McDonald’s wage hike stems from evolving views on morality, politics and economics

Ronald thanks his staff with a $1 raise. Thai McDonald's via www.shutterstock.com

On April 1, in an announcement that just a year or two ago might have been seen as an April Fools’ prank, McDonald’s said that by July 1 it would raise wages to at least one dollar above the local minimum wage in each of its 1,500 US stores.

While this only applies to about 90,000 workers at company-owned restaurants, it puts pressure on the more than 3,100 McDonald’s US franchisees, each running an average of about four stores each. These outlets have about 750,000 workers, who no doubt will clamor for their own pay hike.

So why did McDonald’s do it, just a few weeks after Walmart set off the wage-hike bandwagon among retailers?

At the heart of most arguments about the minimum wage lie franchising and fast food businesses, with their high-volume, price-sensitive, customer-driven markets and predominantly low-wage workforce. My research on the topic shows that the push to raise wages by McDonald’s can be attributed to the evolution of three separate themes – morality, economics and politics – that have all been trending in favor of higher pay.

At the same time, the introduction of new automation technologies is requiring employees with higher skills – and pay. And the industry’s franchise nature may increase the pressure on others to follow McDonald’s lead.

The minimum wage debate

Morality

Debates about a minimum wage for workers often focus less on whether the law should require it and more on what constitutes a “living wage,” a term increasingly used. If people agree that workers cannot sustain themselves and dependents under a certain wage and benefit level, then the moral argument becomes plain: they must receive something at or above that level, and a minimum wage pegged under that amount must be raised.

Most people agree to higher wages due to these moral concepts, and this public consensus, while not yet a governing framework, certainly drives much of the debate.

Economics

It has long been contended that raising the minimum wage leads to job losses, reduced business growth and less disposable income. However, some economic research suggests the opposite: that doing so offers positive economic benefits overall as workers at the lower rungs of the labor market have more money to spend, and businesses and consumers adjust to higher wages and costs for products or services.

Because legal requirements vary from jurisdiction to jurisdiction, the interesting questions involve how those differences affect local economic performance. Comparisons must account for many factors, with the mobility in labor and other markets as well as the price elasticity of supply and demand.

Politics

Debate about raising the minimum wage almost inevitably turns to arguments about the role and efficacy of governments, unions, schools, taxes and business. Assumptions about supposedly hard-hearted businesspeople, uncaring consumers, venal union bosses, myopic bureaucrats or lazy workers abound.

Historically, the lowest-paid jobs tend to be the most transitory, making it harder for the workers to become politically active or organized. However, regardless of how it has happened, the ongoing protests for a higher minimum wage and the response in some states or municipalities (most prominently, Seattle’s June 3, 2014, ordinance raising the minimum hourly wage) has attracted much attention.

That in itself may be a victory for those seeking economic “justice.” It is part of a larger battle over compensation, extending to matters such as eligibility for overtime pay (to be greatly increased per new federal decrees) and efforts to tie CEO compensation relative to company performance and average pay.

McDonald's protest via www.shutterstock.com

Other factors

Related to the minimum wage debate and, more generally, to society-wide income division are two fundamental matters: the roles of technology and franchising.

Technology

In labor-intense economic sectors such as leisure and hospitality, the use of automation proceeds apace. Just as gas stations decades ago dramatically shed their labor forces as they moved to self-service, so restaurants may cut down greatly on their need for workers through the use of ordering and payments kiosks.

Fast-food workers may, in McDonald’s and elsewhere, be paid more and be expected to have a new set of skills working with the technology, but the number of workers per outlet may fall significantly. This is a development we can already see in its initial stage, and other job eliminators down the road seem likely, even if we cannot foresee the particulars.

Some jobs in service fields until recently were considered insulated from outsourcing but have, through technology, been made capable of greater production, usage of lower-cost labor, or both. Therefore, more jobs may be subject to truncation or at least global competition, with higher wage scales perhaps priced out of the market.

Franchising

More than a third of all retail sales are through franchised outlets, and franchising is present in almost every industry imaginable, according to extensive research I’ve conducted on the topic. But it is one behemoth in the field – the fast-food sector – that likely springs to mind when one thinks of franchising.

The nature of franchising means McDonald’s treatment of workers could foretell what its competitors and franchisees may do. As McDonald’s expects more from its workers, and pays them more, presumably other fast-food networks will have to raise their wages or concede to the Golden Arches a high portion of the more productive, perhaps longer-term employees, as well as customer and community goodwill.

The need for a national debate

Many argue that the current minimum wage is high enough, and that market forces should dictate pay. McDonald’s actions, however, seem to undermine the argument that wage scales already fairly reflect what employees should be paid. The company’s announcement could also signify genuine wage growth generally, after many years of little change.

The political and moral pressure put on McDonald’s and other retailers shows that companies are now considering these perspectives as well as the economics when determining wage scales. Even more important than the moves to change a particular minimum wage under state or local law is the national discussion about how to ensure a “living wage” for all workers.