Fast-Food Companies Probably Can Afford to Pay Workers More

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Nationwide fast-food strikes are ramping up today, as thousands of low-wage restaurant workers are walking off the job, demanding the right to organize and wages as high as $15 per hour.

The issue of fast-food worker pay has been in the news a lot lately, after McDonald’s published a much maligned sample budget for its low-income workers that more or less proved how impossible it is for minimum-wage workers to support themselves, let alone a family. This story was followed by a now debunked report from the Huffington Post that argued that McDonald’s could double its restaurant workers’ pay by simply raising the price of a Big Mac by 68¢.

Henry Blodget of Business Insider took the argument further, writing that McDonald’s profits are so healthy that it could afford to raise wages without raising prices — and still remain profitable. As Ryan Chittum of the Columbia Journalism Review points out, this ignores the fact that most McDonald’s employees work for franchises, rather than the parent company, and that these franchises have a much lower profit margin than their corporate parent.

(MORE: Fast Food Workers Strike Across the Country)

Much of this goes to show the danger of trying to extrapolate larger points from anecdotal and incomplete information. The fact is, franchise financial data is private, and even if McDonald’s and its franchises are wildly profitable, it may not say that much about the overall health of the restaurant industry. But looking at aggregate data from Sageworks, a private-company financial-data analytics firm, shows that private fast-food firms are doing quite well these days, and that they’re not sharing their profits with workers. According to Sageworks data:

  • Profit margins for privately held fast-food companies are 4.6%, up from 2.1% in 2009
  • Revenues over the past year are up 12.1%, following a 8.4% increase the previous year
  • The percentage of revenue spent on payroll has decreased from 23.5% to 22.9%

That being said, a profit margin of 4.6% isn’t huge. At least, it’s not the sort of profitability that would allow most firms to double their wages. But it does show that whatever success these companies are having, they aren’t sharing it with employees.

And this isn’t just a problem with the fast-food industry. This comes at a time when wages have been almost completely stagnant. And corporate profit margins across the board have soared in recent years, while the median worker’s pay has stayed flat.

US Corporate Profits After Tax as % of GDP Chart

US Corporate Profits After Tax as % of GDP data by YCharts

Regardless of how profitable McDonald’s is or isn’t, it’s clear that in the aggregate, many businesses could afford to pay their workers more. Can you really blame fast-food workers for realizing this fact and trying to force their bosses to share some of corporate America’s good fortune?

MORE: Fast Food Strikes Go Viral: Workers Expected to Protest Low Wages in 35 Cities Thursday

29 comments
FletchforFreedom
FletchforFreedom

I am always distressed by the lack of basic economic understanding in the general public and more so when it is perpetuated by irresponsibly ignorant articles like this one.  The question is where to begin.

There is a common misunderstanding that profits determine compensation.  This is completely false.  In fact, profits have no connection whatsoever to pay levels (nor should they) except inasmuch if the profits fall below a certain level, the business goes under and all the jobs in it vanish.  Compensation (like any other price) is determined by the interaction of supply and demand as determined by the valuations of buyers/employers and sellers/workers.  In the case of labor, it's value is determined by the return that can be generated by the worker.  It makes no difference if the company makes billions and billions of dollars a year, if the worker can only generate a return sufficient to be paid $7.25/hr, the company will not pay $10/hr because the worker loses money.  On the other hand, the competitive labor market will bid up the price for labor such that the price (compensation) will approach the value generated.  This is not merely basic economics; it has been demonstrated empirically.

At this point someone invariably makes the claim that the employer has "all the power" or, in economic terms, employers have disproportionate bargaining power in relation to workers.  This is called monopsony.  But then monopsony has been proven not to exist (excepting major league baseball players during the reserve clause era but that's hardly indicative of the market in general.  See for example: William Boal (1995) “Testing for Employer Monopsony in Turn-of-the-Century Coal Mining.” RAND Journal of Economics, 26(3):519-36; and William Boal and Michael Ransom, “Monopsony in the Labor Market," Journal of Economic Literature, March 1997, 35(1), 86-112.

The impact of a price floor has been understood literally for centuries.  A price floor set above the equilibrium price will result in increased supply (more workers in the market) and decreased demand (real job loss).  There is more than three-quarters of a century of research demonstrating that job loss is exactly what takes place.  Notable research includes Charles Brown et al, "The Effect of The Minimum Wage on Employment and Unemployment" based largely on work assembled by the comprehensive Minimum Wage Study Commission An Neumark and Wascher's "Minimum Wages and Employment (2007).  And a survey of the research can be found in the very useful "50 Years of Research on the minimum Wage" by the Joint Economic Committee of the House of representatives.  Even a study often touted by the pro-minimum wage crowd by Stanley and Doucouliagos "Publication Selection Bias in Minimum-Wage Research? A Meta Analysis" (2009) while finding that job losses are not "material" shows a 0.1% disemployment effect (job loss) associated with a 10% increase in the minimum wage.  For a rise to $9.00/hr, that equates to a loss of at least 370,000 jobs.  The bulk of the research shows that job loss is not only greater but as much as several times greater, likely as the price floor climbs closer to the aggregate equilibrium wage rate.

At this point someone invariably refers to the "research" that they found at the ubiquitous pro-minimum wage websites, some - most notably the Employment Policy Institute - funded almost entirely by organized labor.  The problem is that most of that research doesn't bear scrutiny.  It primarily refers to the Card & Krieger study in 1992 but that has been so methodologically undermined that it is simply not taken seriously.  Studies by a fed economist and by noted researchers Neumark and Wascher and notably Berman's "the Crippling Flaws in the New Jersey fast Food Study" have found serious flaws with the original research.  As noted minimum wage researcher Finish Welch, professor of economics at Texas A&M University put it:

“When wages or other prices are artificially increased, less will be bought. This well-trod soil, the economists' law of demand, is as true today as when Adam Smith first described it more than two centuries ago. Wishing it were not so, or regretting that some have earning capabilities far below others, will not change the basics of human behavior. As employers or consumers we try to get the most for our money. An arbitrary minimum wage increases the cost of hiring those who would otherwise earn less, but it does nothing to make them more productive.

“In recent years there have been a handful of ad hoc examples or studies reporting cases where the minimum wage has increased and employment apparently did not fall. Foremost among these is the New Jersey/Pennsylvania comparison by Princeton Professors David Card and Alan Krueger. But re-examination of their data has raised so many questions that the study is generally dismissed by professional economists. Their finding, and that of a handful of other examples, should not surprise. Many things affect employment, and the minimum wage is only one. If we can disprove the law of demand by presenting seemingly anomalous examples, we can also prove that smoking does not cause cancer by pointing to a few old people who smoke.

“The proof is not in the isolated example. Rather it is in the preponderance of the data, and there the picture is clear. On April 1, 1990, the federal minimum hourly wage was increased from $3.25 to $3.80. One year later it was increased to $4.25. Over the course of these two increases national average employment of low wage labor fell relative to other employment; teenage employment fell relative to adult employment; employment of high school dropouts fell relative to employment of those with more education; employment of blacks fell relative to that of whites and employment of Hispanics fell relative to that of non-Hispanics. If the minimum is again increased, we can expect a repeat performance. Increasing the minimum will make some jobs more attractive -- it will also make them harder to get.”

Other studies so frequently referenced by those pro-minimum wage websites (Schmitt, Dube et al) use the same Card & Krueger methodology that has already been shown to be invalid and can be ignored on that basis.  Dube, interestingly, was the economist Elizabeth Warren chose to validate her own demands regarding a higher minimum wage in testimony before Congress.

No matter how desperate some are to believe that minimum wages are beneficial, the research, completely consistent with long standing economic reasoning, shows that they have never worked as an anti-poverty measure, have never put more money in the hands of the working poor and have, instead, resulted in job loss and have increased the number of people on welfare rolls.

Finally, the "stagnation" myth alluded to in the article must be addressed.  It repeats the long discredited canard that workers have gotten the shaft since the 1980s when nothing could be farther from the truth.  In fact, total real compensation - what workers are actually paid - has increased steadily and substantially in every decade since data has been kept (note "Nonfarm Business Sector: Real Compensation Per Hour" data collected by the St' Louis Fed.  That, in the face of rising healthcare costs more compensation has been demanded in the form of benefits has caused a shift in the nature of compensation, but the key driver of inflation has been that very increase in healthcare costs.  As a result, more in wages is available to pay for those things not covered by benefits than before.

lZl_Jody_lZl
lZl_Jody_lZl

The definition of a livable wage should be determined by each person along with goals for achieving it.  It should not be an expectation for the minimum amount of work possible.  

SandyLester
SandyLester

“Arguing with a liberal is like playing chess with a pigeon. No matter how well you play chess, the pigeon just knocks over all the pieces, craps on the board, spews some unintelligible profanities, and struts around like he won.”

DerekMiller
DerekMiller

A bunch of readers guys jumped on Steve, but he was right. You can't force someone to pay more than the market rate, whether it's an owner or an employee. Let's say you had three McDonalds on your street, one selling BigMacs for $2.50, one for $3 and one for $4. How agreeable would you be if the government forced you to pay $4 for that burger rather than $2.50? American consumers have shown that they prefer less expensive consumer goods made in China to more expensive ones made in America. (As a group of course, with individual exceptions.) 

The 4.6% profit margin for privately held restaurant companies is pretty miserable. Much as many would love to hate business owners, they (surprise, surprise) also want some income in exchange for their labor. Many have put their life savings and their retirement funds into those restaurants. Come on, people! When you hear that 80% of restaurants fail within five years, what do you think? That the owners made millions and closed the restaurant to go live on the Bahamas?! No, they put all their time and money in it, their employees got paid, and they didn't. Profits, besides going towards the owner's income, also go towards recouping all the investment somebody (the owner, the banks, other investors) put into the business. Opening a restaurant can cost from $300,000 to $1,000,000 and more. How many TIME readers would like to put that kind of money into something and accept no return?

Like in any business, there are some wildly successful restaurants, and many more barely scraping by. A significant raise in the minimum wage will not hurt the wildly successful ones too much, and their employees will be happy. But many of those barely getting by will close their doors, and their employees will be unemployed. How happy will they be that ... somebody else got a raise, but they got fired? I doubt "thank you" is going to be part of their response. 

rebeccapistiner
rebeccapistiner

I have a son that works as an Assistant Manager on the night shift (the most dangerous of shifts) in a corner gas/retail store. He earns $9.25 an hour. He took the job at a lower rate, stocking shelves and as worked his way up over two years. He HATES his job. He really does. And so he goes to school full-time and will only have to be there 2 more years.  I couldn't be more proud of him. And he will be too when he achieves his goals. 

And I am between jobs, earning $9.20 teaching English. I am also taking online classes and extending the possibilities to earn more. Oh...I forgot to tell you that I have an MBA. But, I am doing what I am doing to get where I want to go. And I knew what this job paid when I accepted it. And I accepted it and will continue to do it to the best of my abilities. And I won't demand a raise. Not until I have fulfilled my commitment and can find something that is as fulfilling and pays more.

These folks need to grow up and get a grip. If they feel they aren't earning enough at the fast food chains I suggest they start taking classes when they aren't working to improve their possibilities. Or they could quit and find better paying jobs given their current qualifications, if they think they can. I assure you there are plenty of folks who would be glad to take their positions at that rate of pay and spend their "off" time improving themselves so that they can have the things they want. 

You have to want to get up and not expect anyone to do it for you. Education is the answer. And it IS available for all. No one said it would be easy.




seizeabe
seizeabe

These corporates have become blinded by their profits.

They need a 'road to Damascus' moment.

Their scales have to be pulled out of their eyes, by the workers.

It wouldn't fall off on its own.

Yes, greed often is blinding!

It prevents empathizing with the life needs of employees.

SteveBlock
SteveBlock

so they want to double their wages but i bet you won't see a double in production. Why is it that everyone wants something for nothing?

I worked in the fast food industry prior to joining the military, put myself through college and am paying student loans, and now have a good job because of sacrifice. No one handed me my job I have.

It seems that America is becomong more lazy and the masses that are demanding more are contributing less and less.

CSteffensen
CSteffensen

Before starting your job and you think you're being paid less than the legal amount, or working in unfair condition, you can always have the choice to quit and seek for a better job that suits to your standards.

Tommy34684
Tommy34684

Profit margins would be higher if Congress would strike the bio fuel laws.

A report came out within the past couple weeks stating that a welfare recipient with two dependents receives $29,000 annually when you include housing, medical, food etc. This comes to $13.94 per hour take home pay had the individual worked 40 hours full time with no time off.

sassylu
sassylu

McDonald's gave my high school son is first job. It was a stepping stone to a job where he could make more money. It also showed him he did not want to work there for his career. It takes ambition, education and hard work to succeed.

applefellup
applefellup

Deport mamacita and her rugrats, that is a sure-fire way to raise wages.

SteveFolino
SteveFolino

A business should only have to pay what the market will bear, nothing more.

There's no reason someone should be trying to earn a living working at fast food.  Fast food is for high school and college students that need a part-time income, retirees that want to get out of the house and part-time moms who want to earn some pocket money while the kids are in school.

We educate the children, we give them opportunity... let them get real jobs.

Also, if you can't afford to raise a family then don't.  Keep it zipped up till you can afford to raise a child.

WolfgangGoethe
WolfgangGoethe

Any business that cannot pay a living wage should not be in business. Period.

abanikko
abanikko

@FletchforFreedom What I see most from you here and many like you is the over analyzing using data and educational resources you know most do not have. In doing so you are exploiting an area you know most will not challenge It can be taken for granted that the value of so much of what you know is credible, and most of us acknowledge this. We do acknowledge your wisdom and professionalism, HOWEVER.....You seem SO drunk and high on your self serving superiority and understanding, inundating your mind with all the technical analysis, statistics and modeling and loving our ability to belittle others, you've become oblivious and totally disconnected from basic logic.

Believe it or not, basic logic is present amongst us even at the most uneducated levels. What you have attempted is extremely insulting.

As IF to say "THIS is why all of you need to just accept a perpetually degrading lifestyle in which the harder you work, the less you make, the more our employer's make".

Most of us are NOT getting any raises to battle our own inflationary pressures. Are you trying to convince us that employers, businesses that they take NO measures in order to battle inflation and protect their profits?

You see, There is this huge grey box in which most of us know not the complicated, technical processes that play out in which the educated an highly informed DO understand and you base our ignorance in hype of yourself on such.

You and many others have forgotten the basics! We see what goes INTO that grey box, and GUESS WHAT?

We ALSO see what comes OUT! We KNOW what SHOULD be coming out of that box based on what we all have known to be the infamous "American Lifestyle".

It has changed! And getting worse! If an employer cannot pay its workers enough to scrape by, then what s its worth in our economy? Do we consider restaurants in America a need or want? For investors ONLY they're a need. But they're only WANTS to the rest of us. Can we do without them? ABSOUTELY! Can they do without us? I am almost to the point I cannot afford to get to and from work. How am I viewed and valued? Employers have gotten used to looking upon labor as expendable, replaceable. At the present rate is quickly becoming a very bad deal in which to work for someone else.we may see an incredible surge in entrepreneurialism. If that happens, today's employers may find themselves backing WAY up in order meet the more realistic competition.

Question for you! Was the supply and demand model founded on a system WITH borders or will flourish in our GLOBAL economy?

ScottT.Holiday
ScottT.Holiday

@DerekMiller That 4.6% profit margin that is up 2.5% in one year,. Fast Food restaurants seem to find the money to pay their top corporate executives millions of dollars annually. The pay for the people actually making the profit has been stagnant. Pay is not determined by what the mystical magical market determines, it is determined by the value people place on the jobs people do and the amount of money an industry generates. Fast Food workers work hard, it is not easy work; It is demanding physical labor. Fast food isn't some fly by night industry where teens are employed to learn the value of hard work and then move on. It is a multibillion dollar industry, one which can afford to pay people it employes a livable wage.  

SandyLester
SandyLester

@seizeabe Really, they are blinded by a profit margin of 4-5%. Business are in the business to make money, they are not a welfare office. You want a better life, work for it.

Tommy34684
Tommy34684

@SteveFolino The market was capable of making the owner a millionaire and that was OK huh. Ridiculous commentary Steve. Students are people too with wants and needs like anyone else.

ronajrny
ronajrny

@SteveFolino Get into the 21st century and out of the dark ages Steve. Try opening your eyes instead of your mouth and look, then try to see the demographic that fast-food (and most substandard wage jobs) are comprised of today. It is attitudes like yours that have made education unaffordable for most Americans and now we are educating the children of different countries with the money we supply them by borrowing from them the money we send them by buying the crappy goods we import from them that they produce by paying their slaves nothing while doing the jobs we shipped them, leaving very few REAL jobs in America, educated or not in addition to for paying for all the corporate welfare, some of which is defined as social services for their workers who they don't pay enough to not need "welfare" themed help. I won't even start in on what the military/industrial complex that people who think like you appear to think approve of costs us in human and real capital. As for businesses paying what the market will bear, the market that comes to mind when business and market are used in the same sentence is the stock market. By any empirical data you want to look at, the market will bear paying not only a living wage, but one that will enable many American workers to not only sustain themselves, have health care, possibly some old-age security and maybe even have have the "right" to afford to have children, care for them and possibly even educate them, but that last one is a stretch considering the state of K-12 education and the cost of higher education in OUR country. Also, if you can't say anything intelligent and relative, then don't. Keep it zipped until you can. I won't hold my breath.

tom.litton
tom.litton

@SteveFolino So your saying if someone looses their job and can't find another, then they should just stay on welfare rather then take one of these jobs?

Can we at least provide retraining opportunities so that they don't stay on welfare their entire lives? 

barneydidit
barneydidit

@SteveFolino A valid, but perhaps somewhat simplistic argument Steve. I agree wholeheartedly that flipping burgers isn't really designed to be a career choice. At the very least, a person should be able to go from flipping burgers to upper level management over the course of 3 or 4 years, at which time they typically receive higher wages and benefits. 

There are however a large number of people who find themselves in entry level fast food due to layoffs in their industry, local economic conditions, recent graduations from college but no signs of a job in their field yet, or even recent departures from the military. Pure economic rules may warrant paying these people "what the market will bear", but if social pressure contributes to a reasonable raise in their salaries, and I only pay $.68 more for a Big Mac, I'm on board. 

djritko
djritko

@ScottT.Holiday @DerekMiller The ONLY reason corporate even close to anywhere near what you say, is the multitude of locations. your argument is invalid!

The livable wage is a fallacy! Every wage increase has a resulting increase for goods & services. Then you need to adjust that "living wage" again, and the cycle repeats.

lZl_Jody_lZl
lZl_Jody_lZl

@ScottT.Holiday @DerekMiller  Notice how the profit margin was measured from the beginning of the recession.  I would like to see what it was three to five years before the recession so we get an accurate picture of what a 4.6% profit margin really is.  

rebeccapistiner
rebeccapistiner

@ScottT.Holiday
Try harder at what? How do you know how hard I am trying? Or what my goals are?  I wasn't complaining...just stating facts. I would bet you have debt I don't carry. MBA 101...Don''t assume anything. 

But in any case, the point of my post was not to compete with you or anyone else. I am happy with what I am currently doing and with my foals and plans to achieve those goals. Not everyone measures success in financial gains.

My point is that when you accept your position at a particular rate of pay, in spite  of your education or experience you can't just go and ask for a 40% raise and expect to get it. At least not in my world.

aztecian
aztecian

@pdxuser @WolfgangGoethe they should be regulated like cigarettes.  they should pay extra taxes for all the health problems they helped to create.  they should be paying $30/hr!

Tommy34684
Tommy34684

@cjh2nd @aztecian @pdxuser @WolfgangGoethe Many jobs can be done by morons. Look around today to see for yourself that it is not only jobs in the fast food industry. And btw fast food workers in California, Vegas and NY make more money than in Florida and their businesses all are open and making millions for the owner. Your comments are invalid.

cjh2nd
cjh2nd

@aztecian@pdxuser@WolfgangGoethe

"they should be paying $30/hr!"

that's idiotic. if fast food starts paying people $30/hr to flip burgers all it means is other types of businesses will start paying more to prevent their employees from going to mcdonalds and the prices of consumer products will go up since everyone will have more money, and the fast food workers will still be relatively just as poor. you're never going to make a good living doing a job that any moron with half a brain can do