America's fast food industry is in a pinch. While we shouldn't overstate how strong the current economy is, it's definitely doing better. That means more job offers with higher wages, which means lower-pay industries like fast food are having trouble finding workers. Labor shortages abound, turnover in the sector — which comes with its own costs to business — has reached brutal levels, and restaurants are running afoul of regulators in their efforts to get more productivity out of less staff.
What's funny is that all these problems have the same solution: Pay workers more! That will widen restaurants' pool of available workers, and keep the workers they do have happier on in the business longer.
Granted, pay in fast food has started rising as the economy's heated up. But compensation remains low, with average estimates running from $8 to $10 an hour, depending on the restaurant, job, and local minimum wage laws. But that's hardly alleviated the strains the industry is under.
Turnover, for instance, is estimated to be anywhere from 100 percent to 150 percent — meaning fast food restaurants are replacing their entire workforce at least once a year, and possibly more than that. Burning through employees at that rate is no simple matter: replacements require time and training and other inconveniences that cost restaurants money. On the grimmer side, fast food is an industry that has disproportionately relied on teenagers for staffing — it's often seen as an entry-level job for someone just starting off the in the workforce — and that also means restaurants can fall afoul of child labor laws. Just this week, Massachusetts fined Chipotle $1.4 million for breaching limits on how many hours per day and hours per week 16- and 17-year old employees can be worked — over 13,000 violations over a four-year period. Chipotle was also penalized for taking too long to pay its employees, and for not following sick time rules.
Nor was this the industry's only child labor incident recently. Massachusetts officials also fined Qdoba half a million dollars, while federal regulators slapped a penalty on a Wendy's franchisee across nine states. Franchise branches of McDonald's and Burger King have also been hit in the last few years. "Understaffing is a massive problem," Jonathan Maze, the executive editor of Restaurant Business Magazine, told The New York Times. "You have companies that are stressed to try to fill hours and keep people on, and it can lead to violations."
Once fast food restaurants find themselves violating one of the most basic rules of economic decency (i.e. don't exploit kids) you'd think raising pay instead would become an attractive alternative. But if you read enough stories on labor shortages across the economy — and certainly within the fast industry specifically — what's astonishing is how often everyone rolls with the unspoken assumption that paying workers more just isn't an option.
In another Times piece on the shortage of teenage workers in particular, fast food restaurants said they're trying things like "dental insurance, sign-up bonuses and even travel reimbursement," a list that's all well and good, but that also sort of dances around the obvious. The owner of a Subway in New York City told the paper that he's "tried everything he can think of to find workers, placing Craigslist ads, asking other franchisees for referrals, seeking to hire people from Subways that have closed." You might notice one particular menu item missing from that list of "everything he can think of." At this point, it's so bad that he's (gasp) working behind the counter himself.
When confronted head on about the pay issues, the fast food industry and its defenders basically claim that compensation can't go up without endangering profits or hiking prices. But in either case, the appropriate response is arguably, so what?
Profits vary across the industry, with some big players like McDonald's bringing in very big margins of 20 percent. For the most part, profits in the industry are slender, with margins around 2-to-6 percent. But the more fundamental thing to remember is that most any company can actually survive just fine with no profits at all.
With standard corporations, for instance, profits aren't calculated until every worker — up to and including the CEO — has already been paid, not to mention all other expenses accounted for. Profits are just gravy spat out to shareholders. The whole company could run and expand and compete just fine without wasting any of that money on the capital class. Fast food restaurants, on the other hand, are often "pass through" companies, meaning the profits just go as regular income to the owner. If you eliminate profits to raise workers' pay, it would indeed make little sense if that meant an owner had to manage the restaurant for free. But quite often in pass-through businesses, owners pay themselves a salary for managing the firm, which again goes into operating costs before the remaining profits are calculated. Exactly how much room different fast food restaurants and chains have to raise pay by shrinking profits depends on the specific design of the company in question.
So let's say that you can't raise pay that much even after squeezing all the extra juice out of profits. Then you have to raise prices. Again, that's not as dire as it sounds. Research suggests that raising the pay floor in fast food to $15 per hour would require just a 4.3 percent hike in prices, and that's assuming you kept profit margins of 6.3 percent.
An important wrinkle here is that a lot of fast food restaurants are franchises, which means the local business and owner is often squeezed by the overarching corporation, which can bleed them with fees and impose all sorts of restrictions on hiring and pay practices. But this is why laws and regulations need to be reformed to clarify corporations' obligations to the employees in their franchise branches.
Hiking pay comes with other benefits that can take the sting out of costs elsewhere. As already mentioned, it can reduce turnover. Making work more pleasant for employees can often make frequenting the establishment more pleasant for customers. There's also the option of investing in new technology, like automated kiosks, to help workers be more productive. (Automation has an ominous ring these days, but it's important to remember that tech augments workers as often as it replaces them — and if it replaces them in the context of a labor shortage, that's because workers got other, better-paid jobs elsewhere.) Indeed, the argument that fast food restaurants have no choice but to pay poorly falls apart as soon as you look beyond America's shores. As of 2013, McDonald's was paying $14.50 per hour in Australia and $12.00 per hour in France, and doing fine.
When it comes to why it can't hike pay, the fast food industry's excuses are less than they appear. And those excuses will keep dwindling the more the labor market heats up.
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