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

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.

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