How Will The Restaurant Industry Be Affected By A Federal Wage Hike?
The talks about a federal wage hike have been making the rounds ever since the latest recession (sub-prime mortgage crisis of 2007) ran its course in the States. Ideally, the increase in wages should be in tandem with the growth in the rate of inflation. However, owing to the repercussions of recession such as a slowing labor market and a lack in consumer demand, the minimum wage in the U.S. has not been altered since 2009, when it rose from $6.55 to $7.25. This last hike was a part of the three wage increases mandated by The Fair Minimum Wage Act of 2007.
Recent Developments Around Wage Hike
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As per the law, employers and businesses must pay workers the highest minimum wage prescribed by federal, state, or local law. In the recently concluded U.S. elections, the topic of minimum wage hike was hotly debated, with both the Republican presidential candidate Donald Trump (to $10 per hour) and Democratic nominee Hillary Clinton (to $12 per hour) supporting the move. However, the path towards an increase in wages has become unclear under the leadership of the President-Elect Trump, due to his contradictory statements on the issue. Given the scenario, four states – Arizona, Colorado, Maine, and Washington took it upon themselves to put the motion of a wage hike under vote. The motion was approved by the voters, raising the minimum wage to $12 per hour by 2020 in Arizona, Colorado, Maine, and to $13.50 in the state of Washington. In contrast, in South Dakota a motion to reduce the wages was rejected, showing the growing support for a federal wage hike. According to the National Employment Law Project, a worker advocacy organization, roughly 2 million workers in the four states will see their wages increase.
In a more recent move, the lobby for wage hike suffered a setback when a federal judge in Texas blocked the new wage rule set by the Department of Labor, around overtime pay. The new rule raised the exemption for overtime pay to $47,476 in annual pay, from the current level of $23,360, and the threshold would readjust every three years to reflect changes in average wages. The judge, Laxalt, justified the stand order, saying the rule would burden private and public sectors, straining budgets and forcing layoffs or cuts in working hours. The blockage has left millions of workers in limbo. Investment firms says that retailers like McDonald’s and Starbucks will be most affected by overtime changes.
The Good And The Bad Of Wage Hikes
Although, intuitively a wage hike would seem like a positive move, as it increases the purchasing power of labor, and results in an increased consumer demand, there are a number of arguments against it. One such argument is that by increasing wages, the company’s operating costs go up. Since they are not able to pass on the hike to consumers by way of higher product prices, their margins suffer. In order to maintain margins, corporations try to optimize and make their production process more efficient. As a result of the optimization process, we see a lot more automation in the industry, leading to layoffs in large numbers. In conclusion, it is the labor that suffers by not being able to get employment due to the adoption of automation.
However, the evidence of unemployment increasing post a raise in wages is barely there, as is obvious in the above graph. There are no obvious hikes in the unemployment rate when the wages were hiked in the last 60 year period. This trend can be understood by the fact that as the purchasing power of the workers, and thus, consumer demand increases, the economy also gets a boost. Higher demand for products, means businesses need to produce more, which leads to increased, and thus higher, employment. Further, as employment increases less people need to depend on government provided unemployment benefits and other welfare programs.
Impact On The Fast Food Industry
The fast food or food and beverage industry is notoriously famous for its long working hours and low pay. As of May 2009, the workers in the food and beverage industry were the lowest paid, after gaming dealers.
However, some employers in the fast food industry, either due to goodwill or pressure from employees, or to take advantage of the improving consumer sentiment, are taking it upon themselves to boost pay. This may seem counter intuitive, given all the noise about deteriorating margins in the face of higher labor costs. Many have argued that franchisees have very thin margins to be able to increase salaries or hire full time workers. The move by Sonic, a drive-in fast food company, to increase wages and hire more workers, defeats this logic. Sonic CEO, Cliff Hudson, said that the “company’s research has proved that investing more in labor is necessary if the chain wants to compete in a crowded industry.” Another example is ubiquitous McDonald’s, which raised the salaries of its workers by $1 per hour in 2015. This, in turn, pressured its franchisees to raise wages. McDonald’s CEO said that the salary hike resulted in an improvement in customer satisfaction scores and led to lower attrition rates. Starbucks, is another big firm, which, in July, announced a 5% hike to the wages of all U.S. employees in its company operated stores.
Moreover, under the new Trump administration, corporations and employees are likely to see a lower tax burden due to the proposed decrease in corporate tax rates, and the proposed 13% cut in federal income tax for those making below $75,000 a year. This gives corporations more room to contribute towards improving labor conditions, while establishing themselves as employees’ choicest workplace.
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