Major Anti-Poverty Measures at Risk and Could Be Better

October 20, 2014

Last week’s Supplemental Poverty Measure report confirmed at least one thing we already knew. The refundable tax credits lift more people out of poverty than any other major public benefit, except Social Security.

The more powerful of the tax credits — the Earned Income Tax Credit — boosted 6.2 million people, including 3.2 million children over the poverty threshold in 2013, according to the Center on Budget and Policy Priorities.

The Child Tax Credit did the same for 3.1 million people, including 1.7 million children, again per CBPP.

These tax credits have enjoyed broad bipartisan support, as well they might. The EITC in particular is said to serve as an incentive to work, for which there is some evidence. And who would  stand against help for working parents raising children?

We now have the germs of a bipartisan consensus on certain improvements to both. For example, both some leading Democrats and the Senate and Congressman Paul Ryan have proposed making more childless workers eligible for the EITC and increasing the credit for them.

Senators Marco Rubio and Mike Lee say they have a proposal that will, among other things, raise the Child Tax Credit, end the phase-out and make the credit refundable against payroll, as well as income tax liabilities. Fine print as yet to be seen.

And fine print could make a very big difference to low-income families — as well as some immigrant families, even if not low-income — as the now-passed House child tax reform bill shows.

Into the dialogue, if we can call it that, comes the Center for American Progress, with a set of recommendations — some already proposed by others, some new. Here’s a somewhat selective — and occasionally elaborated — summary.

Keep the Improvements We Have

First and foremost, CAP says, Congress should make the Recovery Act’s improvements in both the EITC and the CTC permanent law. Both are due to expire at the end of 2017. And thus far, Republicans in Congress have shown no inclination to extend them.

For the EITC, no extension would mean a reversion to a more severe “marriage penalty,” i.e., a lower credit (or no credit) for some workers who marry. It would also mean a stingier credit for families with three or more children.

For the CTC, no extension would mean no credit at all for very low-income working families. The current $3,000 threshold for claiming the credit would revert to what’s in the permanent law, with all the annual upward adjustments since 2001 — thus a threshold estimated at $14,700 for 2018.

And for those clearing the threshold, the refunds would shrink because they’re based on a percent of income over the threshold, up to $1,000 per child.

About 1.8 million people, including a million children would fall into poverty, CBPP warns. Far more would fall deeper into poverty — 14.6 million, including 6.7 million children.

Expand Eligibility for the EITC

CAP takes note of the disadvantages the EITC poses for childless workers — and for workers whose children haven’t lived with them for more than half the year. They’re actually at a double disadvantage, it says, because some research suggests that employers take account of the EITC in setting wage rates.

It endorses, in general terms, an expanded credit for them. Also a lower age for eligibility. But instead of the commonly-mentioned 21, it favors 18, provided that the workers’ parents don’t claim them as dependents.

Boost Child Tax Credit Refunds

CAP wants the CTC to become fully refundable, as the EITC already is. Families would then receive refunds for the total amount that the credit, plus whatever other credits and deductions they can claim reduce their tax liability to less than zero.

It also recommends indexing the credit to keep pace with inflation. This would achieve somewhat the same results as the already-indexed provisions of the EITC do.

But the CTC would still have the same $3,000 threshold, whereas workers can claim the EITC, no matter how little they earn. The Tax Policy Center has recommended eliminating the threshold, a reform also advocated by others.

Change Other Policies to Promote Financial Stability and Upward Mobility

CAP has several recommendations to make it easier — and more attractive — for workers to save at least part of their EITC refunds. Several others would make it easier — and less costly — for workers to improve their earning prospects by getting a college education or job training.

All but one of these reaches beyond the EITC itself. And none can be properly summarized in a paragraph or two. Those interested can find the asset-building recommendations here and the education recommendations here.

CAP does, however, have a financial stability proposal strictly for the EITC — a partial early refund. Workers could initially receive up to $500 of the refund they were already eligible for during the second half of the tax year — more in later years because the limit would rise with the inflation rate.

This, CAP says, would help them pay for unusual expenses, e.g., a car repair, moving costs, without resorting to payday loans or the newer, equally extortionate auto title loans.

An estimated 21% of eligible workers don’t claim the EITC. Various reasons for this, including the complexities of filing. Perhaps more would if the “rainy day fund” proposal, as Generation Progress calls it, were adopted.

But if Congress has to pick and choose, then I think it should give top priority to making the temporary improvements permanent — and to giving childless workers a fair shake.

 


Better Poverty Measure, Worse Poverty Rate, But Not for Everybody

October 16, 2014

As in the past, the Census Bureau’s Supplemental Poverty Measure yields a higher poverty rate than the official measure that was the basis for the reports the Bureau issued last month. According to the just-released SPM report, the rate last year was 15.5%, rather than 14.5%.*

This means that about 2.9 million more people — roughly 48.7 million in all — were living in poverty. At the same time, 1.3% fewer people lived in deep poverty, i.e., at or below 50% of the income threshold that determines who’s counted as poor.

These differences as well as the many others reflect the fact that the SPM is constructed differently from the official measure. There’s a brief explanation of how it’s built in the last section below.

Other Shifts in Poverty Rates

We see shifts up and down for state-level rates. For example, the rate for the District of Columbia rises from 19.9% to 22.4%. Rates fall in 26 states and rise in 13. (These reflect three-year averages to compensate for the relatively small sample sizes.)

As in the past, rates also shift for major race/ethnicity groups. Most of the shifts are relatively small. An exception here for Asians, whose poverty rate was 5.9% higher, and for blacks, whose deep poverty rate was 4.6% lower.

The most marked shifts are again for the young and the old.

  • The child poverty rate drops from 20.4% to 16.4%, reducing the number of poor children by about 2.9 million.
  • The deep poverty rate for children is less than half the official rate — 4.4%, as compared to 9.3%.
  • By contrast, the poverty rate for people 65 and older rises from 9.5% to 14.6%.
  • And the deep poverty rate for seniors ticks up from 2.7% to 4.8%.

Poverty Rates Without Key Federal Benefits

The changes for seniors largely reflect the fact that the SPM factors in medical out-of-pocket costs. But the SPM report also tells us that the senior poverty rate would have been 52.6% without Social Security payments. In other words, Social Security protected about 23.4 million seniors from poverty last year — more than three and a half times as many as were poor.

This is only one of the policy-relevant figures the SPM report provides in a section that shows how poverty rates would change if some particular benefit weren’t counted as income. Some examples Census has helpfully translated into raw numbers:

  • The refundable Earned Income Tax Credit and Child Tax Credit lifted 8.8 million people out of poverty.
  • But for SNAP (food stamp) benefits, about 4.8 million more people would have fallen below the poverty threshold.
  • Unemployment insurance benefits lifted 2 million people over the threshold.

So we see that the much-maligned safety net programs work. But we also see that policy choices have impaired the impacts some of the biggies formerly had.

For example, SNAP benefits lifted about 5 million people out of poverty in 2012, before the across-the-board cuts became effective. We’ve yet to see the effects of the further, targeted whack at benefits that’s part of the new Farm Bill.

The anti-poverty impacts of UI benefits shrunk further — a trend dating back to 2010, according to the Center on Budget and Policy Priorities. The number of people the benefits lifted out of poverty last year was nearly half a million fewer than in 2012.

And that was before Congress let the Emergency Unemployment Compensation program die at the end of last year. The new UI figure almost surely reflects reductions it made when it last renewed the program, however.

SPM 101

As I’ve explained before, the SPM is a more complex — and generally viewed as better — poverty measure than the one that’s used for official purposes, e.g., as the basis for the federal poverty guidelines that help determine eligibility for many safety net and other means-tested programs.

The Bureau begins by setting initial thresholds based on what the roughly 33rd percentile of households with two children spend on four basic needs — food, shelter, clothing and utilities.

It then bumps the amount up a bit to account for some other needs, e.g., household supplies, transportation that’s not work-related. It also makes some housing cost adjustments based on differences between major geographic areas and whether households rent or own — and in the latter case, with or without a mortgage.

Next, it deducts for certain other necessary expenses, e.g., work-related expenses, out-of-pocket costs for health care. And, as income, it adds the value of some non-cash benefits that households can use for the four basic needs. It also, for the same reason, folds in the refundable tax credits.

The report I link to at the beginning of this post provides a fuller — and considerably more wonkish — explanation.

* This is the same rate the Census Bureau reported last month. However, most of the official rates in the SPM report differ somewhat because the Bureau has included children under 15 who are unrelated to anyone they’re living with, e.g., foster children. The official measure doesn’t include them as part of a family unit.

I’m using the adjusted rates so we can have apples-to-apples comparisons. But the rates reported last month are those that should be used for other purposes.

UPDATE: The Center on Budget and Policy Priorities reports that the refundable tax credits lifted 9.4 million people out of poverty. This figure, it says, is based on its analysis of the SPM data. I don’t know why it’s higher than the Census Bureau figure I linked to.


What the Food Stamp Challenge May Do … and What It Can’t

October 13, 2014

D.C. Hunger Solutions invited me to take the Food Stamp Challenge last week. I’d be joining not only fellow District residents, but also Maryland and Virginia residents who’d been recruited by similar Food Research and Action Center initiatives there.

I took a pass. Truth to tell, I couldn’t see myself living on a $33 grocery budget for the week. For food maybe. But doing without the rich, dark coffee I drink from morn to eve? No way.

I told myself that taking the Food Stamp Challenge wouldn’t achieve anything anyway. It’s supposed to raise awareness of hunger — and more particularly, the woeful insufficiency of SNAP benefits.

Well, I already know that, as a long stream of posts indicates. And I felt that I’d bore friends and followers by blogging, tweeting, FaceBook posting, etc. about my daily trials. Do you really care that I scraped the bottom of the peanut butter jar for lunch or how I suffered from caffeine withdrawal syndrome?

Maybe if I extracted lessons, the way D.C. Hunger Solutions’ Executive Director Alex Ashbrook has. But that didn’t occur to me. I suspect I would have been too grumpy and jittery for contemplation anyway.

Rationalizing perhaps. But I still can’t get on board with the notion that the Food Stamp Challenge raises awareness of what it’s like to depend on SNAP benefits — an inherent flaw acknowledged by D.C. Hunger Solutions itself.

On the one hand, those who do depend on SNAP don’t buy food for only a week. They’ll have some oil on hand to fry up potatoes — perhaps some rice and beans in the cabinet because they stocked up during a sale.

Or in some cases they won’t because, unlike any Food Stamp Challenge participant, they don’t have transportation to get to a grocery story (and home with all the bags) — or because they don’t have a kitchen to cook in.

More importantly, their food stamp challenges go on and on. It’s one thing to dine on ramen noodles for a couple of nights. Quite another to know you’ll be serving ramen noodles to your kids for the indefinite future.

Blogger Professor Tracey captured this difference back in 2009, when she critiqued a month-long Food Stamp Challenge undertaken by a reporter.

“He always knew the experiment would end,” she wrote. “I would be willing to wager for the majority of people living on public assistance that for them one of the most disconcerting aspects is having no idea when they will be able to stop relying on public assistance, if ever.”

And, of course, SNAP recipients can’t quit or cheat, as we know some Food Stamp Challenge participants have — and can guess others did as well.

Finally, we need to recall that the amount participants are challenged to live on is a fourth of the average monthly SNAP benefit. That’s about $33 here in the District and nationwide — somewhat less in Maryland and Virginia.

But the average is considerable lower in some states — barely over $29 in three. And all the averages are just that. Lots of SNAP beneficiaries receive much less — as little as $16 a month in all but two states.

This, we’re told, is one reason that only a third of seniors who’d be eligible for SNAP benefits apply, even though many others can’t fend off hunger without groceries from a food pantry. Paltry SNAP benefits also help explain the reliance on nonprofit feeding programs, of course.

Here in the District, the DC Council has budgeted enough in local funds to raise the minimum SNAP benefit to $30 a month — thanks to a campaign spearheaded by D.C. Hunger Solutions.

It has also adopted the mayor’s proposal to raise the minimum LIHEAP (Low Income Home Energy Assistance Program) benefit. This will preserve the somewhat higher SNAP benefits some residents have received because — again thanks to D.C. Hunger Solutions — it adopted the so-called “heat and eat” option in 2009.

Nine of the 15 states that had adopted “heat and eat” have done the same, putting House Republican leaders into an awful snit.

Did policymakers shore up SNAP benefits because they’d learned from the Food Stamp Challenge?  Hardly. But notwithstanding all that I’ve said, I suppose it’s possible that policymakers and others who can get their stories into major media may, if only briefly, call attention to the benefits problem.

And I suppose it’s also possible that living for a week on a food stamp budget may put fire into the briefly-unsatisfied bellies of some Challenge participants who’d been content to leave advocacy to others.

Yet a series of polls tell us that more voters than not already think the federal government should spend more to combat hunger. Did this matter to Congressional Republicans — House members, in particular — when they set out to slash SNAP spending for the next five years?

When I shared my reservations about the Food Stamp Challenge with an anti-hunger advocate, she said, in so many words, “The people who should take it won’t.” I think they won’t care about the experiences of those who do either.

They’re ideologically driven to cut safety-net spending and will rationalize that however they can. But there’s animus against poor people in some quarters too. They don’t want to work. They use their SNAP benefits for liquor, lap dances, etc. rather than to feed their children. They [you can fill in the rest].

Darned if I know what we can do to persuade these folks that no one wants to depend on public benefits — or that everyone should have enough to eat, every day of the month, fresh fruits and veggies included

Make the Food Stamp Challenge a qualification for public office?

 

 


We Don’t Know How Many DC Youth Are Homeless, But We Do Know Too Many

October 9, 2014

My last post focused on poverty among older teens and young adults, both in the District of Columbia and nationwide. Some, though far from all are homeless. Here’s what we know — and don’t — about the scope of the problem.

As you’ll see, we still don’t have a good fix on how many homeless young people are out in the world alone — those formally known as “unaccompanied.”

The U.S. Department of Housing and Urban Development reports that, on a single night sometime during January 2013, there were 40,727 homeless, unaccompanied youth in the U.S. These are all 18-24 year olds. Teenagers on the cusp of adulthood are lumped together with younger children. Far fewer were unaccompanied, according to the counts HUD tabulated.

Nearly half (48%) of the unaccompanied youth counted were unsheltered, i.e., spending the night in a car, public transit station or, in HUD-speak, elsewhere “not designed for or ordinarily used as a regular sleeping place for human beings.”

The District reported only six homeless, unaccompanied minors and said that all were sheltered. As some of you may recall, I questioned this figure when the results of the Washington metro area counts were first reported.

To HUD itself, the District also reported 158 homeless 18-24 year olds “in households without children.” Eighteen, it said, were unsheltered.

An additional 446 in the same age bracket and counted were in households with at least one children — presumably, in most cases, their own. Somewhat over half were in an emergency shelter — and none unsheltered, the report says.

If accurate, this is probably because the count was made on a freezing-cold night, when the District is legally obliged to shelter anyone who would otherwise have no safe place to stay.

What we know for sure is that more parents at the now-notorious DC General shelter are still in their teens or not much older. Last winter, nearly half there were between 18 and 24, according to the coalition that developed the roadmap for a better homeless family system.

Yet we also know for sure that both the national and the District’s figures are undercounts. This is partly because homeless youth — the unaccompanied, at least — are singularly hard to count.

But even the best count wouldn’t give us an accurate read because the definition of “homeless” that HUD must use — and therefore, the definition its grantees must use for their counts — excludes many youth, as well as older people whom most of us, I think, would consider homeless.

HUD has only recently begun requiring breakouts for homeless youth. And the latest posted reports are more detailed than those for the previous year. So we can’t trace trends. But we do have some evidence that the number of homeless, unaccompanied children and youth is rising.

The Department of Education, whose definition of “homeless” is broader than HUD’s, reports that the public school systems to which it had awarded grants for support to homeless students had 62,890 who were enrolled during the 2012-13 school year and with no parent or guardian looking out for them. This represents a 14% increase over the 2010-11 school year.

We don’t get a breakout for the District, alas. But we do find total homeless student enrollment figures in prior Education Department reports.

So we learn that the D.C. public schools reported 2,499 homeless students during the 2009-10 school year and 2,947 during the 2011-12 school year. This represents an increase of nearly 18%.

Though the upward trends indicated are probably accurate, the hard numbers are again almost surely undercounts.

For one thing, the homeless, unaccompanied students are only those who received services from grant-funded staff or activities. For another, the totals, including the District’s, tell us only how many homeless students school authorities could identify.

Homeless students, we’re told, are often reluctant to seek aid and hard for school authorities to identify when they don’t. They’re fearful of peer reactions, being put into foster care, etc. We can assume this is especially the case for those who are on their own.

And, of course, the Education Department’s figures don’t include youth who’ve dropped out of school — or those who’ve graduated and been unable to find jobs that would give them the wherewithal for rent.

In sum we seem to have better data on homeless children and youth than we used to — the unaccompanied cohort in particular. But we know they’re imperfect.

Here in the District, we may have better numbers fairly soon. The budget for this fiscal year includes $1.3 million for the End Homeless Youth Act — an optimistically titled bill based on recommendations by another coalition.

The bill requires the Department of Human Services to conduct “an extended youth count,” which, I take it, means something considerably more comprehensive than the one-night counts that have yielded such dubious figures.

But the bill itself called for $10 million in annual funding, reflecting what the coalition estimated the first year of its plan would cost. A million was for evaluation, including, but not limited to the youth count.

So it’s not altogether clear what we’ll have and when. Meanwhile, however, even the figures we have are plenty good enough to tell us that we’ve got a larger, more complex problem than our public agencies and the nonprofits they help support have the resources or the inter-connections to cope with effectively — let alone solve.

The Winter Plan for the upcoming season identifies 117 shelter beds specifically for young adults and 10 beds (no, this is not a typo) for unaccompanied minors.

And, as I earlier wrote, there’s no genuine plan for homeless families — thus none for the large number headed by parents in their late teens and early twenties. Setting aside the urgent shelter capacity issue, solutions designed for older people, e.g., rapid re-housing, may not be suitable for them.

Many challenges for the new administration. One can only hope it will be more concerned with meeting the diverse needs of its homeless constituents — even if that means spending more, as it probably will.

 

 


More Than a Third of Young DC Adults in Poverty Last Year

October 6, 2014

My recent post on the new poverty rates for the District of Columbia prompted an email from Deborah Shore. She wanted to know what I could tell her about poverty among older teens and young adults.

I’m sure many of you know why. For the rest, Deborah is the executive director of Sasha Bruce Youthwork, a nonprofit she founded 40 years ago. It now provides emergency shelter, transitional housing and a range of services to homeless and at-risk youth in the District.

Deborah also chairs the board of the National Network for Youth — a large coalition of organizations that serve and advocate for runaway, homeless and disconnected youth, i.e., those who are neither in school nor working.

I’m grateful for her question because, like many others who reported on the results of the American Community Survey, I didn’t initially pay attention to the figures for young adults.

Children, of course. Yet the very high poverty rates for them, both in the District and nationwide, can’t be neatly separated from poverty among teens and young adults because some are parents — mostly single mothers, it seems.

The Census Bureau doesn’t tell us a whole lot about youth in poverty, though I suspect one could dig up a fair amount if one had the tools to work with the detailed tables that expand what it reports from a special piece of the Current Population Survey. I don’t.

So I went searching among the thousands of tables the Bureau uses to report the results of the ACS — a better source for community-level data anyway. Here’s what I found there and in some other reports.

Folded into the District’s child poverty rate are roughly 2,925 children on the verge of adulthood, i.e., 16 and 17 year olds. They represent about a tenth of all poor D.C. children — a far lower percent than the very youngest.

But many more who’d just crossed the threshold were officially poor. The Census Bureau reports 21,000 young D.C. adults, i.e., 18-24 year olds, in poverty. This makes for an age-group poverty rate of a bit under 37%. It’s more than 11% higher than the national poverty rate for the age group.

And (here comes the bombshell ) nearly one in four young adults in the District lived in deep poverty last year, i.e., had incomes at or below half the applicable threshold. For one person living alone, deep poverty means a maximum annual income of $6,060 — and for a single parent with one child, a maximum of $8,029.

By far and away more young adults in the District were deeply poor than poor, but less so. This was not true for young adults nationwide. For them, the deep poverty rate was 13.7%, according to the ACS, or 10.2%, according to CLASP’s analysis of the Current Population Survey.

Well, what are we to make of all this? One thing is that the poverty rates reflect the unusually hard time young adults are having in the labor market.

The unemployment rate for 18-19 year olds was 19.8% last month, as compared to 5.4% for everyone older who was also jobless and actively looking for work. The rate for 20-24 years olds was 11.4%. And rates for both groups were even higher for men.

Such figures as we have suggest that far from all jobless young people were actively looking. Last year, only 64.7% of 18-24 year olds were either working or seeking work. This is nearly 8.7% lower than in 2000.

At the same time, those who were working didn’t earn much. The median for 18-24 year olds was $17,760 in 2012 — and for those with less than a high school education, a mere $13,510.

Try as I might, I haven’t found comparable figures for young adults in the District. The Economic Policy Institute provides a couple that come close, however. It tells us that 14.8% of D.C. workers under 25 were unemployed last year, not including those who were still enrolled in school or those who’d decided it was futile to look.

An additional 26.2% were underemployed, i.e., working part time, though they wanted full-time work or had looked during the year, but given up. (I don’t know why EPI doesn’t count the latter as unemployed.)

Both rates are due partly to the fact that young workers generally have a tougher time getting — and staying — employed than workers with more job experience. This is especially true when there are far more job-seekers than jobs to go around.

But the premium our local labor market puts on college degrees is probably also a factor, as the DC Fiscal Policy Institute’s analysis of 2012 unemployment rates shows.

And so far as good jobs are concerned, only one of the “high demand/high wage” jobs in the District requires only a high school diploma or the equivalent — and only two others less than a four-year college degree.

Both the poverty and the un/underemployment rates help explain the surge of homeless families in the District, since nearly half the parents who spent at least part of last winter in the DC General family shelter were 18-24 year olds.

They also help explain some first-time-ever figures for homeless youth who had no family members with them. Of which more in my next post.

 


Who’s Responsible for Fast-Food Workers’ Low Wages?

October 2, 2014

Let’s see. Where was I? In the midst of dissecting responsibility for the low wages so many fast-food workers are paid.

As I’ve already suggested, it’s a mistake to focus solely on fast-food restaurant owners because most of them are franchisees. So in addition to the usual restaurant costs, e.g., food, labor, rent, we need to recall the fees, royalties and other charges the franchising companies levy.

Whether these make higher wages unaffordable is a separate issue. The report for The New Yorker that I used in my previous post indicates that some franchisees are doing very well indeed.

Less iffy are other ways that fast-food companies share accountability for wages that are far too low to live on. Hourly rates are only part of the picture.

Another, which I’ve mentioned before, though not in this context, is software the companies provide to enable just-in-time scheduling, e.g., keeping workers from clocking in when they arrive and/or sending them home early when business is slower than expected.

A lawsuit against McDonald’s seeks to hold the company jointly liable for the former, which is one of several labor law violations alleged against its franchisees. Whatever the outcome, the software represents a more general sort of accountability.

Because, for good and ill, McDonald’s exercises considerable control over how its franchised restaurants are operated. It obviously has a large interest in maximizing sales — and in enforcing common standards, e.g., cleanliness, quick service, foods served and how prepared.

But it has an even larger interest in maximizing shareholder profits — closely related to, but not the same as the interests cited above. Disgruntled franchisees claim they’re being squeezed. “[T]oo much focus on Wall Street,” one says.

This much is certain. McDonald’s has been buying back shares, i.e., taking them out of the market to boost the price of those investors still hold. It spent more than $1.8 billion on buy-backs last year alone.

And it’s paying top management handsomely. The CEO received about $7.7 million last year, according to a Demos analysis. Crain‘s Chicago Business reports $9.5 million, noting he received more in 2012.

Either figure is far from the highest amount big fast-food CEOs received. The average, skewed upward by Starbucks’ CEO, was about $23.8 million, not including certain types of income CEOs commonly receive. This makes for an overall CEO-to-worker pay ratio of more than 1,000-1.

For all but three of the CEOs Demos could report on, at least 60% of compensation related to stock awards and stock options cashed in. So you can see that they have a very good reason to prop up the value of their companies’ shares — two actually, since if share prices tank, they’re out of work.

Which brings us to another player in the wage-setting arena. Shareholders, we’re told — not thee and me, but hedge funds and other big investors — demand short-term gains, no matter what.

The long-term gains companies might achieve by paying workers more — or in the immediate case, making it easier for franchisees to pay more — don’t qualify as “maximizing shareholder value.”

Companies that don’t deliver enough fast enough face takeover threats — or the equivalent. McDonald’s, for example, felt constrained to sell off restaurants and promise $1 billion in buy-backs to appease a hedge fund manager.

In short, we need to look beyond the balance sheet of a fast-food franchisee to assess the arguments against a minimum wage increase. And a place to look is the corporate parent — what it does with its profits, how it gets them and what drives the decisions it makes.

The self-proclaimed Franchise King suggests that companies like McDonald’s will have to adjust their fee structure to help their franchisees if the minimum wage increases to $15 an hour — as it eventually will in Seattle. Perhaps this would also apply to some of the other recent and prospective minimum wage boosts.

It’s hard to predict how all this will net out. We know that the majority of fast-food workers today aren’t teenagers who want a little running-around money, but mostly adults — in many cases, parents with children.

We know we’re subsidizing low wages because our tax dollars pay for the public benefits that more than half of all “front-line” fast-food workers rely on. What they receive from just four of the major federal programs costs us nearly $7 billion a year — $1.2 billion for McDonald’s workers alone, according to the National Employment Law Project.

And we know — or ought to — that fast-food companies could tweak their business models to support higher wages in their franchised restaurants, as well as pay them directly in the restaurants they operate.

We might have to pay more for our burgers. Or perhaps, as Tim Worstall at Forbes says, not a penny more.

Whichever, shareholders would have to decide that their investments are better off if fast-food companies address the root causes of protests, bad publicity and related risks that McDonald’s has already identified — even if this means less in dividends and/or buy-backs.

Not saying it would, mind you. We’ve got a raging debate over how a substantial minimum wage increase would affect franchised fast-food restaurants. So we’ve no firm grounds for predicting outcomes at the corporate level.

The fast-food workers’ protests seem to me an altogether good thing. They’ve already helped gain an executive order that will set $10.10 as the initial minimum wage for workers employed by federal contractors.

Whether they’ll galvanize more minimum wage increases to $15 an hour is, to my mind, doubtful. But they’ve surely raised awareness of the need for a substantial minimum wage increase.

And they’ve prompted some public scrutiny of how franchising businesses make their money and what they do with it.

That, to me, is the best retort to the National Restaurant Association and the fast-food companies it fronts for, which staunchly maintain that franchisees can’t possibly absorb a minimum wage increase. And to the Heritage Foundation, whose brief got me started on all this.


Can Fast-Food Restaurants Pay Their Workers More?

September 29, 2014

William Finnegan at The New Yorker tells the story of Arisleyda Tapia as part of an in-depth report on the fast-food workers movement. She’s one of thousands who’ve banded together to demand a minimum wage increase to $15 an hour.

Arisleyda makes $8.35 an hour in the costliest city in the country. She and her daughter sleep together on a bed in a partitioned-off apartment room. She has two children back in the Dominican Republican.

The Heritage Foundation predicts dire results if these union-backed walkouts and other protests succeed.

Owners would have to raise prices by 15% to cover the additional wage costs, Heritage says. Customers would react by ordering cheaper items, eating at home more often or upscaling to restaurants with more menu choices, table service and the like.

So owners would have to raise their prices even more because they’d be making less, but still have to cover fixed non-labor costs, e.g., supplies, rent, insurance. Next thing you know, they’d be left with profits averaging only $6,100 per restaurant per year — a 77% loss.

Or they’d automate tasks now performed by workers. Some already are, but Heritage says the shift to technology would accelerate. So there go those entry-level jobs that supposedly give young, low-skilled workers a foothold on the ladder to higher-paid positions.

In short, we ultimately get the old harms-those-intended-to-help argument, plus alleged harms to all the many consumers who now favor fast food.

I dignify this brief with a post mainly because Campaign for America’s Future includes in its rebuttal a point that’s often ignored — and one that’s often occurred to me, based on what I learned during my years at McDonald’s Corporation.

Specifically, fast-food restaurant owners who are franchisees, as a great many are, have low profit margins in part because of what the parent corporation exacts in fees, charges for advertising and royalties — usually a percent of gross sales.

McDonald’s franchisees also fork over payments for rent, training, software and other items. Burger King charges for at least some of these and has some of its own.

Franchisee payments account for about a third of McDonald’s revenues, according to Vanessa Wong at Bloomberg BusinessWeek. The percent for BK is even higher, she reports.

Last year, McDonald’s U.S. franchisees contributed more than $4.3 billion to the company’s coffers. No comparable figure for BK because it reports the U.S. and Canada together.

If we can trust Heritage (a question mark), fast-food restaurant owners — including, but apparently not limited to franchisees — clear, on average, 3% in profits before taxes. But McDonald’s own profit margin, as of June, was somewhat over 19%.

What this means, CAF concludes, is that “McDonald’s and other large fast-food companies have successfully shrugged off responsibility for the welfare of its [sic] workers by making the franchisees responsible.”

This, to me, isn’t quite what the numbers say. And I’m not comfortable with the implicit attack on franchising in and of itself. But the numbers do suggest that the fast-food companies bear part of the responsibility for the low wages their franchisees pay.

They’re not solely responsible, however. We consumers can’t reasonably dump all the blame on them, since so many of us routinely patronize fast-food restaurants, knowing how little they pay. And big fast-food companies like McDonald’s are shareholder-owned.

All this — especially what fast-food companies do and could do — warrants more explanation than even my somewhat flexible length limit allows. So I’ll leave off here and return to the topic in a separate post.

UPDATE: Shortly after posting this, I discovered that the National Restaurant Association has cited 3% as the typical fast-food restaurant’s earnings, before interest, taxes and amortization. This well may be the Heritage Foundation’s source. Whether trustworthy is a different issue. In 2010, the Association and Deloitte & Touche jointly reported 6% as the average profit before taxes for “limited-service” restaurants.

 

 


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