Supporters cry fairness and a living wage, while critics predict economic disaster, which they claim is already beginning. In April, Seattle took the first step to raising its minimum wage to $15 per hour, and other cities like New York and San Francisco may be following close behind if pending initiatives are any indication.
Currently, Seattle employers are required to pay at least $11 per hour to their workers. In January 2016, this minimum rises to $12 per hour for smaller businesses and $13 per hour for those employing over 500 workers and not contributing toward health benefits for employees. The full raise to $15 per hour takes effect for larger employers in 2017 and for smaller employers as late as 2021.
The Predicted Impact of Raising Minimum Wage
Financial experts like Forbes’ Tim Worstall have been vocal in their predictions that raising the minimum wage to more than double the federal minimum wage of $7.25 per hour will hurt businesses and lead to negative outcomes. Basic economics would suggest that increasing wages this dramatically would lead to businesses laying off workers, raising their prices, or both as they seek to offset increased costs.
In addition, employers are expected to cut worker benefits like health insurance, retirement benefits, free parking, and food discounts to offset the increase in wages. After all, they might not need to lay off as many people if they can cut other costs; however, the benefits that are cut will mean that the $15 per hour actually amounts to less of an increase in total compensation.
If employers are unable to continue to run their businesses successfully with fewer employees, the last predicted consequence of the minimum wage hike would be that more businesses are forced to close their doors for good. Fewer businesses would not only mean fewer jobs, but also less competition, which would also drive prices higher for consumers.
What Has Happened So Far
Although some restaurants have closed in Seattle since the hike was announced, they have stated when interviewed that their actions were not due to the minimum wage increases. Some, like Renee Erickson, actually support the law change. "I’m totally on board with the $15 min.," she told The Seattle Times. "It’s the right thing to do." Although she is closing one restaurant, she runs three others and is in the process of opening two more. "Opening more businesses would not be smart if I felt it was going to hinder my success."
But other effects are beginning to creep in as a result of the mandate. For fast food and retail workers, the increase is fairly straightforward, but for tipped employees, the issue isn’t as clear.
Normally, employees that are tipped, such as restaurant wait staff and hotel cleaning crews, could be paid a lower minimum hourly rate, as long as their tips brought them over the minimum wage. Seattle’s law change has thrown all of this into confusion, however, with possibly detrimental results. A few restaurants in Seattle have now abandoned tipping as a practice, instead of adding a "service charge" onto customers’ bills to offset the new $15 hourly wage. Although this may seem fairer to cooks and hostesses who don’t get tipped, it could lead to lower wages for wait staff, who can make far more than $15 per hour with their tips.
Other detrimental effects reported by workers in SeaTac, a Washington city where the minimum wage has already been raised to $15 per hour, are reduced tips, reduced overtime and loss of free food and parking. One woman said, "It sounds good, but it’s not good," and went on to report that she lost her 401K, health insurance, paid holidays and vacation. It is possible that a significant number of people would actually lose net compensation under a $15 minimum wage, which is the opposite of the intended effect.
If many full-service restaurants move away from tipping in order to comply with new laws, their costs may actually go down or be offset by the "service charges" they are able to levy. This could give them an advantage over fast food restaurants, enabling them to lower their prices or at least give customers the perception of lower prices.
The Franchise Reaction to Seattle’s Law
Only a week after Seattle’s city council passed the $15 minimum wage hike, the International Franchise Association and 5 franchise companies filed suit against the city. Their reason: franchise companies were considered "larger" businesses under the new law, even though most independently operated franchises fall far short of the 501 employees required to be considered larger businesses.
Although the case is still pending, an injunction to protect franchisees against the Seattle requirements was refused by the courts, leading some to predict that the case will fail. The reasoning given so far is that franchises are able to receive help from the large, sometimes multi-billion dollar franchise companies they are affiliated with. Therefore, they would have an unfair advantage against smaller, independent businesses.
It is unlikely that they would receive enough help from franchisors, however, to offset such a large increase in labor costs. Some have wondered whether this minimum wage hike is intended to punish large companies, which are perceived by many to be "greedy" and seeking ever-larger profits while using low-wage workers to do it. While there is no doubt that franchisors generate profits, they also bolster local economies by hiring many workers and providing products to consumers at relatively low prices.
Franchises are one of the groups that would be most affected by Seattle’s law since they typically hire many lower-paid workers to staff retail locations and restaurants. A $15 minimum wage could be a major blow to franchise operations and require major restructuring in order for them to stay in business.
How Fast Food Can Weather a $15 Minimum Wage
Whether or not the dire predictions of the experts come to pass, franchisees across the country are now beginning to consider how they can survive significant increases in the minimum wage. Undoubtedly, many will be forced to reduce staff, overtime, and even benefits to pay these kinds of increases.
Already, some franchises like McDonalds are considering labor-saving devices like self-order kiosks and automatic fry dispensers, which could help a franchise unit do the same work with fewer employees. It’s not a move McDonalds operators want to make, but they realize the need to do something to offset pressure to increase wages that seems likely to turn into law in more areas. "We are in uncharted waters," wrote one franchisee in a recent survey response. "The minimum wage issue is a major threat to the survival of the operator community."
Labor costs are typically the largest part of a restaurant business’s obligations. If franchises don’t find ways to remain viable, they will be forced to make another move that may have unintended consequences: raising prices.
Will Raising Prices Work?
Most large companies prefer to cut costs rather than raise prices if they can, and for one simple reason: raising prices can lead to lower sales. Each price increase, no matter how small, can make consumers unable to afford the product, or unwilling to pay more. Even if 5% of customers decide not to buy, or decide to buy 5% less often, it can be disastrous for companies and franchises whose profit margins may not be much more than that amount.
What is intended to generate more revenue can end up generating the same or even less. It’s a risky proposition that must be handled carefully. Furthermore, prices for most franchises are fixed and mandated by the franchisors, which means that price increases must come from higher up than the franchisee.
Price increases may be inevitable in the wake of pressure to increase the minimum wage, even incrementally, as in Obama’s proposed (but rejected by Congress so far) federal hike to $10.10. However, if all businesses raise their prices to cope with minimum wage hikes, the increases will offset the income gains brought about by the hikes, and a vicious cycle may ensue that demands further increases down the road. The bottom line of such a cycle is likely to be higher levels of inflation, which will hurt the economy in general over time.
Cost of Living Disparities Make Federal Minimum Wage Problematic
Another issue with a federal minimum wage of $15 per hour is that not all areas have the same cost of living. In rural areas and smaller towns, cost of living and wages tend to be much lower. Getting paid $15 an hour in Beckley, West Virginia, for example, would be worth $19.23 compared to average cost of living, according to Fortune. In New York City, by contrast, $15 an hour only gets you the equivalent of $12.24.
Not only does this kind of disparity make a $15 federal minimum wage unequal, but it also puts an even heavier burden on business owners in rural areas to pay the equivalent of almost $20 per hour while those in cities are affected far less and may already be paying closer to $15 per hour.
Because of these and other considerations, a $15 federal minimum wage seems unlikely at present. But even a federal raise to $10.10 per hour is an almost 30% increase that will put a strain on many franchisees and entrepreneurs struggling under the weight of existing mandates like providing health insurance to employees as part of the Affordable Care Act.
Other Threats to Fast Food Outlets
Demand for higher quality food has already thrust some fast food outlets into dangerous territory. If many full service restaurants move away from tipping in order to comply with new laws, their costs may actually go down or be offset by the "service charges" they are able to levy. This could give them an advantage over fast food restaurants, enabling them to lower their prices or at least give customers the perception of lower prices.
In the face of already stiff competition and pricing models that are failing to generate profits for many franchisees, increased competition from restaurants could pose a serious problem for fast food franchises in years to come. Chains that emphasize healthier ingredients like Chipotle and Panera Bread have begun to increase their market share as habitual fast food patrons begin to feel the effects of too much fat, salt and sugar on their bodies.
Fast food franchises will need to adapt to changing market conditions as they seek to provide what consumers are looking for at a price they can afford. Already, fast food outlets like McDonalds have had to move away from economical but nutritionally suspect additives and ingredients, although they still have a way to go in offering healthier fare.
What Might the Future Hold for Fast Food?
The impact of raising the minimum wage is anything but certain after a few short months, and the issue has proven to be more complex than it first appears. Most franchise owners want to be fair to workers, but realize that paying mostly teens and college students a "living wage" when they are still being supported by their parents is not really fair to anyone, least of all themselves.
Sound bites and oversimplifications about a "living wage" may sound good to minimum wage workers that feel exploited and overworked, but a changing minimum wage may have unintended effects that could leave many without jobs at all or with reduced benefits that take away from their wage gains.
In addition, as prices rise faster than inflation to help cover these added costs, shifts in fast food business models may be needed in order to keep them competitive and convince customers to pay more. Although challenges surely lie ahead, the speed and convenience of fast food will likely keep it around in the long run.
About the author:
Stephan Baldwin received his B.A. from Lock Haven University of Pennsylvania in Interactive Design. He went on to start Traffic Media, a successful online consulting firm specializing in website design and marketing for real estate professionals in South Florida. Looking for a change in scenery, Stephan accepted the position of Marketing Director with Franchise Gator and moved to Atlanta where he currently resides. Stephan brings over 10 years of experience in UI design, SEM, SEO, email & affiliate marketing to Franchise Gator.