Bigger Salaries Mean Bigger Food Costs
On July 1, Illinois’ state minimum wage increased to $7.75 an hour. This salary will help nearly 650,000 workers cope with the rising cost of living and basic necessities, gas, rent, childcare, medicine… and groceries!

Yup, groceries prices and salaries are more connected than you may think. According to Federal Reserve’s Jason Henderson, “Labor costs have emerged as the biggest component of the retail food dollar.” Because processed food and restaurant food are more labor intensive than more basic foods, labor has risen to 38.5% of the retail cost of food for Americans, who are spending more at away-from-home eating. That percentage is expected to increase in the next couple of years as the federal minimum wage will increase, too:

• $6.55 per hour effective July 24, 2008
• $7.25 per hour effective July 24, 2009

This is nothing new. For years, the costs of processing food have surpassed the cost of growing it. In 1950, 41% of the retail price of food came from commodity costs. Today, 20% of that retail cost comes from commodities.

The difference is caused mostly by rising labor costs. This increase reduces the profit margins throughout the food chain. It is difficult for restaurants and food service businesses to absorb the cost. In order to remain competitive – or even stay in business – they pass on the cost onto consumers.

Source: “What is Driving Food Price Inflation” by Jason Henderson, Assistant Vice President at the Kansas City office of the Federal Reserve