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How Raising the Minimum Wage Would Benefit McDonald’s and Walmart

You’re not likely to hear the CEO of any company that employs a lot of low-wage workers saying the minimum wage ought to be higher. But if it were, such companies might turn out to be unlikely beneficiaries.
The minimum wage, currently $7.25 an hour at the federal level, is getting renewed attention as a weak recovery proceeds without many new jobs that pay enough to support a family. Today’s protests against fast-food chains such as McDonald’s (MCD), Wendy’s (WEN) and Taco Bell (YUM) in dozens of cities are a new phenomenon, since low-paying fast-food and retail jobs used to dominated by young people likely to move onward and upward. As such jobs have become a better-than-nothing career for 30- and 40-somethings, pressure has grown for employers to raise pay so their workers can enjoy a decent standard of living.

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“It’s well past the time to raise the minimum wage,” President Obama, who favors a $10.10 minimum wage, said in a recent speech. “It means workers have more money to spend, to save, maybe to eventually start a business of their own. It will be good for our economy. It will be good for our families.”
Market forces aren’t on the workers’ side, however, which is part of the problem. More than 11 million Americans remain unemployed and many others without jobs have stopped looking for work. So the pool of people qualified to do low-skill jobs is a lot bigger than the number of workers needed, which makes it a buyers’ market. And no single company is likely to voluntarily raise pay (otherwise known as “costs”) if competitors don’t. Shareholders would wail, justifiably, and the competition might end up with a cost advantage.

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That’s why new laws raising the minimum wage—at the federal or state levels, or both—might do more good than harm. The federal minimum wage hasn’t been raised since 2009, and since 1980 it has risen by less than inflation. Perhaps more importantly, a higher minimum wage applied to all companies equally  could take pressure off the Walmarts (WMT) and McDonald’s of the world to singlehandedly help workers in the hope that other companies would follow.

But wait! Wouldn’t a higher minimum wage push up prices and curtail profitability? Maybe, maybe not.

“If all companies have to do it, it doesn’t end up changing the consumer’s experience very much,” says Chris Tilly, director of the Institute for Research on Labor and Employment at UCLA. Restaurant chains can reduce portion sizes (don’t tell their customers!) or take other measures to offset higher labor costs. If higher wages keep more workers from looking for other jobs, that reduces turnover, which in turn saves money. And higher-paid workers might offer more attentive customer service or perform better in other ways that benefit the company.  “There’s some pain to be shared,” says Tilly, “but also a gain.”
Small businesses may be more likely than big ones to cut back on hiring if wages go up, one of the most common arguments against raising the minimum wage. But even small-business owners seem skeptical of that. In a recent Gallup-Wells Fargo poll, 50% of small-business owners said they disapprove of raising the minimum wage to $9.50, but a surprising 47% said they support the idea. Only 28% said it would force them to reduce hiring, while 64% said it wouldn’t.
In fact, opposition to raising the minimum wage is much softer than opposition to, say, Obamacare or certain regulatory measures that raise the compliance costs and paperwork burdens on businesses. In another Gallup poll, 76% of respondents—including 58% of Republicans—said they favor raising the minimum wage to $9 per hour.
Agitators would like more, with some calling for fast food wages of $15 per hour. That seems improbable, but it might not be a bad opening bid. If they were to settle for something closer to $10 per hour, a lot of CEOs might breathe a quiet sigh of relief.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.