First, let’s get some things straight. I believe that a person should earn all the market will bear for his skillset. Most everyone in America believes that. I also believe in competition both in the business sector and in the employment sector. Competition produces better products and employees all around, and ultimately the consumer is the winner. Given that, that there are limits to the amount of money a business can charge for its goods and services, and a limit to how much a business can afford to pay an employee and still make a profit. Washington State has recently answered the demonstrators’ demands by raising the minimum wage to $15. Fallout from that move has been quick: a number of businesses in Seattle will close by year-end due to the increased labor expense and the inability to sustain a profit—an absolute requirement for being in business for any length of time. Upon hearing these reports, advocates of an increased minimum wage did not rethink their position but doubled down by saying any business that could not pay its workers $15 an hour should not exist in the first place. That response speaks volumes concerning their the naive understanding of business in America.
Yes, we live in a free country for the most part. Yes, any one of us can go into business for ourselves and we can set our sights as lofty as we like. Eventually, however, reality kicks in because every sector of business has ceilings and limitations which govern its ability to compete in the marketplace. Ultimately, one’s competitors and the consumer are the ones who determine both the quality and value of your product and how much you can reasonably charge for it. If the resulting return on investment is not profitable, then you have two choices—either get into a different business or change your business model to fit the reality of the market. Advocates of a higher minimum wage want to ignore these basic facts mostly out of ignorance. Very few, if any, have ever run a business and/or they only care about what goes into their pockets.
Oh, but Mr. Brown, McDonald’s has one of the highest net profit margins in the business world—surely they can afford to pay their employees a better wage. You are correct in pointing that out, but you miss the point. Much of the retail sector of McDonald’s is built on franchisees who have bought a license from the McDonald’s Corporation that allows them to sell approved food products packaged and prepared as directed by McDonald’s. In terms of profit, operating the business, meeting payroll costs, etc., the franchisee is on his/her own. Whether the business is a success or failure is up to the franchise itself. Since the franchise owner has paid a very large chunk of money up front for the franchising fee, the land, the building, etc., it stands to reason they want to succeed.
Let’s take a deeper look at McDonald’s. The fantastic profit margin reported is derived from the sales of franchises and the wholesale distribution of food products to retail outlets in the chain. It is not a function of the retail sales of food. The eateries which McDonald’s owns at the corporate level are operated as their own profit centers and those profits do go into the bottom line, but I can assure you that they are not the driving force in achieving the large margins. Those margins come through bulk buy and sell of food products—a large distribution network with a relatively small employee base.
At the retail level, where the franchisee must survive, the price of fast food must stay relatively in line with the local competition. A combo meal comprising a cheeseburger, fries, and a drink must remain within a certain price differential or I (the consumer) am not going to go out of my way just to spend my money at McDonald’s versus Wendy’s. Raising the minimum wage for employees in these franchises to $15 an hour certainly will drive that price differential up considerably and likely to the point at which the business can no longer attract a growing consumer base. “But wait,” you say. If all fast food outlets have to pay a $15 minimum wage, wouldn’t that level the playing field? All of them have to charge higher prices, right? That is true but the consumer now looks at the broader question of whether or not fast food is the best value for the dollar. At the prices demanded by $15 an hour labor, a consumer’s money may buy tastier food at nicer restaurants. Not all consumers will follow that reasoning but there will be enough of them to have an impact on the fast food industry where the battle cry seems to be the loudest for the $15 minimum wage.
But let’s consider the broader implications of a minimum wage hike across all sectors and markets. Prices to the consumer will go up across the board to cover increased labor costs. That minimum wage change is also going to cause many union contracts to be renegotiated, since baseline wages are typically “pegged” to the minimum wage, with union members receiving a percentage or flat premium above it. And, we will become less competitive in the world marketplace. Ultimately, this increased overhead comes down to one of two endings—either the costs are passed on to the consumer, or the business closes its doors. When cost is passed on to the consumer on such a broad scale, the cost of living will rise quickly all about us and the increase in our buying power from our wages will be cancelled out. In other words, we are right back where we started. Ultimately, all we did here was accelerate the forces of inflation in the marketplace and to the consumer.
Of course this logic will ultimately be lost on those who consider themselves far too in-the-know. They will continue to make wage demands yet not offer anything of value for their higher premium as employees. The point that they ultimately miss is that their talents and skills are not worth any additional money to McDonald’s as long as a hamburger from Mickey D’s is not worth any additional money to the consumer. Chew on that for a while.
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