McDonald’s pay hike doesn’t go far enough

Workers for McDonald’s and other fast food firms say they aren’t paid a living wage.
Workers for McDonald’s and other fast food firms say they aren’t paid a living wage. AP

There has been surprising news across minimum-wage land: Paychecks are beginning to rise. Earlier this year, Wal-Mart raised its minimum pay to $9 an hour, then Target matched. Now McDonald’s has improved on those rates. Starting July 1, McDonald’s will pay at least $1 an hour more than the local minimum wage for workers at the restaurants it owns in the U.S., the Wall Street Journal reported.

As always, the devil is in the details. And while those details have been far less dramatic than the headlines, they are worth exploring. The motivations of the companies are even more intriguing. Before we delve into why McDonald’s did this, let’s look at a bit of recent history.

In February, Wal-Mart, the nation’s largest private employer, said that as of this month it would raise its minimum pay nationwide to $9 an hour – $1.75 more than the federal minimum of $7.25. As we noted, this was a raise for about a half-million Wal-Mart workers in the U.S. In February 2016, the company’s minimum rises to $10.

The details are less impressive: Most of Wal-Mart’s lowest paid workers are unaffected by the recent increase. Two-thirds of Wal-Mart’s employees work in stores in states whose minimum-wage laws are already $9 an hour or higher. Hence, the vast majority of the company’s employees will see no raise at all.

The increase at McDonald’s may be even less significant: The pay increase of $1 an hour more than the local minimum wage only applies to those people working in the 1,500 restaurants the company itself owns in the U.S. That excludes the 13,000 McDonald’s franchises in the U.S.

The splashy company announcements lead us to wonder what the motivation for these changes might be. Yes, of course, we know that almost everything these businesses do is aimed at improving the bottom line; but what was the math behind giving employees a raise? A few reasons come to mind.

The first, as we noted with Wal-Mart, is reducing employee turnover, which is a staggering 44 percent a year. Although that turnover isn’t atypical for low-wage employers, the sheer size of Wal-Mart makes it an enormous cost.

But there are other issues worth discussing: Social media’s impact on consumers and competition for employees as the economy improves.

Both of these seem to have worked to the detriment of McDonald’s – especially among the millennial generation, which has voted with its dollars to eat at places that serve fresher, healthier food such as Chipotle.

Don’t underestimate the competition for quality workers at fast-food restaurants. The supply of people willing to do the difficult, dirty work of grilling greasy burgers and fries or interacting with drive-through customers is finite. Wal-Mart has similar issues finding qualified minimum-wage workers. And as the economy continues to slowly improve and unemployment declines, that pool of workers gets smaller. It really was just a matter of time before wages had to rise.

Barry Ritholtz is the founder of Ritholtz Wealth Management.