The Trouble With Minimum Wage McJobs

by Alyssa Oursler | October 17, 2013 2:52 pm

Income inequality has been widening in recent decades, to the point that economics Nobel Prize winner Robert Shiller[1] just called it the “most important problem” we are facing today.

No industry better illustrates this stark new reality than the fast-food industry, where corporations like McDonald’s (MCD[2]), Yum Brands (YUM[3]) and Burger King (BKW[4]) rake in millions or even billions in profits while workers often make minimum wage.

Just recall the McDonald’s budget guide[5] for employees that was discovered this summer — ironic proof that showed just how unreasonable it is for a person to live on fast-food wages, much less support a family. Viewed in that light, strikes for better wages[6] that have sprung up across the country this year make perfect sense.

What many people might not realize, though, is that the negative impact of low wages extends far beyond fast-food workers.

And the benefits of better pay would do the same.

The Minimum Wage Saddle

Around half a century ago, CEOs at big companies earned around 20 times their typical employee, as James Surowiecki recently noted in The New Yorker[7]. That multiple has ballooned to 270. Surprisingly, increased disclosure has actually made things worse on this front since CEOs know what they can get away with asking for, and because boards compare their executive compensation to averages, then pay slightly above that.

“Higher pay becomes a kind of self-fulfilling prophecy,” corporate-governance expert Charles Elson told Surowiecki.

A similar self-fulfilling prophecy takes place at the bottom rungs, too. Fast-food companies know very well what they can get away with: minimum wage.

But when workers get paid less than what they perceive as a fair wage, productivity is shown to decrease — Fed chairman nominee Janet Yellen has written several academic papers[8] about this trend. One study found that underpaid employees “adjust not only the amount of effort but also their perception of the quality of the labor,” as Yellen wrote[9].

Thus, increased pay could improve not just workers’ lifestyles, but worker productivity … which in itself could offset the increased corporate costs.

The National Toll

Also, while fast-food corporations save money through low wages, U.S. taxpayers often are the ones footing the bill when poorly paid workers don’t pocket enough to get by.

A recent report by the National Employment Law Project[10] points out that more than half of front-line fast-food workers rely on at least one public assistance program to support their families, according to University of California-Berkley research. All told, the 10 largest fast-food companies in the U.S. cost taxpayers more than $3.8 billion per year, with McDonald’s alone responsible for a third of the tab. Similar data[11] has been broken out for minimum wage retailers like Walmart (WMT[12]) as well.

In short, better fast-food wages likely would save taxpayers some money.

Also important to note: If corporate profits go back into workers’ pockets, that money isn’t just going to be socked away. Minimum wage workers still have things they need to buy, so that money is likely going right back into the economy.

Putting more money into high-earners’ pockets, on the other hand — whether that means upping CEO compensation, or even rewarding shareholders via dividends or buybacks — doesn’t have the same immediate effect. Those folks have their basic needs met and are more likely to buy assets as opposed to consumer goods, or even just sit on their money.

An Employment Killer?

That brings us to our last point, centered around one of the most common arguments against higher wages: that it will result in fewer jobs.

Minimum wage buzz is getting louder on the West Coast, as both candidates for the Seattle mayoral race support the $15 minimum wage[13] fast food workers have been pushing for. Economist Steven Bronars, in a classic response, said the result will simply be lost labor and lost business. And he even put together a list[14] of more than 100 job positions within Seattle that would be affected in some way.

However, other research argues against the lost-jobs theory.

In New Jersey, for example, the minimum wage was raised from $4.25 to $5.05 in 1992 … and researchers David Card and Alan Krueger[15] actually found “that the increase in the minimum wage increased employment” compared to several control groups. One probable reason: The aforementioned consumer spending increase can actually help create more jobs — something we’ve been struggling to do during this slow economic recovery.

EPI researchers Doug Hall and David Cooper[16] noted this in a recent report, writing:

“Recent research reveals that, despite skeptics’ claims, raising the minimum wage does not cause job loss. In fact, throughout the nation, minimum-wage increases would create jobs. Like unemployment insurance benefits or tax breaks for low- and middle-income workers, raising the minimum wage puts more money in the pockets of working families when they need it most, thereby augmenting their spending power.”

Bottom Line

It’s arguably immoral to pay fast-food workers minimum wage that can barely cover basic living expenses — especially in the face of giant corporate profits and big-time CEO compensations. And it would be nice if such reasoning alone was enough to elicit change.

So far, though, it hasn’t been.

But the effects of low wages extend far beyond the underpaid workers. There’s some proof that higher wages and lower inequality would benefit most Americans.

And if corporate America needs an excuse, better wages could even bleed back through to the bottom line.

  1. economics Nobel Prize winner Robert Shiller:
  2. MCD:
  3. YUM:
  4. BKW:
  5. McDonald’s budget guide:
  6. strikes for better wages:
  7. James Surowiecki recently noted in The New Yorker:
  8. written several academic papers:
  9. Yellen wrote:
  10. National Employment Law Project:
  11. Similar data:
  12. WMT:
  13. support the $15 minimum wage:
  14. put together a list:
  15. researchers David Card and Alan Krueger:
  16. EPI researchers Doug Hall and David Cooper:

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