Raising the Minimum Wage is Bad Policy

minimum-wage1

mcdApparently, the Thursday before Labor Day was a day of organized protests by fast food workers demanding a “living wage” of $15 per hour for burger flippers and french fry slingers.
This post on Yahoo! Finance’s “Daily Ticker” caught my eye, especially the title:

McDonald’s Should Share Billions in Profits With Fast Food Workers: Labor Organizer

Maybe it’s just me, but whenever I see the term “organizer” immediately I conclude that the individual lacks basic understanding of mathematics and economics. Let’s see what he has to say.

Kendall Fells, the organizing director of Fast Food Forward, which is overseeing the New York City campaign, tells The Daily Ticker that these workers are not demanding that Congress raise the minimum wage but that the companies that employ them pay a living wage.

I was right.  No understanding of mathematics, economics, and (likely) reality.
I actually applaud Kendall Fells for lobbying the company, rather than the government, to hike wages. In my mind, nothing is worse than lobbyists putting pressure on government officials to coerce a third-party to be required to act in a certain manner without their consent or input — even if it’s an “evil” corporation. If workers and a company agree to pay certain wages through an arms-length negotiation between the two parties, there is nothing wrong with that.

There is, however, a misunderstanding — unintentional or otherwise — that fast food workers are being abused by corporations that aren’t paying them enough. A second misunderstanding is that fast food companies do not share their profits with their workers.

First, in order to accept the premise that workers are being abused by corporations, you must either believe (1) that Upton Sinclair’s novel The Jungle is based on contemporary goings-on or (2) that fast food workers aren’t entering into voluntary contracts with corporations to work for a certain sum of money per hour. Both are absurd beliefs. Working conditions in America are the envy of the world and credit is due to the early labor movement in this regard.

Also, at the risk of being flippant, slavery was abolished in the 1860s. People who are unemployed (particularly young people) would likely love to work for a fast food company if it meant not having food on their table if they did not. Beyond these two misunderstandings, I think Kendall Fells is sorely misguided with respect to the notion that McDonald’s doesn’t share its profits with workers.

McDonald’s, like all corporations, has a duty to make the corporation as profitable as possible.  That’s the point of a for-profit corporation: make a profit.  At the same time, though, it is disingenuous to suggest that McDonald’s doesn’t share any of its profits with the lower-level employees.

McDonalds Benefits And 401K

In fact, McDonald’s employees have a large range of benefits, which include vacation, paid holidays, health insurance, dental insurance, disability, and term life insurance. Most importantly, all McDonald’s employees are entitled to receive profit sharing through McDonald’s 401(k) program.

McDonald’s offers an incredible 401(k) match for its employees:

Our Profit Sharing and Savings Plan lets employees save from 1% to 50% of their pay on a tax-deferred basis in the 401(k) feature of the plan. McDonald’s matches eligible employees’ contributions with $3 for each $1 of the first 1% of pay they contribute, and $1 for each $1 on the next 4% they contribute. Eligible employees may also receive a discretionary profit sharing match of 0% to 4% based on the first 1% of pay they contribute. Employees are always 100% vested in their contributions and the company matches.

That’s a really good 401(k) program. I’ve written about the importance of Americans saving for their own retirement considering how Social Security is in such piss-poor shape. McDonald’s providing a 300% return on the first 1% that employees contribute to their 401(k) and 100% for each $1 that they contribute over the next 4% is as close to “free money” as one can get for retirement. That’s not assuming any discretionary contributions, which can really increase returns over the long run.

Some simple math and compounding: if an $8/hour employee were to set aside the full 5%, it would be a contribution of $832 per year from the employee. McDonald’s would contribute $499.20 for the first 1% contributed and $665.60 over the next 4% of contributions. That’s nearly $2,000 per year. This assumes (1) no pay increase, (2) no overtime, and (3) no promotion. Given time to compound (assuming historical rates of return), saving $2,000 per year from age 19 to 25 would compound to nearly a million dollars by age 65. That’s a lot of assumption, but the data over the last 100 years supports it.

Even US News notes that this is a generous 401(k) program:

The company that invented extra-large fries and soda provides many of its employees with a supersized 401(k) match. McDonald’s matches each dollar an employee contributes to the 401(k) plan with three dollars, up to the first 1 percent of pay. For employees age 21 and older who have been with the company for at least a year, the company also matches a dollar for each dollar saved on the next 4 percent of pay. Workers may also receive a discretionary profit sharing match, which was 3 percent last year. The frontloaded matching formula is designed to help employees without a lot of extra income to save to start building their nest egg. “That’s a tremendous way to inspire employees at all income levels to participate,” says Mellody Hobson, president of Ariel Investments, a Chicago investment firm. Salaried restaurant managers are automatically enrolled in the plan at 1 percent, unless they opt out or change their contribution level. Ninety-eight percent of these managers participate in the 401(k) plan.

“This plan is for everyone in the company, from the CEO to the restaurant worker,” says Ken Naatz, director of retirement plans at McDonald’s. Naatz saved 5 percent of his pay in the 401(k) plan last year and received a 10 percent employer match, including the 7 percent maximum guaranteed match and the 3 percent discretionary match.”This is our only retirement plan. We want it to be really good,” Naatz says. “It is designed to retain talented people at McDonald’s.”

I like the fact that executives participate in the McDonald’s 401(k) program and that it’s the only retirement plan at McDonald’s. There’s a “skin in the game” concept going on with that and all employees benefit.

Lastly, it is important to note this Bloomberg piece, which states that 40% of McDonald’s executives began as low-level employees. That’s the point of a low-level job. You start there and you move upward through hard work — or you leave to take another better-paying job. If burger flippers were paid like CEOs (or even $15/hour), the cost of a Big Mac would be prohibitively high. That makes everybody poorer, because the measure of wealth is the ability to purchase goods and necessities, and what you have left over. Simply earning more per hour is not enough if the costs of necessities and goods are rising faster than wages (looking at you, Ben Bernanke).

The Minimum Wage

Indeed, a wise opinion piece was (once upon a time) written on the subject of the minimum wage:

The Right Minimum Wage: $0.00

But there’s a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the minimum wage by a substantial amount would price working poor people out of the job market. A far better way to help them would be to subsidize their wages or — better yet — help them acquire the skills needed to earn more on their own.

A free market setting wages and employees free to accept work at that wage (or not), thus forcing an increase in the wages required for the job to be performed. Supply and demand. Imagine that!
As always, free markets are better markets.

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This week has a slew of important economic data, including consumer confidence, retail store sales, construction spending, initial jobless claims, and the all-important August BLS Jobs Report on Friday at 8:30 a.m. This report will likely be a market-moving event, because it is the last BLS Jobs Report before the September Federal Reserve meeting where members of the central bank are expected to announce a “taper” of the Quantitative Easing program, meaning less bond purchases. Exciting stuff.

Mike hails from New York City, where he practices law. He has an interest in advancing conservative and libertarian-leaning causes, which in his view have significant overlap. Mike spent his law school years in Texas, where he was instrumental in founding a chapter of the Republican National Lawyers Association. Mike has also served as the president of an international youth organization, where he was involved in lobbying American elected officials in support of various not-for-profit philanthropic causes.

16 Comments

  1. drklrdbill said:

    The last time the federal minimum wage was increased was in 2009. 15$/hour is too high, but I do think the minimum wage should be tied to the CPI at least.

    • Miké said:

      Thanks for the comment. The problem with that approach is that governments often stoke inflation. If things get “hot” like in 2008 (or the 70s), a spike in the minimum wage would slaughter biz and the economy.

      • Jim Swift said:

        Another problem with that also is that few would want the minimum wage to go down.

        The way social security is structured is instructive. When the SS CPI (I believe it’s CPI-W) sees a spike, it doesn’t mean payments go down when spike recedes. The stay the same at the spike level.

        Contrary to seniors’ griping, it’s not a “raise” for good behavior, it’s an inflation adjuster. And they complain (all while they get overpaid) that it hasn’t gone up when it shouldn’t.

        The same is likely to happen if you tie the minimum wage to CPI.

        Now I do believe two states tie their state minimum wage to an inflation metric, and one has it structured to rise and fall. That’s neat, but unlikely to be federal policy.

  2. Lawful Plunder said:

    Wages are just another price, and price fixing (in any area) is bad…always…period. To the extent the minimum wage is mostly below the market-clearing wage, it’s not a big deal. To the extent that it isn’t (in some locales) it does real damage. In any event, you can’t legislate an increase in wealth, so all you’re doing by increasing the minimum wage is re-distributing it, and making the economy less efficient in the process.

    The problem is that we’re subsidizing low wages in the form of the EITC/other poverty-related programs, the effect of which is to increase the supply of low-wage labor higher than it otherwise would be. As a result, the taxpayer is providing a subsidy to McDonald’s and other low wage employers. That’s definitely good for McDonald’s shareholders, but dubious public policy.

    The obvious answer, of course, is to do away with all price-fixing/subsidy schemes. However, the obvious (and right) answer is rarely popular or possible politically.

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  6. jsnh said:

    No wonder the teenagers are not able to hold any part-time jobs. These type of jobs were filled by the young people in the US to learn and earn some money for college, pocket money, etc., not as a job for the main bread winner of the family. Raising the minimum wage again only increases the prices for the consumer and the vicious cycle continues only at a higher level. Notice how many companies are out of business? We tried to go to a Ruby Tuesdays’ a couple of weeks ago and found that three in our area was closed. The only one we found in town was not that busy either. This is very sad and scary.

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  9. historianMI said:

    Why has no expert reader mentioned that if you give the french-fry slinger $15/hour, that will probably be more than the manager gets. And does this mean that the guy 2 days on the job gets the same pay as someone who has worked there two years? Generally, if the low level guy gets a raise, then so do all the other employees, so the E5 guy isn’t getting less money than the the E1 or E2……

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