Labor officials are about the last people to be impressed by evidence that hiking the minimum wage drives up entry-level unemployment. These last several weeks they’ve been putting words into action in targeting fast food restaurants. Unions, led by the Service Employees International Union (SEIU), are retooling their campaign to establish a $15 an hour minimum wage for fast food employees, more than double the current $7.25 an hour basic federal minimum. Hundreds of protestors, though not necessarily union members, were arrested for blocking traffic on Labor Day. President Obama voiced his approval of the campaign that day in a speech. And the SEIU has called for a nationwide strike. Yet if supporters really wanted to do workers a good turn, they would focus on the real possibility that they may wind up driving a lot of restaurants out of business.
Union Corruption Update last September addressed this “Fight for 15” campaign at length. The article made note of the fact that fast food restaurants, which are overwhelmingly franchisee-owned, are nonunion for some good reasons. These establishments aren’t exactly the essence of fine dining. They provide convenience and low prices, not elegance or innovation. And their menus, though containing market-tested flexibility, are limited. Teen and young adult workers view such places as an origin, not a destination, regardless of their eventual career choice. The pay is low and the turnover is high. Employees thus normally have very little desire to be represented by a union.
Unions notwithstanding see fertile organizing ground here. And this is because the last couple decades have not been “normal,” especially in major metropolitan areas. Put bluntly, a huge segment of the fast food labor force now consists of Third World immigrants possessed of limited literacy and English-speaking ability. Immigrants, especially if they reside here illegally, aren’t likely to complain about low pay or benefits. And their turnover is likely to be substantially lower because their lifetime earning capacity is far smaller. Upward mobility eventually will come to some, but slowly. Knowing this, management has an incentive to keep wages down. Average wages at McDonald’s, Wendy’s, Taco Bell and other major fast food restaurant chains, depending on levels of experience and responsibilities, typically range from 50 cents to two dollars an hour above the current $7.25 an hour minimum.
Though these workers are hard to reach, unions see a potential organizing bonanza. Their goal is a $15 an hour federal minimum wage, but they know that collective bargaining power can help close the gap. That’s why over the past couple years, unions have been using nonprofit ‘worker centers‘ as front groups. These nonunion organizations now number more than 200 around the country, whereas they barely existed 20 years ago. Many of them are Hispanic and Asian ethnic self-help associations with a hard-Left political edge. When it comes to labor issues, many operate in union-like ways, yet are not subject to federal labor laws. Yet though they usually begin independently, some wind up as union stalking horses. There is a mutual advantage in such alliances: Worker centers get funding and expertise; unions get access to potential dues-paying members.
The worker center driving most activism in the fast food industry is Fast Food Forward. Based in Brooklyn, N.Y., the group is a project of the Service Employees International Union. It also has close ties to New York Communities for Change, a nonprofit group heavily funded by SEIU and, to an extent, the United Federation of Teachers. And it is run by activists of what used to be the New York branch of the now-disbanded Association of Community Organizations for Reform Now, or ACORN. A little over a year ago, on August 29, 2013, demonstrators led a walkout in dozens of cities in hopes of winning a $15 an hour “living” minimum wage. This was the doing of Fast Food Forward. The group already had conducted a similar one-day strike over Thanksgiving weekend of 2012, persuading employees of dozens of New York City Burger King, KFC, McDonald’s and Taco Bell outlets to walk off their jobs. It mobilized another such event on April 4, 2013.
SEIU leadership is fully supportive of this effort. SEIU President Mary Kay Henry had this to say in reference to the November 2012 protest:
People who work for large, profitable corporations, like those in the fast food industry, should be paid enough to afford basics like housing and groceries for their families. But the reality is that hundreds of thousands of fast food workers need food stamps and other help from public assistance and private charities just to tread water in this economy.
Fast food workers, like workers at Walmart and workers in airports, are taking a brave step forward together to call for a living wage and a voice at work so they can lift themselves out of poverty and contribute more to the entire economy. We all stand to gain when workers can better afford to drive the economy forward.
Such rhetoric is superficially uplifting, but it overlooks a number of labor market realities: 1) states and localities have the authority to set a minimum wage that is higher than the federal minimum – and often exercise that authority; 2) at most three percent of all American workers at any given time make the minimum wage; and 3) among workers who do make the minimum, only a small percentage are actually full-time principal family wage earners. Most compellingly, the “Fight for 15” campaign overlooks the possibility that if successful, it may trigger large-scale job losses.
The Union Corruption Update article of a year ago summarized a broad range of empirical studies that had concluded that raising the minimum wage, especially to a “living” level, raises unemployment among teens and other inexperienced workers. The last 12 months have seen further supporting evidence: a Heritage Foundation analysis of Bureau of Labor Statistics (BLS) statistics; a Department of Agriculture conference paper reviewing the literature on fast food employment over the last 25 years; and a Congressional Budget Office report (see pdf) projecting the impact of hikes in the overall federal minimum wage, respectively, to $9.00 and $10.10 an hour, the higher rate now the centerpiece of Democratic-sponsored legislation.
Let’s focus first on evidence specific to the fast food industry. Nobody would argue that working at a McDonald’s or Subway’s is the path to riches. At the same time, labor costs at such establishments are not insignificant. A Heritage Foundation analysis of industry financial statements for the year 2013 (see pdf), released early this month, concluded from analyzing recent BLS data, that labor costs (i.e., wages and payroll taxes) for the average fast food restaurant represented 26 percent of sales. Material purchases, depreciation, marketing, rent/utilities and “other” represented, respectively, 31 percent, 4 percent, 3 percent, 9 percent and 24 percent. Before-tax profit accounted for the other 3 percent, or a little over $27,000 a year. There is no way, argued Heritage labor policy analyst James Sherk, that a typical fast food restaurant can absorb the extra cost of a $15 an hour wage without substantially raising prices.
The impact of a price hike on sales may substantially diminish customer traffic. The clientele tends to be on a tight budget and there is a ready availability of substitute goods, which in this case can be taken to mean home meal preparation. A conference paper presented in July by U.S. Department of Agriculture economists Abigail Okrent and Aylin Kumcu, summarizing studies published during or after 1990, concluded that the fast food industry has a price elasticity of demand of slightly less than unity. In layman’s terms, this means that a 1 percent price increase causes a nearly 1 percent sales volume decrease. Raising wages to $15 an hour would nearly double total labor costs and trigger a sharp drop in sales volume. A $15/hr. minimum wage, The Heritage Foundation concluded from this, would lead to a price rise of 38 percent, a sales reduction of 36 percent, and a profit reduction of 77 percent. The average annual per-outlet profit margin would be a mere $6,100.
Can restaurant management avoid dramatically raising prices in response to large wage hikes? It would be possible, but not easy. And the side effects might be more harmful than anticipated. Fixed costs such as rent, property taxes and insurance, for all practical purposes, can’t be cut. Cutting costs related to safety, maintenance and food preparation would render the operation unattractive and possibly in violation of local health ordinances. One feasible option would be to convert the status of full-time employees to part-time. But this process, which already has begun in the face of the employer mandates of the Obama health care law, has its limits. Part-time employees want at least enough hours to pay for some basic expenses, not just pocket money. Another option would be to hire the most skilled and experienced workers available. After all, if management has to pay $15 an hour, it might as well get its money’s worth. But in response, non-fast-food restaurants, in order to retain the best non-tipped workers, might have to be match or exceed that figure. And that could trigger unemployment in that part of the restaurant world as well. Yet another option would be to substitute machine for human labor. This is increasingly happening at certain family-style restaurant chains such as Chili’s – customers now can order and/or pay via online smart phones placed on tables; McDonald’s recently has announced plans to institute this feature at its own restaurants. Meanwhile, inventors in California have devised a machine that can cook up to 360 hamburgers an hour. A growing portion of the fast food work force may have to look for work.
As for the impact on the general economy, the minimum wage long has been recognized as a source of unemployment. A 39-page report issued in February by the nonpartisan Congressional Budget Office (CBO) concluded that raising the federal minimum wage to $10.10 an hour, which Sen. Tom Harkin, D-Iowa, and Rep. George Miller, D-Calif., proposed in March 2013 under their Fair Minimum Wage Act (H.R. 1010), would trigger significant job losses. Even a milder option, a $9 an hour minimum wage, would create unemployment. The CBO estimated the number of workers under each scenario who would be directly affected – that is, people who either would receive a higher wage or become jobless. They found that with a rise in the minimum wage to $10.10 an hour, 16.5 million workers would end up with higher average weekly wages and 500,000 workers would wind up jobless during the second half of 2016. The overall rate of unemployment would rise by 0.3 percent. A $9.00 an hour minimum wage would produce higher wages for 7.6 million workers and unemployment for 100,000 workers.
To some extent, the hike already has happened. And the evidence suggests the long-term results would be counterproductive. This February, President Obama issued an Executive Order requiring federal contractors to pay their employees $10.10 an hour starting in 2015. This directive applies to restaurant properties on military bases. A Department of Labor regulation raising the minimum “health and welfare” benefit rate at such facilities from $2.56/hour to $3.81/hour already had gone into effect in June 2013. Combining the two mandates would raise the cost of employment on military bases by an estimated 76 percent. This May, very likely due to these actual and impending hikes, three McDonald’s restaurants on Navy bases, and another McDonald’s on a Marine base, closed. Other similarly-situated restaurants have requested a release from their service contracts. In response, the DOL sensibly removed fast food employees from coverage of the benefits rule.
The CBO study suggests an unpalatable tradeoff ahead. Raising the federal minimum wage will raise wages for those immediate below the threshold, and to an extent, those slightly above. But to achieve that, we would have to accept a sizable number of people thrown out of the work force for at least a short duration, which in turn would drive up total unemployment benefits, not to mention the unemployment rate – all the while without necessarily improving productivity of affected businesses. Union officials and allied nonmember activists are providing a distorted picture in having their audiences look at the plus side only.
The SEIU, undaunted, is the leading edge of “Fight for 15” advocacy not only for the fast food industry, but for the entire economy. Organized labor as a whole is highly active. Recently, the AFL-CIO reprinted a blog by first-term Clinton Labor Secretary Robert Reich arguing that a $10.10 an hour minimum wage is a partial, but insufficient step to achieve economic justice. The goal, he argued, should be $15 an hour. Reich opined: “At a time in our history when 95 percent of all economic gains are going to the top 1 percent, raising the minimum wage to $15 an hour isn’t just smart economics and good politics. It’s also the morally right thing to do.” Yesterday the Minnesota AFL-CIO unanimously approved a resolution in support of a $15 an hour minimum wage for workers at Minneapolis-St. Paul International Airport. And early this year the San Francisco Labor Council, whose executive committee includes members from the SEIU, the Laborers, the Plumbers, AFSCME and other unions, adopted a resolution in support of a $15/hour minimum wage for the City of San Francisco. The City’s current minimum wage of $10.74/hour, argued the council, is inadequate. The unions are getting help from President Obama. Speaking in Milwaukee on Labor Day at an annual AFL-CIO-sponsored event, Obama said of Fight for 15: “All across the country right now there’s a national movement going on made up of fast food workers organizing to lift wages so they can provide for their families with pride and dignity.”
So far, two U.S. jurisdictions, both in Washington State, have adopted the union standard: SeaTac and Seattle. SeaTac, a municipality of more than 25,000 persons whose boundaries encompass Seattle-Tacoma (“SeaTac”) International Airport, was first out of the gate. Last November, local voters very narrowly passed Proposition 1, an initiative to establish a $15/hour wage for employees of restaurant, hospitality and transportation-related businesses inside and near the airport. The measure, strongly supported by the SEIU, Teamsters and other unions, had been approved for the ballot that June by the city council. Late that December, King County Superior Court Judge Andrea Darvas partially overturned the ordinance, arguing that it did not apply to employees of businesses located on Port of Seattle-owned airport property. The union-backed group sponsoring the initiative, the SeaTac Committee for Good Jobs, then filed an appeal with the Washington State Supreme Court, which is reviewing the case. Union-sponsored workshops, conveniently, are exempt from the law.
The City of Seattle was next. This June 2, the Seattle city council voted 9-0 to phase in a local minimum wage from the current (statewide) $9.32 an hour to $15 an hour. The ordinance gives businesses with 500 or more employees up to three years to comply; businesses with less than 500 employees would get up to seven years. It also has a built-in annual cost-of living adjustment. The proposal originated with a strident Indian-born radical, Kshama Sawant, elected to the city council last November running as a member of the Socialist Alternative Party, a U.S. affiliate of the British-based Trotskyist Committee for a Workers International. How radical is Sawant? Put it this way: She’s radical enough to have called for (in previous political campaigns) nationalizing Washington State-based corporations such as Amazon.com, Boeing and Microsoft. She managed to build support among fellow council members and, ultimately, new Mayor Ed Murray. The mayor, applauding the council, remarked following passage: “Some have called what we have done a radical experiment. I disagree. The real radical experiment has been the economic policy of the last 34 years that has dismantled our middle class.” The International Franchise Association filed suit shortly thereafter, arguing the law discriminates against small businesses bearing the name of large companies.
Union activists might not see high hopes for replicating the SeaTac or Seattle laws anytime soon, but they certainly made their presence known on city streets this past Labor Day. Demonstrators across the nation turned out to call for a $15 an hour minimum wage for fast food workers; more than 400 protestors around the nation were arrested for blocking street traffic. Outside a McDonald’s at New York City’s Times Square, police arrested 19 workers sitting in the middle of a nearby street. In West Milwaukee, Rep. Gwen Moore, D-Wisc., was arrested along with at least 25 other individuals after refusing to leave the street. Kendall Fells, organizing director for Fast Food Forward, the SEIU-sponsored worker center that coordinated the event, defended the actions. “There has to be civil disobedience because workers don’t see any other way to get $15 an hour and a union,” he said. “There’s a long history of this, from the civil rights movement to the farm workers movement.”
Fells and other activists are pinning their hopes on a pending ruling by the National Labor Relations Board in a California case unrelated to the restaurant industry. Union Corruption Update reviewed the details of this case, Browning-Ferris Industries (32-RC-109684), in July. A year earlier, a Teamsters local had filed a petition to represent workers at a San Francisco Bay Area-area recycling plant owned by Browning-Ferris Industries (BFI) of California, Inc.; a union contractor, Leadpoint Business Services, handles hiring, wages and other personnel issues at the plant. The local wants the NLRB to recognize Leadpoint and BFI as a dual employer for collective bargaining purposes. The case has major ramifications for the fast food industry. Contrary to popular misconception, fast food corporate headquarters do not set wages and benefits at franchise restaurants bearing the company logo; franchisees do that. And virtually all such dining establishments, from McDonald’s to Burger King, are franchisee-owned. A union victory could force parent companies with deep pockets across a wide range of industries to the bargaining table.
As long as a great many Americans choose to eat at fast food restaurants, this conflict isn’t going to disappear. This is an industry with high turnover and low profit margins – not exactly optimal grounds for union organizing. The fact that a large and growing proportion of its workers are unassimilated immigrants makes collective bargaining even less attractive. This is why labor unions have launched a two-pronged battle: 1) organizing workplaces through worker centers; and 2) persuading government to raise the minimum wage for the fast food industry, and eventually the entire economy, to $15 an hour. What the unions aren’t considering is evidence, much of it recent, supporting a longstanding observation: Raising the minimum wage, especially given the size of the increase they seek, will be efficient at eliminating entry-level jobs, not creating them.