On July 29, a walk-out strike was coordinated across the country by workers in the fast food industry in a protest for higher wages. The McDonald’s chain garnered the most attention by the media as pundits debated the state of the economy with these strikers as fodder. At these walk-outs, workers were donning red clothing and banners declaring that they were “worth more” and demanded that they receive a “living wage.”
Cases like these are often interesting exercises in basic business and economics principles. In general, the two most basic items in cost accounting that will determine the price of a good: the cost of materials (beef prices, for example) and the cost of labor. All for-profit businesses are in existence for the sole purpose of at least reaching their break-even point — the point in which net operating profit is zero. Anything below this point is failure, and anything above is success.
So how does this apply to McDonald’s in particular? The fast food industry operates on strict revenue models in order to reach their break-even point. Any business would have to when they’re selling most of their goods for a single dollar. Therefore, in order to keep their prices from fluctuating, fast food franchises alter the only price they can control: the cost of labor.
Let’s do a little basic math – with some generous rounding in favor of the strikers for the sake of argument – starting with the facts. According to Entrepreneur.com, there are a total of 12,605 franchises in the United States. In the last fiscal quarter, McDonald’s reported around $1 billion in net operating income. In this theoretical scenario, each franchise makes about $80,000 in profit every quarter. The strikers are using data from New York City to bolster their claims (oh so strangely, the Big Apple is the most expensive American city to live in), which say that the average fast food worker there earns around $11,000 a year, with a minimum wage of $8.25/hour. They advocate for raising the minimum wage to at least $11.00/hour.
It’s not out of line to suggest that there are around ten workers on a line at a time. Let’s say that all the franchises are open 24-hours-a-day, and they all work straight twelve hour shifts. At current minimum wage in New York City, a single franchise’s quarterly wage labor cost then totals around $225,000. With the proposed wage increase, the total jumps to $300,000. All other costs unchanged, that’s 88% of their profit up in smoke.
If the minimum wage in New York City were to increase to $11.00/hour, this would mean disaster for these workers. Franchises would have only three options to adjust to the changes: decrease quality (it can’t get much lower), increase prices (which customers wouldn’t stand for), or fire workers, the latter of which is the easiest and, yes, best, option.
The numbers I concocted might not be the most accurate, but I’m not McDonald’s’ chief financial officer, and neither are these workers. The jobs they are working pay a low wage because they are very unskilled with no barrier to entry due to the high turnover and high demand. These jobs aren’t meant to provide a livable wage, and thus, they are extremely expendable laborers. These workers should be careful of what they wish for, because they might just get it.
And it looks as if their wish may come true, thanks not to the fast food companies but the “generous” helping hand of the government. In a recent Rasmussen poll, 61% of Americans favor raising the minimum wage to $10.10, and favor basing future increases on inflation, regardless of the economic consequences. If these protesters keep it up, they may play a part in doing what no one has done before: taking down the big clown Ronald McDonald.
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