New York's Fast Food Wage Board, a panel appointed by Gov. Andrew Cuomo, has recommended increasing the minimum wage to $15 an hour from $8.75 for quick-service restaurant businesses with 30 or more locations. The target, according to Mr. Cuomo, is “large, national companies which have been making extraordinary profits” while “underpaying their workers,” who are supported by public-welfare programs such as Medicaid.
But the higher labor costs that the New York state labor commissioner is expected to approve will not hit large companies. That’s because small business owners own and operate all of New York’s Burger King restaurants, and about 95% of its McDonald’srestaurants, as franchisees. These business owners set the compensation for the workers they employ. Burger King and McDonald’s, on the other hand, are paid a percentage (generally a 3% to 5% royalty fee) of the restaurant’s gross sales, regardless of the franchisees’ profits.
There are 7,303 franchised restaurants in New York operating under agreements with 116 brands, and like other restaurant owners, many pay some of their employees the starting wage of $8.75 an hour. Yet the owner of even a single franchised restaurant would automatically have to pay a minimum $15 an hour, simply because of his affiliation with a brand that has more than 30 restaurants nationwide. That’s not fair.
Could these restaurant owners cope with such a huge increase in operating costs by reducing their profits? Quick-service restaurant franchises operate on slim profit margins—on average 2 to 4 cents on the dollar according to an Employment Policies Institute study. And to the extent they make lower profits, these business owners will be less likely to open new restaurants. Restaurateurs who own more than 30 non-franchise quick-service establishments also will be put at a disadvantage with competitors not subject to the higher minimum wage.
To manage increased costs, franchisees instead may be forced to reduce their current staff or reduce their hours. They might even seek to automate some of their processes by implementing kiosks or mobile platforms for ordering food. The result would be fewer job opportunities for unskilled young men and women, who rely on these entry-level jobs to learn important work and life skills and to move up the employment ladder.
What about increasing prices? Certainly, consumers’ willingness to pay more for fast food would help offset the franchisees’ increased labor costs. However, increasing prices may result in losing customers who will seek lower-priced options. Two levels—one for franchises and another for other restaurant owners—will force some franchises to close.
State or local governments that raise the minimum wage across the board will help the lowest-wage workers who manage to keep their jobs. But the solution to the lack of quality jobs is not a massive minimum-wage increase for a subset of one industry, in an attempt to turn low-skilled entry-level jobs into middle-income jobs. The real culprit is six years of ineffective progressive economic policies. According to the Bureau of Labor Statistics, there are 8.3 million Americans still unemployed and another seven million “marginally” employed, often working two or three part-time jobs to make ends meet. There are more than 550,000 fewer full-time jobs today than there were in December 2007, before the recession began.
The answer to the current drought in jobs with a good salary isn’t another well-intended but misguided government fix. Instead, it is economic growth that will create the kind of jobs that will permanently lift people out of poverty. A vibrant free-enterprise system is the only way to generate that kind of economic growth, not blatantly discriminatory social experiments conceived by union bosses.
Mr. Caldeira is the president and CEO of the International Franchise Association in Washington, D.C.
