I originally posted this back in 2013 when it became a hot topic around the country. Recently it is back in the news and so I wanted to update it and get your opinion on what is a solution to this issue.
Over the past few weeks, there has been plenty of news about fast food workers pay. Many workers across the country have marched in hopes of getting a pay raise to $15/hour. While everyone deserves to earn a living and get paid a fair wage, there are many factors at play when essentially doubling fast food workers pay. I will look at both sides of the issue, hoping to bring some clarity to this issue.
Background: Setting Up The Story
According to the Federal Reserve Bank of St. Louis, the average fast food workers pay is just under $9.00 per hour with annual earnings of roughly $12,350 per year, while working around 26 hours per week. The current movement is calling for pay increases to $15.00 per hour, better benefits, more hours and the right to unionize. (This is the third time since November 2012 that the union-backed group Fast Food Forward has organized marches.) A few points on this:
- The reason hours are only 26 per week is because it allows the restaurants to avoid having to offer health care benefits to its workers. This is even more of an issue now with the introduction of the Affordable Care Act.
- If fast food workers pay was to increase to $15.00 per hour and they were working 26 hours per week, their annual earnings would be $20,280 or roughly $8,000 more than they are now.
- An $8,000 pay increase along with more hours sounds like a great thing, so why not just increase fast food workers pay? The reason is because there are many consequences to doing this.
Downsides To Increasing Fast Food Workers Pay
A common argument I hear being made in favor of increasing fast food workers pay is that a big corporation like McDonald’s earns millions of dollars each year, therefore they can afford to increase pay. But we have to look at how McDonald’s operates in order to understand this.
McDonald’s the corporation makes the majority of its money through franchise fees from individual restaurants. These franchise fees are based on a percentage of sales each year. McDonald’s only owns about 20% of the McDonald’s restaurants (about 6,000 restaurants out of 34,000 worldwide). The rest are owned by franchisees, many times people just like you and me. These are small business owners, not the huge international corporation many think of when they see the Golden Arches.
By increasing fast food workers pay, the franchisees are going to have to find other ways to cut costs or increase sales so that they can continue to be profitable. If they aren’t profitable, then they go out of business (according to McDonald’s annual reports, roughly 300 restaurants are closed each year). You could make the argument that McDonald’s the corporation could lower the franchise fees the franchise owners pays. The result of doing this would cause McDonald’s profits to suffer, which would most likely lead to increases in other area’s to make up for the decline in profits.
One such area to make up the lost revenue could be in product prices. The exact impact of increased labor costs is difficult to compute but a University of Kansas researcher figured the average price of a Big Mac would go up 68 cents, from $3.99 to $4.67. And items on the famous Dollar Menu would go for $1.17 each. However, new research shows that this estimate was not taking all variables into account and that the actual price increase is not really known.
What is known is that prices would most likely increase some amount. I have read arguments saying that McDonald’s couldn’t increase its prices because consumers would simply go to another fast food establishment. But if McDonald’s is paying workers $15/hour and others are only paying $9/hour, those other restaurants are going to have to increase wages to get and retain workers which will result in the need for those restaurants to increase prices as well.
Another downside to increasing fast food workers pay to $15 is the effect it will have in other industries. Where I live, many entry-level jobs that require a college degree start out at $15 – $17/hour. If fast food workers earn $15/hour, then all other jobs in other industries are going to have to increase their pay as well in order to attract new hires.
When increases in pay happen across the board and people have more money to spend, they will spend that money. Demand will increase which will increase prices. It’s the basic idea behind inflation. Over the long-term, prices will simply increase by roughly the same amount, putting us back to square one all over again.
Advantages To Increased Fast Food Workers Pay
Of course, there are some advantages to increasing fast food workers pay. The biggest advantage to increasing fast food workers pay is that a higher starting salary can also allow the employer to better screen candidates and create a higher barrier to entry. This will actually lower turnover costs and the other costs associated with finding new employees including better employee morale, less time spent training new hires, and fewer mistakes.
Current estimates are that employee turnover at McDonald’s is 150%. This means that over the course of a given year, no one that was working for a particular restaurant at the start of a year is still working there at the end of the year. That blows my mind.
Another advantage is increased spending power of the workers. With a higher salary, they would be able to afford more things, save money, make improvements to their homes, etc. Ideally they will save more money as well, getting them in better financial shape. By simply increasing fast food workers pay, the overall economy benefits since the US economy is based on consumption.
My Take – Issues at Hand
As with the advantages and disadvantages of increased fast food workers pay, there are a lot of issues that impact my feelings on this issue. Here they are, in no particular order.
Businesses that are around and survive over the long-term are profitable because they are smart and adapt with the changing of times. Essentially doubling pay will most likely force the hands of businesses to find ways to serve customers with fewer employees: introducing self-serve checkouts and other forms of automation are examples. So while higher pay is great, there will potentially be fewer jobs offering that higher pay which means many people who were earning $9/hour are now earning nothing because they are out of a job.
Not A Career
The next issue is more involved. Working in fast food was never meant to be a career. These were jobs for Jimmy and Sarah for when they were in high school and college, for some senior citizens, and for a stay-at-home spouse to work a few hours and earn a little extra money. But because of the recession many workers are underemployed – they are working low paying jobs because they cannot find anything else. They are working these jobs for their livelihood when these jobs were never intended to be a career.
Look at what McDonald’s published as an example budget for one of its typical workers. You’ll see that there are multiple sources of income listed there. McDonald’s is acknowledging that you’ll need a second job, or McDonald’s is your second job. (Note that I am not going to talk about the details of this budget, specifically the monthly expense numbers. I just wanted to point out the income noted.)
When you look at the average income now of a fast food worker who is not working multiple jobs, they are living off of roughly $1,000 per month. Living on $1,000 is much harder than you think it is. But this is a catch-22 situation.
Working in fast food doesn’t require any skill-set or training/education, so what justifies the doubling of pay? Just because you want $15/hour doesn’t mean you deserve it. I’ve heard fast food workers saying they work hard, therefore they should get paid more. But hard work doesn’t simply equal higher pay. For example, let’s say I land a job as a master chef at a high end restaurant. For those that don’t know, I can cook the basics, but by no means am I a talented chef.
I have to bust my butt to make the dishes customers are ordering. Compared to a master chef, I have to work much harder to make the same dish that she can make. Since I am working harder, and putting in more effort, does that mean I deserve a higher salary? Not at all. In fact, the opposite is true. The chef deserves a higher wage than I do because she is better skilled at the job than I am.
At my last job, working for a high net worth financial planning firm, I wanted to earn $50/hour, but I couldn’t do enough and my skills weren’t valuable enough to earn that amount of money. When it all boils down, a job pays based on the skills required to do the job, not what you need to live on.
Taking this one step further, not every job is meant to allow you to buy a house, raise a family and send your kids to college. Not every worker has the skills that will allow them to fund all those things. This is the problem: the lack of skills, not the current pay of fast food workers. What is the cause of a lack of skills? For one, it would be education. We need to look at and reform the education system. So many Americans don’t have the skills to earn a wage that will allow them to live.
And I am not just talking education in the sense of history, science and math, but also personal finance. We need to help more people understand why you need to save, the power of compound interest, and how investing works.
Raising The Wage Is Treating The Symptom
Finally, we have the problem that raising the minimum wage is only treating the symptom, not the disease. I touched on this before regarding education. If we better educate our children, we are treating the disease.
Here is why raising the minimum wage is only treating a symptom. If wages rise to $15/hour, will all fast food workers be happy? Over the short term, the answer is yes. They will be happy to earn a higher income.
But after some time, they will not be as happy any longer. They will go back to disliking their jobs. I know because I was in their shoes.
After college, I was working a job I didn’t like. I stuck with it because it was a job and I couldn’t find anything else. One day, we found out the Department of Labor determined that the jobs we did was administrative and that we deserved to get paid for overtime. Up until this point, we were exempt from earning more when working overtime.
With the new job classification, the company knew they had to pay more because they would not be able to retain workers when other firms were paying much more for the same job. So we got a bump in income overnight.
While our hourly rate didn’t double, it did increase substantially. Right after this happened, I suddenly liked my job. But this happiness wore off after a few weeks. Even though I was earning more money, I was still working a job I hated.
It is just like trying to get out of credit card debt. You can pay off your debt but will find yourself right back in the hole if you don’t get to the real issue as to why you are overspending.
The solution for me was to find another job I was happy doing. This is the solution for many fast food workers as well. Unfortunately it isn’t easy since there aren’t that many good paying jobs out there and many of these people don’t have the education or skills to land these jobs.
When we look at issues like this, we tend to look at the most political features: workers are paid low wages while big business makes millions. But increasing fast food workers pay by almost double is not so simple. It’s an incredibly complex issue and we have never seen anything like this before. Therefore, we don’t know what the true result of doing this would be.
Through talking with people about this issue, people either side with the workers – the workers are the good guys and deserve higher pay. The corporations are the bad guys, they make millions. Other times the workers are greedy and lazy, or the bad guys and the corporations are the good guys, providing jobs to people. Why is everything nowadays good versus bad and rich versus poor? Isn’t there some middle ground we all can agree on?
Maybe the whole issue is that the government supports the paying of low wages? The welfare system was initially designed to help those on hard times get back up on their feet and get off of public assistance. Now it seems as though the welfare system keeps people on welfare and is no longer a safety net. Corporations know this and choose to pay low wages because they know people can live off of a fast food workers pay and welfare. But this is an issue all its own.
Readers, what are your thoughts on increasing fast food worker’s pay?