Web Exclusive | February 2014 | By Mary Avant

The Cost of Higher Wages

Proposed minimum wage increases have operators worried about labor costs.

Proposed minimum wage increases have operators worried about labor costs.
Proposed minimum wage increases could mean lower employee turnover but also lower job creation. CKE
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Brands and operators in the quick-service industry are not looking forward to proposed minimum wage increases that are being seriously considered by states, local municipalities, and the federal government, especially following President Obama’s most recent State of the Union address.

After encouraging Congress to raise the federal minimum wage from $7.25 to $9 in 2013, the President expressed interest in increasing the federal minimum wage to $10.10, though some cities and states are being pressured to increase to as much as $15.

An increase in labor costs could possibly be the straw that breaks the camel’s back for quick serves and other businesses that are facing higher taxes, energy costs, and health-care costs along with a greater number of federal regulations, says Andy Puzder, CEO of CKE, parent company to Carl’s Jr. and Hardee’s.

“When you add on top of all that an increased labor cost by increasing the minimum wage, you make it more and more difficult for businesses to come up with business models that work,” he says.

Puzder believes minimum wage increases would also be bad for the still-recovering economy as a whole. “If we had a very thriving economy, if people had jobs, if the unemployment rate was fairly low, if the labor participation rate were very high, if things were going along very well and then there was an effort to raise the minimum wage,” he says, “I think there’d be a lot less resistance.”

Rather than wait and see if or when minimum wage increases go into effect, brands are already preparing for the increases and thinking about the effects it may have on their bottom line.

“Everybody increases their prices and within a short period of time, the increase in the minimum wage is worth a whole lot less because everything costs a whole lot more.”

One possible effect: a rise in menu prices. “This is what traditionally happens whenever the minimum wage goes up,” Puzder says. “Everybody increases their prices and within a short period of time, the increase in the minimum wage is worth a whole lot less because everything costs a whole lot more.”

And with the extra costs companies now have to consider, Puzder says, it’s becoming more difficult for operators to raise menu prices to balance out each additional burden.

Higher minimum wages could also mean price increases down the production line, says Scott DeFife, executive vice president of policy and government affairs for the National Restaurant Association (NRA).

“An increase in the minimum wage to a $10, $12, $15 level is going to impact the industry not just in terms of the wages to the entry-level workers within the industry,” he says. “It’s also going to have rippling effects, because the cost of the food coming in is going to be more, the cost to get the food from the manufacturer to the distributor will be higher. There’s a lot of other costs that are going to go in there that don’t have anything to do with just the wages of the restaurant employee.”

In addition, because quick-service customers care about the value these restaurants provide, any chance that minimum wage increases would be passed on to the customer could hurt traffic levels, DeFife says.

However, menu price increases may not be as steep or detrimental as many in the industry project, says Kent Jacobs, chair of the UC Berkeley Center for Labor Research and Education.

“The size of wage increases that we’re talking about in terms of the federal minimum wage proposals would overall lead to a pretty small increase in price,” he says. In San Francisco, for example—where the minimum wage was raised from $6.75 to $8.50 in 2004—limited-service concepts raised their menu prices an average of just 2.8 percent, compared with restaurants in areas that did not institute a minimum wage increase.

Increased menu prices might not be the only forced change in the industry to accommodate higher minimum wages, though. Puzder suggests operators might hire fewer people and depend more on automated technology like tablets. And DeFife worries that minimum wage increases could cause employment rates to fall for demographics that the quick-service industry typically attracts.

“If the entry-level wages go too high, the experience level, the skill level is going to increase for people who are going to get those jobs,” he says. “I’m fearful that teenage unemployment will go up even more than it already is, that they will price out these entry-level positions for a vast majority of the workforce.”

And while higher minimum wages won’t cause the industry, on a broad scale, to cut jobs—the industry continues to grow, DeFife says—they could result in fewer jobs being created.

Despite these potential challenges, a minimum wage increase isn’t all doom and gloom for the industry, Jacobs says, adding that higher wages often lead to lower employee turnover, improved morale and performance, better customer service, and a reduction in grievances and absenteeism.

“The advantage is the ability to retain workers,” Jacobs says. “So in that sense, you start putting a little more premium on worker retention versus operating a model that’s based on people staying a short period of time and cycling through.”

Should increases go into effect, restaurants must be prepared to handle them efficiently, finding ways to either overcome the costs through smarter scheduling or by increasing revenue through higher traffic or menu prices, says Michael Alter, president and CEO of small business payroll provider SurePayroll.

“The [increases are] going to be what they’re going to be, and you can’t change them. So you have to figure out how to manage around them or manage with them,” he says. “The real leverage is going to be in more efficient labor scheduling—making sure you have only who you need when you need them.”

DeFife says it’s important to remember that a minimum wage increase won’t be a “silver bullet” to end income inequality, and that operators should always work to invest in their employees and communities.

“Education and training and opportunity really make the difference in people’s lives,” he says. “And as an industry, we need to quantify the investments that are being made in people, training, education, and certification that have real value to people’s earnings and take-home pay.”