Fast Food Employees will Suffer Most : Excessive Wage Increases

Know this about store owners in the fast food industry, they will innovate to keep profits, which means getting rid of anything that drags down the business.

Higher Wages for Fast-Food Employees Come at a Cost
Source: James Sherk, "Higher Fast-Food Wages: Higher Fast-Food Prices," Heritage Foundation, September 4, 2014.

September 9, 2014

A new study from James Sherk, policy analyst at the Heritage Foundation, reveals exactly what's at stake when fast food employees' wages are increased to $15 and hour -- something union activists are aggressively pushing for. The proposed pay increase may sound nice, but the wage hike will ultimately hurt consumers and workers alike.

Sherk explains why raising the fast food wage is not as simple as it sounds:                   

• Wages and payroll taxes constitute 26 percent of the typical fast food restaurant's sales, while food and other purchases comprise 31 percent of sales, making those two items more than half of the budget.
• The average fast food cook makes $9.04 per hour. The proposed pay hike to $15 would raise wages by 66 percent. In all, a restaurant's total costs would increase by 15 percent.

Because most restaurants operate at a 3 percent profit margin (meaning they earn just 3 cents for every dollar in sales), absorbing the pay increase would decrease profits by 77 percent. With such a wage increase, certain consequences are inevitable:

• Restaurants would initially have to raise prices by 15 percent to absorb the wage increase. But because the higher prices will hurt sales, restaurants will have to raise their prices further, up to 38 percent.
• No longer having the option for an inexpensive and convenient meal, many customers will seek out alternatives.
• Restaurants will try to reduce labor costs with automation, replacing workers with machines.

As Sherk explains, these consequences are especially significant for the less-skilled workers who benefit from work opportunities in the fast food industry. Entry-level jobs allow young and less-experienced employees to gain basic work skills, allowing them to move on to higher level jobs. Indeed, the typical fast food employee does not remain in his job for long:

• A McDonald's employee tends to stay in his job for just 8 months.
• Of minimum wage workers, two-thirds receive raises within one year of employment.
• The median pay raise for these workers is 24 percent.

Sherk warns Congress against supporting the effort to artificially inflate fast-food wages. Restaurants forced to comply with the wage mandate will be forced to raise prices, close their stores or make labor changes, cutting jobs and hurting low-skilled workers.