Changing Legislation on the Minimum Wage in the US and its Potential Impact on the Fast Food Industry

Changing Legislation on the Minimum Wage in the US and its Potential Impact on the Fast Food Industry

Changing Legislation on the Minimum Wage in the US and its Potential Impact on the Fast Food Industry

Analyst Insight by Emily Balsamo – Research Analyst

Recently, a wage panel in New York State recommended that the minimum wage specifically for fast food chain restaurant workers be set at US$15 an hour by 2018 in New York City and by 2021 in the state. New York’s move to higher wages follows in the footsteps of Los Angeles, San Francisco and Seattle. Americans have become increasingly concerned about the social and governmental impact of the minimum wage, and fast food operators are central to the debate. Fast food companies will need to restrategise significantly in light of increased labour costs, to maintain both profits and a positive public image.

Public awareness of the issue

The issue’s prominence in the national consciousness was most apparent when nationwide protests and strikes occurred on 15 April 2015 – with 15 April being the day on which annual federal and state tax returns are due in the US. The “Fight for $15” campaign called for a US$15 per hour minimum wage for fast food workers and options for unionisation. Protests in 230 American cities centred on individual fast food establishments, as well as government buildings, with many fast food workers going on unofficial strike for the day. However, public awareness of the discrepancy between a living wage and the wages paid by fast food operators is not new. In 2013, McDonald’s released a highly publicised suggested budget for employees, which included income from a second full-job to fill basic financial needs. The budget outline has been seen as an admission by the company that surviving on a McDonald’s wage alone is not possible.

Low wages cost tax dollars

With a few regional exceptions, the minimum wage is so low throughout the US that many working Americans are still eligible for public assistance, such as food stamps and Medicaid. In fact, according to the Berkeley Center of Labor Research and Education, nearly 75% of recipients of public assistance are employed. The federal minimum wage before taxes in the US is currently US$7.25 per hour, with most states and/or cities implementing their own local minimum wages above the lower federal limit.

Public interest in raising the minimum wage stems, in part, from recent publicity on how tax dollars subsidise low wages. The Service Employees International Union (SEIU) funded a study in 2015 which found that working families rely on US$153 billion in public assistance each year as a result of low wages. Fast food restaurants have been central to the issue, often paying at or slightly above the minimum wage, with a high percentage of fast food workers receiving federal aid. According to the editorial board of the New York Times, “The problem is that as labour standards have eroded, allowing profitable corporations to pay chronically low wages, taxpayers are not only supporting the working poor, as intended, but also providing a huge subsidy for employers by picking up the difference between what workers earn and what they need to meet basic living costs. The low-wage business model has essentially turned public aid into a form of corporate welfare.” In response to what is essentially federal subsidisation of companies’ low-pay practices, it was recently announced that the state of California will start to publish the names of employers that have more than 100 employees on Medicaid and how much these companies cost the state in public aid.

Industry response

US citizens’ increased awareness of the low-wage practices of fast food operators and their effect hurts the public image of the industry. A few companies have taken steps to regain public favour and deflect negative press surrounding low wages. McDonald’s announced that, starting 1 July 2015, employees in company-owned outlets would earn US$1 more than the mandated minimum wage of the region and it is in the process of outlining a plan to raise the average wage to US$10 per hour by 2017. The restaurant is also exploring offering benefits to employees at its company-owned stores, which comprises about 10% of employees. Chipotle announced an initiative launched on 1 July which allows for sick days and vacation days for its employees. Starbucks, which has been an outlier in the restaurant industry for offering health insurance for years, recently made another aggressive stride towards employee development. The company announced the launch of an initiative in 2015 which would help its workers to gain university degrees by heavily subsidising tuition through a partnership with Arizona State University (courses are taken online). McDonald’s and Chipotle also offer tuition reimbursement, though to a lesser extent than Starbucks.

Despite such efforts, fast food restaurant operators will still need to adjust in response to widespread minimum wage reform. There exists a debate among economists on whether or not operators will need to cut jobs to maintain profit margins when labour costs rise. Higher labour costs, however, would potentially be mitigated by the positive effects which higher wages would bring, namely, lower staff turnover. Fast food is an industry that struggles globally with high staff turnover, losing profits and productivity to time spent training new employees. A higher wage as well as benefits such as sick days could potentially drive lower staff turnover, reduced absenteeism and higher individual productivity. Any remaining loss of profit may need to be absorbed through raising prices, though not necessarily to an extreme degree. Long-standing institutions of fast food such as the US$1 or US$0.99 menus of many fast food companies may need to be discontinued, for example. Although such menus have been scrutinised in recent years, anyway, with franchise owners complaining about the impact of such low-priced menus on their own margins.

The future of the cost of food

According to the USDA, Americans spent under 10% of their post-tax income on food in 2013, compared to just over 10% among Canadians, 11% in Germany, 13% in France, 15% in Italy and Japan, and 31% in Russia. This means that the US boasts the lowest average of any country in the world. This statistic is due in part to the low cost of fast food, which accounts for a large portion of the consumer foodservice industry. Minimum wage reform has already been passed in some cities and states, with more widespread legislation not far behind. The rising tide of minimum wage reform strongly heralds a new era of fast food in which operators will need to rethink menu price competition and Americans will need to rethink the value of what they consume.

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