McDonald’s Former President Says A $15 Minimum Wage Will Kill Entry-Level Jobs

<> on May 21, 2014 in Oak Brook, Illinois.
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A loud new voice has joined the fray of those screaming that the minimum wage should never be raised to $15. It belongs to former McDonald’s President and CEO Ed Rensi, who recently published an opinion piece in Forbes to explain exactly why raising the minimum wage is a huge mistake that will end the world. It’s because, Rensi points out, paying people what many consider to be a fair wage would make it impossible for those who need to find entry-level jobs. And it’s wrong, he says, to consider McDonald’s as one giant monolith, because many of the chain’s restaurants are owned by franchisees who aren’t making millions of dollars and jetting off to Ibiza whenever they feel like it.

In his piece, Rensi says that while raising the minimum wage won’t “wipe out the brand” it will make it impossible for people with few options to find jobs. That’s already some flawed logic (why should people without any options be taken advantage of?) but Rensi continues to make his argument, suggesting that not only will this move hurt young workers but that it’s not as easy as raising the price of a burger to make sure that all employees are getting paid.

From Forbes:

Let’s do the math: A typical franchisee sells about $2.6 million worth of burgers, fries, shakes and Happy Meals each year, leaving them with $156,000 in profit. If that franchisee has 15 part-time employees on staff earning minimum wage, a $15 hourly pay requirement eats up three-quarters of their profitability. (In reality, the costs will be much higher, as the company will have to fund raises further up the pay scale.) For some locations, a $15 minimum wage wipes out their entire profit.

Recouping those costs isn’t as simple as raising prices. If it were easy to add big price increases to a meal, it would have already been done without a wage hike to trigger it. In the real world, our industry customers are notoriously sensitive to price increases. (If you’re a McDonald’s regular, there’s a reason you gravitate towards an extra-value meal or the dollar menu.) Instead, franchisees can absorb the cost with a change that customers don’t mind: The substitution of a self-service computer kiosk for a a full-service employee.

Rensi writes that self-service kiosks are already the norm in Europe (and Carl’s Jr.’s CEO really wants to bring a fully-automated restaurant to America) and that raising the minimum wage for workers at restaurants such as Burger King or McDonald’s to $30,000 a year will quickly force franchise owners to start making considerable cuts. That’s worrying, but what’s more worrying is the fact that Rensi doesn’t seem to be able to think of another solution for this problem, especially considering that $30,000 a year isn’t that much money. In fact, statistics released this year by the Department of Health and Human Services show that a household of 3 people (that could be one with multiple workers, a single parent with children, a child supporting elderly parents, or any number of other possibilities) would be only $10,000 above the poverty line if their income was $30,000. And that’s not considering their location. In San Francisco or New York for instance, living on $30,000 a year (or $11,000 if you’re a household of one) is still a huge challenge. If you take San Francisco as an example (and there are plenty of fast food places to work at in the city), just the price of rent — over $4,000 for a two-bedroom apartment– would wipe out anyone’s minimum-wage savings, even in a family with more than one worker.

And here’s something else to consider. In 2015, The Washington Post released data that revealed that it’s costing tax-payers $153 billion dollars a year to subsidize those working in fast food restaurants. That’s not due to a lack of hard work or motivation on the part of the employees, though; it’s due to the fact that chain restaurants don’t pay their employees enough to eat.

From The Washington Post:

After decades of wage cuts and health benefit rollbacks, more than half of all state and federal spending on public assistance programs goes to working families who need food stamps, Medicaid, or other support to meet basic needs. Let that sink in — American taxpayers are subsidizing people who work — most of them full-time  (in some case more than full-time) because businesses do not pay a living wage.

Workers like Terrence Wise, a 35-year-old father who works part-time at McDonald’s and Burger King in Kansas City, Mo., and his fiancée Myosha Johnson, a home care worker, are among millions of families in the U.S. who work an average of 38 hours per week but still rely on public assistance. Wise is paid $8.50 an hour at his McDonald’s job and $9 an hour at Burger King. Johnson is paid just above $10 an hour, even after a decade in her field. Wise and Johnson together rely on $240 a month in food stamps to feed their three kids, a cost borne by taxpayers.

This was made even clearer by McDonald’s itself in 2013 when the company tried to help workers create a budget and ended up, Forbes reported, teaching employees that making a living at McDonald’s was literally impossible. Why? Because even when working full time, the chain (in partnership with Visa) made assumptions about the fact that the average full time McDonald’s employee was working two jobs, paying 20 bucks a month in health insurance, and not really worrying about stuff like child care, vehicles, and groceries (the budget also assumed that heating was free, putting a big fat zero in that slot). And that really is for full-time work.

While Rensi’s argument is compelling–everyone’s going to make less money and young workers will be punished for it because franchisees won’t be hiring anyone–it also puts the entire burden on the owner of your local McDonald’s. They can raise costs and fire workers, sure, but what could McDonald’s do? That’s missing, and according to The International Business Times, Rensi and his contemporaries could help ease the pain of workers a little; not with threats about automated restaurants but by offering franchisees a lower price point.

From IBT:

According to the company’s website, franchisees pay 12 percent of their revenue in royalty payments, excluding rent. That means, according to Rensi’s math, the royalty to McDonald’s Corp. is twice the typical profit margin of a store. If franchise operators are restricted in what they can pay their employees, a large portion of that is because of the money McDonald’s charges its independent store owners.

Last year, McDonald’s extracted $2.98 billion in royalty payments and $5.86 billion in rent fees from franchisees, or about 35 percent of the company’s total revenue last year, according to its latest annual report.

So, what to do? Of course, as many commenters point out on every site such a story is posted, we live in a free market where anyone is free to work where they please. But if people need to eat to survive and have limited options, should they just accept that a minimum wage below $15 is the best they can do or should the companies that employ them work out a way to make working there realistic, if not ideal?