The Minimum Wage and the $15 an Hour Poor [Contributor]

Protests are happening today at two Utah fast food restaurants in support of a marginally successful nationwide movement looking to raise the legal minimum wage to $15 an hour. Currently, the minimum wage is $7.40 an hour. This means that if the movement were to succeed the minimum wage would nearly double.

Upon first glance, this seems like a great idea. It would raise millions out of poverty, ensure a living wage at any job, and give workers more money to spend on goods and services, thus growing the economy.

Unfortunately, while this is the case in the vacuum of an increasing wage, once societal factors, a larger pool of workers at that minimum level, and the need of a business to generate profits are factored, we arrive at a much different scenario.

Problem 1: Inflationary pressure from an increased minimum wage

As these protests are occurring at McDonald’s locations here in Utah, let’s use their costs as a baseline.

One thing to note here is that while McDonald’s restaurants are the sites of the protest, 90% of McDonald’s locations are franchisee owned – essentially small businesses that pay a fee of about 12% to McDonald’s corporate in order to have the golden arches on their establishment. The average McDonald’s nationwide brings in $2.5 million in sales. While it’s somewhat problematic to estimate the actual amount of food that is sold to equal $2.5 million, assuming that the average meal costs $4 for a hamburger, fries, and a drink gives us 625,000 meals sold per restaurant per year. Of that meal, labor costs are around 45%. The average McDonald’s worker makes around $8.50/hour and has health care costs on top of it. That leaves us around $2.20 left ($1,375,000 in aggregate). Of that amount, franchisee costs average $300,000, bringing us down to $1.72 per meal, and we haven’t started paying for the food yet.

Around 33% of the cost of a dollar menu item is the actual food. If we extrapolate on that, we have $1.32 in additional costs on the meal, leaving $.40 in leftover profit (or, about $250,000 per year). Of that 10% profit margin, the owner still has capital costs (a makeover of a current McDonald’s can cost $800,000) and taxes, further pinching that margin.

Thus, doubling wage costs would have at least one of two consequences: fewer jobs due to higher automation or higher food costs for consumers.

While I’ve put together some rough numbers here, folks in the franchisee business have put together something a little closer that gives an even grimmer picture and factors in additional costs. You can look over that data right here.

Problem 2: Where are the entry-level jobs?

To me this is the bigger concern. While I don’t disagree that a living wage should be the goal of society as a whole, I do disagree in how we as a society arrive at the living wage. Every time we increase the minimum wage, it is like raising the water level in a lake. While some things are able to float with the raising water levels, and while trees and islands may still stay above the water line, shrubs, bushes, rocks, and other features dip below the surface. With a large increase over a short time, this problem is exacerbated.

The problem with the analogy is that people aren’t rocks or trees.

If I could get an older worker with 5-10 years of experience in the restaurant business instead of a teenager just starting out, why wouldn’t I take that opportunity. While raising the minimum wage can help some people’s lifestyles get better, it drastically reduces opportunity to get into the labor pool in the first place because it puts millions more workers in competition with those who are just starting out in the workforce. Thus, upward momentum stalls, kids don’t get the work they need, and lower wage/lower skilled workers lose out.

Problem 3: Automation

Once automation starts in an industry, it doesn’t go back.

When airlines moved to check-in kiosks, they quickly became standard and desk agents disappeared. When automobile manufacturers moved to the assembly line, then to robots, then further, those lost jobs didn’t reappear.

The same thing would happen in the restaurant industry. Who’s to say that McDonald’s wouldn’t put automated ordering machines in the front of the house? They already have them in several European countries, and a wage increase would put pressure on franchisees to look at them here. Perhaps the hamburger machine will take the job of those who cook and assemble the food. The ultimate loser here is the worker who lost their job for the sake of some other schmoe who is now making $15 an hour.

Of even greater concern is a proposal to triple the wages of tipped workers from $2.13 to $7 per hour. I see those jobs being replaced by automated ordering at the table in chains like Chili’s, Applebee’s, Olive Garden, and other high volume, low margin restaurant chains.

While profit shouldn’t be the ultimate motive, the ability to earn a good living is a powerful motivator.

One of the great things about the American Dream is the ability of anybody from any background to climb the economic ladder and become successful. With every increase in the minimum wage, we pull rungs out of that ladder and make it more difficult for those who come after us to even start on the ladder to begin with. Instead of attempting to artificially raise them to our level with wage and/or price controls, we should allow them the opportunity to start their climb and then the satisfaction of knowing that they worked hard and made a difference in their lives and the lives of those around them.

Beau Sorensen is COO of First Choice Home Health & Hospice and VisionBound International. He has been in healthcare for over 17 years and has been heavily involved in politics since he was 11.