There has been surprising news across minimum-wage land: Paychecks are beginning to rise. Earlier this year, Wal-Mart raised its minimum pay to $9 an hour, then Target matched. Now McDonald’s has improved on those rates. Starting July 1, McDonald’s will pay at least $1 an hour more than the local minimum wage for workers at the restaurants it owns in the U.S., the Wall Street Journal reported.
As always, the devil is in the details. And while those details have been far less dramatic than the headlines, they are worth exploring. The motivations of the companies are even more intriguing. Before we delve into why McDonald’s did this, let’s look at a bit of recent history.
In February, Wal-Mart, the nation’s largest private employer, said that as of this month it would raise its minimum pay nationwide to $9 an hour – $1.75 more than the federal minimum of $7.25. As we noted, this was a raise for about a half-million Wal-Mart workers in the U.S. In February 2016, the company’s minimum rises to $10.
The details are less impressive: Most of Wal-Mart’s lowest paid workers are unaffected by the recent increase. Two-thirds of Wal-Mart’s employees work in stores in states whose minimum-wage laws are already $9 an hour or higher. Hence, the vast majority of the company’s employees will see no raise at all.
The increase at McDonald’s may be even less significant: The pay increase of $1 an hour more than the local minimum wage only applies to those people working in the 1,500 restaurants the company itself owns in the U.S. That excludes the 13,000 McDonald’s franchises in the U.S. In other words, this raise doesn’t apply to about 90 percent of McDonald’s workers.
There are some interesting details in the company’s announcement, however. McDonald’s will help employees who want to get a high school diploma. The New York Times noted the company will pay those costs, and also offer aid to employees attending college. After one year in company-owned restaurants, employees will also be eligible for paid time off – roughly one week for each year of work.
Slate noted that “in most other developed countries, PTO for workers isn’t a benefit, it’s a national requirement.” Perhaps that why the statistical website fivethirtyeight.com observed that McDonald’s “Vacation Plan” might be a bigger deal than the pay increase.
The splashy company announcements lead us to wonder what the motivation for these changes might be. Yes, of course, we know that almost everything these businesses do is aimed at improving the bottom line; but what was the math behind giving employees a raise? A few reasons come to mind.
The first, as we noted with Wal-Mart, is reducing employee turnover, which is a staggering 44 percent a year. Although that turnover isn’t atypical for low-wage employers, the sheer size of Wal-Mart makes it an enormous cost. For McDonald’s, turnover also is a huge cost, though to be fair, so is a wage increase. Bloomberg Intelligence estimates that a $1 hourly at company stores would have cut 2013 profit by 4.4 percent.
But there are other issues worth discussing: Social media’s impact on consumers and competition for employees as the economy improves.
Both of these seem to have worked to the detriment of McDonald’s – especially among the millennial generation, which has voted with its dollars to eat at places that serve fresher, healthier food such as Chipotle. McDonald’s also faces stiffening competition from burger upstarts such as Shake Shack, 5 Guysand Bobby Flays Bobby’s Burger Palace.
Don’t underestimate the competition for quality workers at fast-food restaurants. The supply of people willing to do the difficult, dirty work of grilling greasy burgers and fries or interacting with drive-through customers is finite. Wal-Mart has similar issues finding qualified minimum-wage workers. And as the economy continues to slowly improve and unemployment declines, that pool of workers gets smaller. It really was just a matter of time before wages had to rise.
That is a positive development – especially for two companies with business models that are so dependent on government aid, tax breaks and Medicaid. As Bloomberg Businessweek reported in 2013, “Fast-food wages come with a $7 billion side of public assistance.” Indeed, a higher portion of employees of fast-food restaurants receive taxpayer aid than in any other industry.
Wal-Mart isn’t much better: Its employees receive $2.66 billion in government aid each year. That works out to $5,815 per worker, and $420,000 per store. Why private-sector employers require public assistance for their full- or part-time employees is beyond me. But it is why I’ve labeled these two corporate welfare queens.
Raising the minimum wage nationally to $12 would drive more of the employment costs back to the companies, which is where they belong. Estimates vary, but it would probably take a minimum wage of about $15 to make these companies’ employees independent of state and federal aid.
It is worth watching to see what the tandem of social media and basic economics does to push these companies toward a higher minimum wage. With April 15 right around the corner, it would be nice to know that your tax dollars aren’t going to subsidize huge for-profit, private enterprises.
Barry Ritholtz, a Bloomberg View columnist, is the founder of Ritholtz Wealth Management. He is a consultant at and former chief executive officer for FusionIQ, a quantitative research firm.