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California’s New Minimum Wage

April 12, 2024  |  954 words  |  Economics, Philosophy

Any suggestion to raise the minimum wage is countered with how such a mandate would adversely affect businesses that use low-wage workers, forcing employers to cut hours, lay people off, or switch to a more automated system.  We are also told it would invariably result in higher prices to consumers.

And when California’s new minimum wage law for workers at fast-food restaurant chains with at least 60 locations nationwide went into effect April 1, it was met with predictable howls of protest and breathless reports of one large pizza chain closing certain California locations, another even larger pizza chain eliminating its delivery drivers, and a smaller fast-food brand in the state deciding to close its doors completely.

But there is another side to this familiar scenario of wage-increases-equal-job-losses-and-higher-prices-to-consumers that usually escapes scrutiny.

Yes, raising wages increases operational costs.  And managing operational costs to achieve a competitive price point for your product that attracts the maximin number of potential customers is the first order of any business.

But if you are a successful operator in the fast-food space with at least 60 locations nationwide you have cracked the code and found the formula.  It is no longer a question of survival.  It is now a matter of trying to maximize the bottom line, not only to enhance the take-home for you and your executive team but also to make things more appealing for potential investors.

At the franchise level, one of the stories to appear in the wake of California’s new law came from the Associated Press, and quoted an owner of 10 Auntie Anne’s Pretzels and Cinnabon locations around the San Franciso Bay Area.  The individual reports the new wage increase will force him to come up with an additional $470,000 a year in payroll-related expenses, and he will have no choice but to raise menu prices 5 to 15 percent to offset the additional costs.  What this gentleman declines to share with us is what his 10 locations currently spin off in profit.  

This is the missing piece of the puzzle.  What if business owners decided not to maximize profit at every turn?  If you have climbed the mountain, if you have a successful business that essentially prints money, it should be okay to adjust the wage structure at the bottom of the organization so the grunts who get your product into customers’ hands can share some of the fruits of their labor.

Of course, this analysis extends up past the franchise owner and lands in the lap of the major fast-food corporations that maintain 60 or more locations nationwide.  Those entities should probably recalibrate the fees they demand of their franchisees, which in turn would allow the individual franchise owner some breathing room to pay its hourly line workers a better rate.

Not to pick on McDonald’s, but it has a net annual income of something like $2 billion on gross revenues of $6.5 billion.  That comes out to a pretty healthy profit margin of just over 31%.  Maybe good old  Mickey D’s could squeak by with, say, a mere 25% in profit.  The problem, of course, is how a slim-downed margin may make your enterprise less attractive to Wall Street.  And no one wants to risk that.

This is where we come face-to-face with an unsettling step on the road to achieving a more equitable (not equal) economy:  People at the top of the food chain who expect their money to “work” for them must scale back their expectations and settle for making a little less on the disposable income they choose to invest.

What of the many retirees of modest means who depend on a steady return on investment to fund their later years, you ask?  When high rollers cite this as a sign of solidarity with common folk it comes across as a diversionary tactic designed to preserve their own outsized gains.  Scaling back returns to a more reasonable level is not the same as slashing them.  As for those older Americans on fixed incomes:  Their concern is funding a retirement they have successfully reached; people whose career is at a fast-food restaurant are trying to get there in one piece.

Next is the argument that paying someone $20-per-hour to flip burgers or make pizza is just downright crazy.  It is the same complaint levied at unionized auto workers and the compensation package they receive for screwing nuts onto bolts.  This belligerent stance implies only people who do ‘important’ things deserve to make a living wage.

But that is the beauty of the American economic engine!  It is what distinguishes us from, say, Guatemala.  Through ingenuity and hard work, and harnessing an abundance of natural resources, some exceptional souls among us have created industries that mass-produce products to address social needs and/or make life easier, while delivering a measure of profitability far exceeding anyone’s wildest dreams.

If only we could adapt our sophisticated business-school model of how best to run these burgeoning industries, so the people on the lower rungs of the economic ladder, the ones with no leverage, did not have to scratch and claw for steady hours, safe working conditions, and decent pay.

One surefire way to prevent cumbersome government interference with our robust free-market economy is to continually improve the level of fairness and justice it yields.  Some organizations have made this a serious component of their corporate mission, but not enough to turn the tide.

Until we reach a critical mass in this area, when, for example, an international fast-food conglomerate deigns to rethink the 31% profit margin it earns on the backs of a low-wage work force, we can expect government to keep butting in with its ponderous, bureaucratic dictates regarding minimum wage laws.

Robert J. Cavanaugh, Jr.

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