The Ugly Truth About A $15 Minimum Wage

Ed Rensi

Mr. Rensi is the former president and chief executive officer of McDonald’s USA.

A $15 minimum wage will mean wiping out thousands of entry-level opportunities for people without many other options. (Photo by Joe Raedle/Getty Images)

The Service Employees International Union spent 2015 expanding its campaign for a $15 minimum wage to other industries. In recent nationwide protests, the union focused again on its original target: Fast food companies, and McDonald's MCD +1.56% in particular.
I worked for the company for three decades, and served as its USA President for 13 years. I can assure you that a $15 minimum wage won’t spell the end of the brand. However it will mean wiping out thousands of entry-level opportunities for people without many other options.

The $15 minimum wage demand, which translates to $30,000 a year for a full-time employee, is built upon a fundamental misunderstanding of a restaurant business such as McDonald’s. “They’re making millions while millions can’t pay their bills,” argue the union groups, suggesting there’s plenty of profit left over in corporate coffers to fund a massive pay increase at the bottom.
In truth, nearly 90% of McDonald’s locations are independently-owned by franchisees who aren’t making “millions” in profit. Rather, they keep roughly six cents of each sales dollar after paying for food, staff costs, rent and other expenses.
Do the math
Let’s do the math: A typical franchisee sells about $2.6 million worth of burgers, fries, shakes and Happy Meals each year, leaving them with $156,000 in profit. If that franchisee has 15 part-time employees on staff earning minimum wage, a $15 hourly pay requirement eats up three-quarters of their profitability. (In reality, the costs will be much higher, as the company will have to fund raises further up the pay scale.) For some locations, a $15 minimum wage wipes out their entire profit.
Recouping those costs isn’t as simple as raising prices. If it were easy to add big price increases to a meal, it would have already been done without a wage hike to trigger it. In the real world, our industry customers are notoriously sensitive to price increases. (If you’re a McDonald’s regular, there’s a reason you gravitate towards an extra-value meal or the dollar menu.) Instead, franchisees can absorb the cost with a change that customers don’t mind: The substitution of a self-service computer kiosk for a a full-service employee.

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In higher-cost European countries, these kiosks are already the norm. In 2011, the company ordered more than 7,000 of them to replace entry-level employees. They’ve been tested successfully in a number of markets in the U.S., and now the company is even testing self-serve McCafe kiosks where a customer can prepare and customize their own coffee beverage.
Hurting young workers
If you’re tempted to shrug your shoulders at this brave new world, don’t. Over four million people in the U.S. are employed at “limited service” restaurants, a descriptor which includes companies like McDonald’s. If even one out of every four jobs was automated, that’s one million fewer job opportunities in a country where the youth unemployment rate is more than three times the overall unemployment rate. (In urban markets such as New York City and Washington, DC, the youth unemployment rate averages 30%.)
These young adults who face long spells of unemployment now are at a long-term disadvantage relative to their employed counterparts. One study released by the Employment Policies Institute found that high-school seniors with part-time work experience earned 20% more per year on average, 6-9 years after graduating, relative to their fellow students who didn’t work. Ironically, today’s minimum wage mandate for higher pay will be condemning young adults to lower-paid and less-successful futures.
I suspect that the labor organizers behind this campaign for a $15 minimum wage are less interested in helping employees, and more interested in helping themselves to dues money from their paycheck. They’re unlikely to succeed in their goal of organizing the employees of McDonald’s franchisees, but they may well succeed in passing $15 into law in other sympathetic locales. You’ll see their legacy every time you visit the Golden Arches, where “would you like fries with that” is a button on a computer screen rather than a phrase spoken by an employee in their first job.