this theory, Card believes economists would need the kind of sales data Phelps is talking about at Wetzel’s Pretzels. It could be the missing piece. “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 the data held up to analysis and Phelps is right, Card said it could help clear up a lot of misconceptions about minimum wage currently being touted as facts.
Right now, the conventional wisdom in the fast food business is that a rising minimum wage is bad for the bottom line. It’s what Phelps feared. It’s what President-elect Donald Trump’s pick for secretary of Labor, fast food businessman Andy Puzder, maintains. And even though there are not good data to back it up, Card said some economists perpetuate the idea. By doing so, he said, they’re choosing to be political instead of scientific.
“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.
Stakes on this issue are high, as a number of states are raising minimum wages.
More Pretzels and More Guitars
At the mall in Concord, store owner Jacobs doesn’t need an economics case study to know he’s been doing well. “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 is already putting his own increased profits back into the economy. He collects guitars and has been using some of his extra funds to buy new ones.
With the minimum wage going up, he believes everybody is a winner. His employees have gotten a raise. His CEO is getting big numbers. His customers can buy more pretzels. And Jacobs can buy more guitars.