Why We Should Care About Payroll Tax Holidays for High Earners

February 19, 2015

Last week, the top 1% of American workers finished paying their Social Security taxes for the year — an inflection point flagged and flogged by the Center for Economic and Policy Research. On the very same day, the Senate Budget Committee held a hearing on the impending depletion of the Social Security Disability Insurance trust fund.

These two events are related because the first provides a fresh perspective on the second, as well as a solution that’s not fresh, but seems sensible anyway.

As I’ve written before, the so-called DI trust fund will run out of reserves in 2016, unless Congress and the President agree on a solution. If they don’t, former workers with severe disabilities will receive only about 80% of their benefits — an average loss of nearly $244 per month.

That’s a real dent in the household budget. Average benefits now are $1,165 a month for disabled workers themselves and only $811 more for those with qualifying spouses and children.

The shortfall has been predicted for a long time, based mainly on demographic changes in the workforce, e.g., the aging of the baby boomer cohort, the large increase in the number of women working — and working long enough to qualify for SSDI.

Federal policy choices have contributed as well — specifically, the decision to take some pressure off the Old Age and Survivors trust fund by raising the eligibility age for full retirement benefits. But for that, many disabled baby boomers wouldn’t be receiving SSDI benefits any more.

All these factors explain why money is going out of the DI trust fund. The beginning of the payroll tax holiday for the very highest earners — and upcoming tax holidays for others who are doing quite well — explains why not as much money is flowing in.

As I’m sure you know, all of us who get paid for our work owe payroll taxes. If we’re employees, we pay 6.2% for Social Security. Our employers deduct it from our checks and pay the same amount. If we’re self-employed, we owe the whole 12.4%.

But the income subject to Social Security payroll taxes is capped — and always has been. For more than 30 years, the cap has been adjusted annually based on the average national wage index.

The index almost always rises, though rarely by a lot. The cap this year is $118,500 — up by $1,500 from last year.

But as everyone who hasn’t been living in a cave knows, more and more income is flowing to very high earners — those making a million or more a year. There were already six times as many of them in 2013 as in 1989, according to the Center for American Progress.

So more and more income escapes the Social Security tax. And it’s not only wage income enjoyed by the millionaires and billionaires, as this year’s cap indicates.

Class warfare alert! Not really. The point is that income inequality helps explain why the DI trust fund could soon run dry — and why the OASI trust fund will long about 2034 — unless our federal policymakers come up with a way to preserve the benefits that most workers and their families need.

A stopgap solution we already have — a relatively small increase in the share of payroll taxes going to the DI trust fund. But as I recently wrote, House Republicans have passed a rule to block any such shift, precedents notwithstanding.

They say they want a long-term solution to the whole solvency problem. Thus far, however, the most we can glimpse of what they have in mind comes from Senate Budget Committee Chairman Mike Enzi, who opened last week’s hearing.

He trashed on the President, of course — in part, for proposing the payroll tax shift. But he also suggested that more workers with disabilities severe enough to meet SSDI’s strict standards could actually work because technology enables people to work from home, start their own businesses, etc.

Michael Hiltzik at the Los Angeles Times perceives a move to distinguish deserving from undeserving SSDI recipients. Perhaps. Or perhaps it means something that one of Enzi’s friendly witnesses advocated “early intervention,” i.e., rehabilitation and other services to keep people with “work-limiting conditions” in the labor force.

Bottom line, however, is that enabling some additional workers with disabilities to remain gainfully employed won’t do a whole heck of a lot to keep the DI trust fund solvent — and nothing at all to preserve full benefits for retirees.

Uncapping the payroll tax cap would. If Congress had simply scrapped the cap four years ago, it could have closed about 90% of the projected funding gap for 75 years.

Other cap-scrapping scenarios could have closed roughly 70-80%. These, which seem more politically realistic, would have boosted benefits for higher earners, as well as capturing more of their income. We’ve had cap-lifting, as well as cap-scrapping proposals too.

So there’s more than one way to minimize the projected shortfall. But any solution that leaves the cap alone is bound to severely reduce retirement benefits — perhaps deny some severely disabled workers and their families any benefits at all.

Not much of a worry for those folks whose tax holiday has already begun. But for the rest of us ….


President Proposes Much-Needed Unemployment Insurance Reforms

February 12, 2015

The unemployment rate may be down from its recession peak. but we’ve still got jobless workers, as we always do. Unemployment insurance benefits are supposed to be their safety net. Yet only 27% of them received any UI benefits last year, the National Employment Law Project reports.

NELP offers about a dozen recommendations to avert a repetition. These are things states and the District of Columbia could do. But the report also flags several problems Congress can address, including one that only it can.

President Obama picks up on these in his proposed budget for next fiscal year. One proposal could make UI benefits available to more jobless workers, regardless of labor market conditions. It could also help them get back to work quicker.

Another proposal could, but wouldn’t necessarily restore benefit levels and weeks of coverage that some states reduced when they had to borrow from the federal government to meet their UI obligations — not a forced choice, as one of NELP’s senior staff attorneys notes.

The boldest of the proposals — and the one I’ll focus on here — would overhaul the Extended Benefits program.

How EB Fits Into the UI System

Unlike the Emergency Unemployment Compensation program that got so much attention when Congress dawdled over renewals and then let it die, the EB program is as permanent as anything federal legislation creates can be.

As its name suggests, it’s supposed to extend UI benefits beyond the period states’ regular programs cover when unemployment rates are unusually high.

But it doesn’t kick in fast enough to serve as a secure safety net for jobless workers — and as a boost, through their spending to state economies. Nor does it reliably deliver federal support for benefits as long as needed — a lesson driven home by the Great Recession.

How the EB Program Works

Under ordinary circumstances, states and the federal government share the costs of EB benefits. States “trigger on” when either the unemployment rate for their UI-eligible workers or their total unemployment rate reaches a specified percent and is a specified percent higher than the rate during the prior two years.

The UI-eligible worker provisions apply unless states have adopted the total unemployment alternative. The latter allows for a smaller percent increase over the so-called look-back period — 10%, instead of 20%. And it provides an additional seven weeks of benefits if the state unemployment rate is over 8%.

In either case, however, the unemployment rate must continuously rise or states will “trigger off.” So there’ll be no more benefits for workers still jobless at the end of the period their state’s regular UI program covers, even if the unemployment rate is still high. Or at least, there won’t be unless Congress enacts a temporary extension like EUC.

What the President Proposes

The President’s budget would convert EB to a federally-funded program, as it temporarily was under the Recovery Act. But eight states that retrenched their own programs would have to revert to 26 weeks or the pay half they do now.

The budget would also reform the problematic trigger system — and provide up to a year’s worth of benefits, in addition to the weeks state UI programs cover.

Basically, it sets up four employment rate triggers, beginning at 6.5% and continuing at 1% intervals up to 9.5%. Each of these produces an additional 13 weeks of benefits.

An alternative formula would trigger benefits if a state’s unemployment rate rose very rapidly. Instead of the usual 6.5%, for example, a state would qualify if its unemployment rate, plus the percent increase over the year equaled at least 6.5%.

This, as the White House budget summary says, “would ensure that the UI program responds quickly to dampen the effects of recessions and provides a critical safety net for unemployed workers in states where jobs are scarce.”

Not a critical safety net for all jobless workers, however. That shocking 27% NELP reports reflects, among other things, state eligibility criteria that deny UI benefits to many part-time workers and to others whose recent work history consists of temporary jobs, with lapses in between.

One of those other parts of the President’s UI packages would give states a financial incentive to expand eligibility in at least two specific ways. These, I’m told, will include those that states had time-limited incentives to adopt under the Recovery Act.

So new hope perhaps for jobless part-timers in nearly half the states that still deny them UI benefits if they can’t, in good faith, seek full-time employment. Also perhaps for some on-and-off-again workers in a dozen states.

What’s for anyone not to like? Well, for one thing, the way the proposed budget would offset the additional costs — two minor tax increases, one for employers and one for all but the lowest-earning employees. Are Republicans in Congress going to go for this? Are the associations that purport to represent employers?

The best the President can do at this point is to lay down a marker, says New Republic columnist Danny Vinik, echoing an unnamed administration official. “Now it’s up to Republican leaders to respond,” he adds. Interesting to see if they do.

 


Some College Education Not Enough in DC’s Economy

February 5, 2015

As you may have noticed, this recovery that’s suppose to be more than five years old now hasn’t been one of those rising tides that lifts all boats. We’ve had scads of reports, media features and the like showing how more and more income is flowing to the already-rich, leaving the rest with a shrinking share.

A new report from the DC Fiscal Policy Institute zeroes in on one angle of this nationwide story — employment and wages in the District of Columbia. It does so mainly by comparing Census data for 2007, just before the recession set in, to comparable data for 2013.

The report’s subtitle tells that “DC’s Economic Recovery Is Not Reaching All Residents.” That’s an understatement. For example:

  • Low-wage workers, i.e., those with earnings in the bottom fifth, actually got paid a bit less per hour in 2013 than in 2007.
  • The unemployment rate for black workers was 6% higher late last summer than in 2007, though the overall unemployment rate in the District was just 2.1% higher.
  • About two and a half times as many black workers were jobless for at least six months in 2013 as in 2007.
  • Higher percents of black and Hispanic workers, especially the former, were working part time, though they wanted full-time jobs.

The big message underlying many of the figures and related graphs is that residents without at least a four-year college degree are no better off than they were before the recession. In some respects, they’re worse off.

We’re used to seeing dismal wage figures and relatively high unemployment rates for workers without a high school diploma or the equivalent. And we’ve surely got them in DCFPI’s report.

But the figures for District residents with some college education, including those with an associate’s degree are an eye-opener. We learn, for example, that:

  • The median hourly wage for the some-college group fell more, in dollars, than the median for workers with no more than a high school diploma.
  • At the same time, the median for residents with at least a four-year college degree increased by $2.00 an hour — roughly the same as what the some-college workers lost.
  • The unemployment rate for the some-college group was close to 15% in 2013. This is nearly three times the rate in 2007 — and only about 4% higher lower than the rate for residents without a high school diploma.
  • About 22% of the some-college workers were involuntary part-timers, i.e., wanted full-time work, but couldn’t get it.

Yet when DCFPI turns to what needs to be done, it focuses largely on the District’s lowest-wage workers — and those who either can’t get jobs or could, but can’t afford the collateral costs.

Our some-college workers may benefit from most of the recommendations, but only to the extent they’re as disadvantaged in our labor market as workers and potential workers without their formal education credentials.

For example, DCFPI puts in another plug for career pathways that integrate basic literacy and job training programs — not, one hopes, an approach our some-college residents need.

It also recommends that the District take better advantage of federal funds available for job training and related supports, e.g., transportation subsidies, through SNAP  (the food stamp program). This, I take it, means invest more local dollars because the U.S. Department of Agriculture will reimburse half of what’s spent on an approved plan.

Two other recommendations would help ease conflicts between work and family obligations. One would enable a worker to take paid leave in order to care for a new baby or ill family member. Obviously preferable to quitting, getting fired or, in the best of cases, losing wages you and other family members need.

Another recommendation — oft made and still not fully funded — would increase the reimbursement rates the District pays providers that care for children with publicly-funded subsidies.

We know that some providers won’t accept such children and that others limit the number they’ll accept because, in at least some cases, the reimbursements don’t even cover the costs of care.

Some parents who don’t work could. Others could work more. Wouldn’t do a thing for their wage rates or job prospects. But there’d be more income to spend on other needs.

Still another oft-made recommendation could boost earnings for thousands of workers in the District’s growing “hospitality” sector, as well as some others, e.g., hairdressers, the folks who deliver our pizzas. These are workers whom employers can pay as little as $2.77 an hour because they regularly receive tips.

DCFPI suggests a 70% increase in the tip credit wage — borrowing, it seems, from the long-stalled minimum wage bill in Congress. But it also notes that seven states have no tip credit wage at all — a model the District could follow, if policymakers would stand up to the restaurant and hotel industry lobbyists.

Don’t look to me — or, I would guess, other progressives — to argue against any of these recommendations. But, so far as I can see, none of them gets to the heart of the problem DCFPI illuminates.

If you live in the District, you’ll have a tough time getting — and keeping — a job that will pay enough to support a reasonably secure, comfortable lifestyle unless you’ve got at least a four-year college degree.

What our local policymakers can do about this I’m hard put to say. And I’m certainly not faulting DCFPI for teeing up a handful of quite modest recommendations they could adopt right now — or as part of the budget the mayor’s people are already working on.

But I don’t think we should just shrug our shoulders either. An economy that works for only about half the adults in the city isn’t, to borrow from DCFPI, “enabling all residents to succeed.”

 

 

 


House GOP Puts Disabled Workers at Needless Risk

January 26, 2015

Seems when minds are made up, they won’t be confused by facts. Consider, for example, Senator (and Presidential-hopeful) Rand Paul (R-KY) on the subject of SSDI (Social Security Disability Insurance).

“[W]hen you look like me and hop out of your truck, you shouldn’t be getting your disability check. Over half the people on disability are either anxious or their back hurts. Join the club.”

Blogger Steve Benen refutes Paul’s “over half” and the barely-submerged allegation of fraud with hard data from the Social Security Administration’s Inspector General, which, as he says, are basically the same as findings by the Government Accountability Office.

What’s so depressing is that we’ve been round this barn over and over again. Someone — an NPR reporter, for example, or a Fox News talking head — asserts that a lot of SSDI recipients could work if they wanted to, but instead have managed to get disability benefits based on “squishy” diagnoses or out-in-out fraud.

Analysts, advocates and responsible bloggers cite data showing, among other things, how stringent SSDI eligibility standards are, how few recipients can work at all, let alone ever earn enough to support themselves again, and how modest the benefits are — far too low for someone to choose them over gainful work.

Rebecca Vallas, whose post I linked to above, has written substantially the same thing so often I believe she could probably do it in her sleep.

What’s even more depressing is that the House Republican majority has now put SSDI recipients in unnecessary peril, relying, it seems, on the oft-debunked claims.

As I’ve written before, the trust fund that helps pay for SSDI benefits will run out of reserves in 2016. This has long been expected. And it has nothing to do with freeloaders, fraudsters or the difficulties jobless workers have had finding new employment due to the Great Recession.

Instead, the number of SSDI beneficiaries has grown in part because baby boomers are getting to the age where disabilities become more common and in part because more women are working — and working enough — to qualify.

A third factor — ironic in this context — is that Congress raised the eligibility age for full retirement benefits to help stave off a shortfall in the Old Age and Survivors Insurance trust fund, i.e., the one intended to ensure those benefits get paid in full.

In ordinary times, Congress would simply shift some payroll taxes that go to the OASI trust fund to the DI trust fund. It’s made such shifts 11 times — sometimes in one direction, sometimes the other.

Doing that now to protect disability benefits would have little effect on the OASI trust fund. It would merely run out of reserves one year earlier, while the DI trust fund would have enough to pay full benefits until the same year — this assuming Congress adopted the Social Security actuaries’ solvency scheme.

None of this matters a whit to Congressman Tom Reed (R-NY), who cosponsored a change in the House rules that effectively prevents any such shoring up of what he calls “a failing federal program.” You see how these unfounded attacks take hold in receptive minds?

No one, I think, questions the need to ensure that the OASI trust fund doesn’t run dry in about 20 years. But the long-term solution for both trust funds, which Reed claims he wants to force, will surely not emerge as law before 2016.

So the House rule, in effect, sets the stage for SSDI benefit cuts estimated at 19% in less than two years. These benefits now average $1,165 a month — less than $200 above the poverty level for a one-person household. Benefits for disabled workers’ spouses and children are far less.

Not surprising then that 44% of younger SSDI recipients, i.e., those 31-49 years old, are poor or near-poor, mostly the former. These are hardly people who can afford to lose close to a fifth of what’s probably their only source of cash income. And they’re many years away from eligibility for retirement benefits — even the reduced benefits they could get at 62.

Monique Morrissey at the Economic Policy Institute views the House rule as “largely symbolic,” since a simple majority can overturn it. And indeed it may if the benefit cuts become an immediate reality — in an election year too, she adds.

But in the meantime, the Republicans have leverage for any of a range of Social Security “reforms.” Morrissey notes recent references to such old warhorses as raising the retirement age (again), replacing social insurance altogether with private investment accounts and/or further means testing — perhaps a phase-out to zero for high-income seniors.

Will seniors, workers who hope they’ll live to be and organizations representing them take kindly to any of these? Faced with the possibilities, will they be told that the only alternative is to keep those other folks from draining the trust fund, as Morrissey predicts?

We’ve already got framing that pits the old against the young. Last thing we need is a spin-off into a conflict between the legitimate needs of seniors and those of younger people with severe disabilities.

And as I, joining many others, have said, it’s wholly unnecessary.

UPDATE: Shortly after I posted this, I came, somewhat belatedly, upon a post by Josh Marshall, the top dog at Talking Points Memo. He foresees the sort of conflict I refer to and calls it a deliberate “plan to set different classes of Social Security recipients against each other in a zero sum for scarce dollars when in fact the scarcity is manufactured.”


Less Poverty, Greater Income Inequality in DC

January 5, 2015

The new year seems a fitting time to check on how the District of Columbia is progressing toward two related goals — reducing poverty and achieving shared prosperity. A true good-news, bad-news story, according to indicators the Half in Ten campaign published last month.

As I’ve written before, Half in Ten created the indicators in 2011, when it restarted the clock on cutting poverty in half in ten years.

They’re organized under four main headings — poverty reduction (of course), good jobs, strong families and communities and economic security.

But they yield a fragmentary picture — in part, because Half in Ten has to use numbers already available for both the U.S. as a whole and states, plus the District. And for other reasons beyond its control, they’re not all current.

I’ve tried in the past to follow Half in Ten’s framework. A different approach this year, based on what I found most striking, especially when I looked back to the original indicator set.

Long story short: The District has a lower poverty rate than in 2010. But shared prosperity still seems a will o’ the wisp.

Poverty Reduction

The District’s poverty rate last year was 0.3% lower than in 2010 — 18.9%, as compared to 19.2%. The new rate is still higher than rates for all but five Deep South and Southwestern states.

The race/ethnicity breakout is one way we see income inequality in the District. For example, as I reported when the figures were released, the 2012 poverty rate for black residents is more than three times the rate for non-Hispanic whites.

Income Inequality

Half in Ten’s indicator is the ratio between the shares of income that went to households in the top and bottom fifths of the income scale last year, according to the American Community Survey. By this measure, income inequality in the District is extraordinarily high — 30.3. It’s far larger than any state’s — and more importantly, larger than in 2010.

But the ratio is, to me, a tad abstract. So let me translate it into actual shares. Of all the household income in the District, the top fifth enjoyed nearly 55.4%. The bottom fifth had to make do with slightly more than 1.8%.

Some Contributing Factors

On the one hand, 70.2% of young adults in the District have at least a two-year college degree — a slight uptick since 2010. As you’d expect, this is far higher than the percent in any state.

On the other hand, only 59% of teens who started high school graduated four years later, as of the 2011-12 school year. This is a slightly lower percent than the rate for the prior school year — and the lowest reported for 2011-12.

Not surprisingly, the District has a relatively high percent of “disconnected” youth, i.e., 16-24 year olds who were neither working nor in school in 2012. This latest “disconnected” rate — 17% — is exactly the same as in 2010, which again puts the District roughly mid-way in the state rankings.

No such flat-lining for the unemployment rate, which declined from 9.9% in 2010 to 8.3% last year. Pretty obvious who’s getting the jobs — and not — in our burgeoning local economy.

On the upside, the teen birthrate declined quite a lot. In 2012, there were 38.6 births for every 1,000 women between the ages of 15 and 19. This is 6.8 fewer than in 2010. And though still high, it’s nowhere near rates in the bottom-ranked states.

Teen birthrates are often correlated to poverty — as cause, effect or some combination of both. Recent research suggests that income inequality is an additional factor because poor young women see little chance of improving their economic situation if they postpone motherhood.

The percent of children in foster care also has bearing on the poverty rate — again, as cause, effect or both. It’s still high in the District — 11 children per 1,000, as of 2012. But it was 20 per 1,000 in 2010.

Further Progress Possible

Some state and local governments are adopting policies that can reduce poverty and enable low-income people to gain a greater share of prosperity, as the report that includes and provides context for the indicators selectively shows.

Here in the District, for example, the minimum wage will step up to $11.50 in July 2016 — $4.25 more than the federal minimum. Ten states also raised their minimum wage last year, making 29 that now have minimums above the federal.

Proposals to raise the federal minimum have gone nowhere in Congress — and most surely won’t during the next two years. The same seems likely for other legislation that would boost low incomes and strengthen both work supports and safety net programs for people who can’t earn enough to meet basic needs.

So, as the report concludes, “the momentum for national change” of a progressive sort has to build at state and local levels. A call to action for advocates and grassroots organizers.

And, I suppose, a hopeful note to end on, since it implies that we’ll have a renewed federal commitment to reducing poverty and income inequality sooner or later. But in the meantime, we’ll have inequities at least as large as those we have now based on where people live.


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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