Why did McDonald’s Increase Their Wages?

When employers doll out wage increases, the announcement is usually met with appreciation and enthusiasm. For McDonald’s, however, their recent wage increases and new benefits were met with criticism and demands for more.

McDonald’s will be raising wages by about $1 for 90,000 employees at 1,500 of their corporate-run restaurants, which is a small number of their locations. Also, many employees will begin to accrue earned vacation time and also be eligible for educational assistance.

The move follows similar increases from other

firms in the low price niche business, specifically Walmart. Unlike Walmart, however, McDonald’s cannot raise wages at the rest of their locations because they are franchisees independent of corporate wage decisions.

What caused the wage increase? Many on the left claim social pressure forced the hand of CEO Steve Easterbrook. Profit-maximizing firms do not usually respond to social pressure that would negatively affect their bottom line. If that were true, they would have risen wages already.

McDonald’s profits have slumped 30% recently due to lost sales, which can be attributed to poor customer experience. By increasing wages and adding benefits, McDonald’s intends to motivate employees by reducing turnover in hopes that it translates to a better customer experience. More competitive compensation should attract and retain a wider employee base. They can compete with firms that also offer higher wages.

Of course, every business decision and market improvement is never enough for some crowds. There is still a push for a $15 minimum wage, but that could lead to even more lost sales. McDonald’s customer base, much of which is low-income, enjoys the dollar menu options because they can eat for less. While some may detest the healthiness, it is certainly a better outcome than starvation.

Wages above the new raise would lead to a dramatic price increase, thus out-pricing many of the low-income families and further reducing McDonald’s sales. The nominal wage increase was a thoroughly calculated decision intended to increase employee motivation without over-pricing meals for dollar menu customers.

Following the wage increase, many “worker’s rights” supporters made comparisons between McDonald’s and In-N-Out Burger, a firm that pays higher wages and performs well. In-N-Out pays higher wages and, according to the pundits, their success means that McDonald’s is capable of the same.

They overlook, however, that the two firms are entirely different. In-N-Out is a private firm that does not have to respond to stockholders. Furthermore, the average price for a cheeseburger at In-N-Out is $6.60 (without fries), indicating higher labor costs and higher quality. Their price is over six times higher than a McDonald’s dollar menu and almost $2 more than the average McDonald’s order value. Hence, In-N-Out sets their starting minimum wage at $10.50, thus competing in an entirely different labor pool.

McDonald’s wage increases has little to do with social pressure and everything to do with a calculated business decision. As labor markets develop, so too do wages increase. I suspect other firms competing for similar labor will make the same decision. After all, if they do not, then their employees could very well leave for the more competitive compensation packages. As consumers, our market power does more for labor wages than any social movement or government decree.

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