Expect delays at your favorite lunch venue today, as they may be short staffed. Fast food employees across the nation are planning to strike today. It is anticipated that the strike will occur in as many as 190 cities. Workers from all chains are uniting to demand that their minimum wage be increased to $15 per hour.
It is a noble cause, the workers deserve a better standard of living, and a bit more money can make a lot of difference. They are making a fair point, employees in fast food do earn less than most. The Economic Policy Institute released a paper about the restaurant industry in August. Average wages for restaurant workers sits at $10 per hour compared to $18 per hour for 'non restaurant'
So why do people work for fast food chains? For one they are willing hire workers who may not be experienced or skilled enough to obtain other work. I've always seen fast food outlets as 'an entry to the workforce' we all had that first job on the resume. Mine was at a magazine store stocking shelves.
Is a flat pay rise the best approach to this problem? Rather than asking for fish, why not ask to be taught to fish? McDonald's donates several million dollars to charity and even has their own charity 'Ronald McDonald House', which does wonderful work. Why not direct some of that altruism to their own staff? Think of it as an investment in your own staff (where as a pay rise would be a cost, not an investment). Here are a couple of ideas:
Subsidized study - Offer employees the opportunity to upskill themselves through knowledge. Offer a range of courses which can help qualify the employees for higher paid roles. Hey you could even start the Ronald McDonald College for upskilling...
Create upskilling opportunities for internal promotion We are focusing on the staff who earn $10 an hour, but a fast food chain employs a huge array of people at pay levels which go all the way beyond 7 figures. Give the workers a chance to spend a day in accounting or logistics, they might learn something hey maybe you'll even discover they have aptitude to work in that department. Your future CEO might be offering someone fries at this very moment! Think it can't be done? Well then you haven't heard of David Murray, the bank teller who stayed with Commonwealth Bank and got promoted all the way up to become a successful CEO
Financial hardship is a common problem for fast food employees. A This strike is great way to bring attention to the issue (it's how we learned about the problem). If the workers are successful, they will see their average income jump from $10 to $15 per hour, that's a 50% jump in hourly earnings.
We'd all love a 50% pay rise, but would this be a solution and help bring these workers out of financial hardship? Here at the Finance Guy, we have some concerns. Here is a Streetonomic look at why an increase in pay may not be a lasting solution.
We tend to say this a lot, but 'companies are in business to make money'. There are two key elements in turning a profit, maximize your revenue and minimize your costs. Wages represent the cost of labor, so naturally a pay increase to workers will see a matching profit decrease by the corporations.
Nobody would care if a fast food chain reports a few million dollars less profit for the year, right? Wrong! Unfortunately companies have people who benefit from their profits, known as stake holders. If you own shares in McDonald's, then you are a stakeholder in their profitability.
It would be wonderful if companies cared enough about their workers to ensure their quality of life. After all with out these workers, there is no fast food chain, looking after this essential part of the business should be important, but unfortunately it is not. If profits at McDonald's are down, we as share holders may lose a few dollars (if we sell), but the CEO and others in managerial roles, could lose their jobs.
If the strike is successful and the hourly wage increases to $15 per hour, the decision makers at all these fast food chains are going to face substantial challenges. How do they protect their profits if costs rise? More importantly how do they protect their high income jobs, they need to make payments on all those luxury cars and boats, specially so close to Christmas.
One way to maintain profit if wages go up, is increasing revenue, but that would be difficult. Fast Food companies are already blasting advertising at us from every imaginable source, and they couldn't make it any easier for us to find them and buy their food. They could rise prices, but that would be a slow and gradual process and would only work if they all did it. Imagine if every fast food chain except Arby's increased their prices by 20%, where would you go for lunch tomorrow?
An easier way to protect profits, is cost cutting, and the easiest cost to cut, is staff. Rising wages will see fast food chains take drastic measures to reduce their staff levels. Some staff will see reduced hours, while others will be laid off completely.
We expect that a rise in pay would create an outcome for employees where we will see:
- Those who continue to work the same number of hours per week, and see a substantial increase in their income. These are the big winners who have achieved the goal of the strike
- Those who keep their jobs, but see reduced hours. Working less hours for similar or slightly better pay is an increase in quality of life because you have more free time, but it doesn't solve the issue of financial hardship. Their income may go up or down a little, but overall they are still financially struggling
- Those who are laid off completely - You successfully achieve an increase in pay from $10 - $15 per hour only to end up with no income at all and have to go find another job. Given how many workers have just been laid off, you probably wish you started looking for a new job before the strike or pay increase ever happened.
A pay rise may solve the financial problem for some employees, but this is offset by those who are now worse off.
The Invisible Hand
If wages go up, companies will find ways to use less staff. The current business model used by fast food chains, is based on the availability of low cost labor. When you enter a fast food restaurant, you expect to see several employees behind tills, several more working in the kitchen, and a few in the dining area.
If the cost of a worker goes from $10 to $15 per hour, they will find ways to use less workers. Think about the workers behind the cash register. Usually you see around 5 of them at a time, so it costs $50 an hour to take your order (and payment), and give you an order number. If this cost were to jump to $75 an hour, we would probably see some changes, here are some hypothetical changes we might see
Cash Registers - How hard is it to place an order, I'm sure, if provided with a touch screen, you could do it yourself. Self check outs are already popping up in most supermarkets. This technology would enable restaurants to have only one employee assisting with cash registers and placing orders. Saving $40 an hour may not justify the cost of installing self check outs, but chains may be more willing to do it if it saves them $60 an hour.
Reducing the Dine in Service - Maintaining the dining area is another cost that can be cut. New restaurants may have smaller areas with less seating. As customers this means that dining in may become difficult and involve more waiting than before. To the restaurant it means paying less staff to keep the dining area clean and ready for the next customer.
Staff minimization through drive through only restaurants - In Australia, some McDonald's locations are open 24 hours. Being open all night is an expensive decision. There will be several hours with very few customers, and (at least in Australia) workers receive a higher hourly rate for working these unkind hours. How do they turn a profit from this? Through staff minimization.
McDonald's is open 24 hours, but from 11pm to 6am, only the drive through is available. This means there are no staff needed to maintain the dining area, and rather than have 5 cash registers, they only need one or two to run the drive through service, which again can be reduced with a self check out system, hey why install expensive technology, I'm sure it could bee done from my phone using their existing wifi. If you go ahead an develop an app for that, feel free to mention The Finance Guy when it becomes a big success :)
Drive through only is a reduction in total service. Dine in is not an option, and if you arrive to a line of cars backed out onto the street and around the nearest corner, you may feel frustrated while looking at the 5 vacant cash registers inside. But for McDonalds it is genius. It reduces cash register staff from 7 to 2, (assuming the two drive through spots are staffed all day). It reduces maintenance staff to zero, and it even reduces the need for kitchen staff.
At most there will be two lanes for the drive through, so no more than two orders are placed at once. During the day, up to 7 orders may be placed at any given time. Even when the cars are lined up around the block, the orders only come in two by two and a small number of kitchen staff can manage.
Funneling the customers like this means that McDonald's is able to ensure that a reduced staff is able to cope. It's a method which will frustrate some customers and cause some to go elsewhere. It's a fall in customer satisfaction and a fall in potential revenue, but the restaurant is willing to accept these falls because the reduction in cost means they stay ahead in the all important pursuit of profit.
Well that's about all I have to say on this topic. I will apologize in advance to McDonald's, I didn't mean to single them out, but once you use an example, it's just easier to stick with it :).
As always all feedback is welcome doesn't matter if it's positive, negative or indifferent. Let us know what you think, should fast food workers get their $15 an hour. What do you think the overall impact of a pay rise would be? How far would it go toward solving their communal financial hardship problems?