Let’s not be too impressed by McDonald’s big announcement that it will soon boost pay for some employees by about a buck an hour.
Here is why. The very business model that was birthed and nurtured by McDonald’s, franchising, will severely nip the impact of this decision.
It’s important to understand that the problem of stagnant wages, for low-wage workers and those further up the pay scale, goes far beyond McDonald’s. The fast-food empire, like Walmart and Target and a multitude of other corporations, in their quest for growth and profits, have all played significant roles in keeping low-skilled workers’ wages low. Piecemeal shifts, like this one by McDonald’s, must be understood in that broader context.
Consider McDonald’s announced wage hike. The company will raise pay at least a dollar more than the local minimum wage for employees of the stores it directly operates, which should bring average pay to about $10 an hour. But note that this does not apply to workers at franchise operations.
Some 90 percent of all McDonald’s restaurants are operated by franchisees. The wages at those restaurants are not governed by corporate, and McDonald’s has fought long and hard to keep that business structure in place.
A dispute with the National Labor Relations Board is ongoing over this very issue. The NLRB wants to force McDonald’s to bear more responsibility for what happens within its franchises, from employee complaints to wage disputes. McDonald’s wants to keep that distance, preferring the model that sees franchises as independent contractors.
Franchises pay about 4 percent of their profits, plus the cost of leasing the restaurant space, back to corporate. The cost of raising wages at the franchised locations, if they feel pressure to match the wage hikes, will be less easily absorbed by those owners.
McDonald’s has had a remarkable record anticipating the whims and trends of the American palate. They gave us the convenience of Happy Meals for working parents. As Americans became more diet conscious, it introduced healthier options like fruit and yogurt parfaits and chicken and fish sandwiches, and got rid of the lard in the fries. All-day breakfast will be the next attempt to lure the millennial crowd into the drive-through lane.
But the company has dodged keeping up with inflation for worker’s paychecks. In fact, the business model of franchising has succeeded so well because the federal and state governments have done little to keep minimum wage laws in step with inflation and economic growth benchmarks.
As the Center for Economic Policy Research has pointed out, “If the minimum wage had kept pace with productivity growth, it would be $16.54 in 2012 dollars.” And if historical wages are compared by purchasing power, the minimum wage in the late 1960s was almost $2 an hour higher than it is now.
Or, as a Wall Street Journal blog post put it: “In 1981, a minimum-wage worker could trade an hour’s pay – $3.35 – for 12 White Castle hamburgers, and receive 23 cents back in change. At today’s federal minimum hourly wage – $7.25 – the worker could buy 10.”
A common retort to this argument is a sort of dismissive snobbery. Nobody with any level of savvy or gumption, it is argued, would try to raise a family on fast food wages. These jobs are for teenagers; they’re not careers.
Blaming the worker, questioning their work ethic or mental fitness, deflects attention from troubling economic trends that have been observable for 30 years now, affecting many workers in occupations requiring far more skills than burger-flipping.
On a macroeconomic level, the labor share of income is in long-term secular decline. And wages stopped growing in tandem with productivity around 1980, and these trend lines have continued to diverge. Meanwhile, profits are at a historic peak.
It’s a great time to own capital and a dismal time to be looking for work if you have average to no skills. Which is why raising the minimum wage – and significantly – is a good idea. Those at the low end of the wage scale badly need a raise, and raising their wages will nudge up the wages of those above them. All those extra wages will create more consumer demand, which will add growth to the economy.
So let’s give McDonald’s a tentative hand for a step in the right direction, while recognizing that a much bigger solution is needed.