Stagnant wages in the U.S. economy have put increasing pressure on businesses that pay the lowest wages to increase their workers' hourly pay.
Fast food chains like McDonalds, Burger King and Wendy's are especially being pushed to increase pay from the legal minimum wage to $10 or more an hour. The businesses respond that in effect doubling employees' pay would mean fewer employees and smaller profit margins.
Would it? Researchers from the University of Massachusetts Political Economy Research Institute (PERI) conducted a study to find out.
They looked at how raising the minimum hourly rate to $15 would affect these businesses. Using U.S. Economic Census data economists Robert Pollin and Jeannette Wicks-Lim have found that paying employees more actually had a positive trade-off. Employees stayed on the job longer.
At the standard rate of industry sales growth, they contend the savings from a decrease in workforce turnover added to revenue generated from increasing prices 3% per year could support a 2-stage increase in the minimum wage from its current level of $7.25, first to $10.50 and then to $15 three years later.
The report concludes it is possible to significantly increase wages without generating employment losses within the industry and without denting profits.
“We conclude that the fast-food industry could indeed absorb the increase in its overall wage bill without resorting to cuts in their employment levels at any point over the four-year adjustment period,” the authors write. “The fast-food industry could fully absorb these wage bill increases through a combination of turnover reductions, trend increases in sales growth and modest annual price increases over the four-year period. We also show that fast-food firms would not need to lower their average profit rate during this adjustment period. Nor would the fast food firms need to reallocate funds generated by revenues away from any other area of their overall operations, such as marketing.”
James Sherk, Senior Policy Analyst in Labor Economics at the Heritage Foundation, disagrees. He concludes that raising the minimum wage to $15 an hour would require the typical fast food restaurant to raise prices by nearly 40%.
“This would cause sales to drop by more than one-third, and profits to fall by more than three-quarters,” he writes.
The bottom line, Sherk says, is doubling fast food workers' pay would make fast food more expensive for consumers.
Faster move to automation
In reality, it may be hard to know how fast food companies would respond if required to double their employees' pay. Washington State, with the highest minimum wage in the U.S., experienced the strongest small business employment growth last April, according to a report by Paychex, a payroll service.
But it's also possible restaurants would invest more in automation, so they could further reduce their workforce. It's already happening in Japan, as the video below demonstrates.
McDonalds, meanwhile, is getting more serious about automation as the pressure to raise wages grows. In October it told financial analysts it plans to start installing self-ordering kiosks in its stores.
Part of the pressure to raise wages likely stems from recent structural changes in the economy. Many fast food restaurants created jobs designed to be filled by teenagers living at home.
But because so many jobs have recently disappeared from the economy, that's not who's standing behind the counter these days.