The high price of mandated minimum wage hikes

When states mandate a higher minimum wage of $20 an hour, as California just did, McDonald's owners and small businesses must adjust or die. Here's a piece I did for the PG in the mid 1990s.

Paying the cost of a higher minimum wage

Everyone loves to get a nice pay raise especially like the one that President Clinton "gave" about 10 million workers yesterday after a bitter political fight.

But as with most of life's so-called "freebies," somebody has to pay for it.

In the real world of hamburger flipping and grocery bagging, businesses big and small will have to foot the bill.

Beginning in October, when the new minimum wage starts working its way toward an eventual $5.15 an hour, they will have to cover their higher labor costs somehow — by raising the price of a Big Mac a few pennies, by making clerks do more work for the same pay, by not giving raises to current employees or by not hiring new ones.

You might think that at McDonald's — the stereotypical headquarters of the Toiling Minimum Wage Masses — the new pay raise would be causing all kinds of big trouble.

Not so, says the owner of one of metro Pittsburgh's 98 Big Mac outlets.

"It's going to have an effect, but not as dramatic as most people think," said the businessman, who asked that his name and store location remain unpublished.

His store, which he said is fairly typical, has 72 employees, counting crew and managers (the metro store average is about 60 employees, or nearly 6,000 total).

A lot of them are working their first real job. Worker turnover is high. But several people have been with him for five years or more "and are already making a hell of a lot more than $5.15 an hour." At any given time, one-third of his crew are in entry-level positions making minimum wage.

After a 30-day training period, if everything works out, they get a 25-cent raise. Job reviews then take place twice a year.

The owner says the impact of the higher minimum on his entry-level workers is softened greatly by the law's "training wage" provision, which holds the hourly rate at $4.25 for employees younger than 20 during their first 90 days on the job.

The trickiest problem he'11 face is what to pay the workers who are already making between $4.25 and $5.15 an hour. He's not yet sure what criteria he'll use to adjust their wages, but he's certain they won't automatically get a 90-cent raise.

How will he cover the costs of the higher minimum wage?

It won't be by hiring fewer employees or laying off any, which is what many conservative economists warn will happen to as many as 200,000 jobs nationwide.

A year from now he expects to have the same number of employees. The cost of the minimum wage will be covered by savings wrought by innovations like precise-pouring, low-maintenance milkshake-making machines or automatic french friers that cost as much as a Honda Civic but quickly pay for themselves by eliminating labor costs.

Also, McDonald's marketing strategy is founded on low prices, which go up very slowly. By next year, for instance, a small coffee which hasn't gone up in price for 2 1/2 years probably will sneak up 4 cents.

Customers will hardly notice, which is the whole idea.

McDonald's corporate mantra "to serve hot food fast and friendly" won't be sacrificed to cover the higher costs of a higher minimum wage. But what about the owner of a struggling neighborhood deli? How does he adjust to a 20 percent increase in labor costs?

It's not easy, says a young deli owner in the South Hills. The deli operator — he didn't want to give his name, so we'll call him Joe — has 20 employees, half of whom are paid the minimum wage. One makes $7 an hour but most of the rest make around $5.15, next year's minimum.

Like most people who make their livings owning delis or restaurants, Joe is adamantly against the minimum wage increase. He says it's just cheap politics and bad economics.

Unlike McDonald's, Joe has no sure and unnoticeable way to increase his revenues, which already are stretched thin to cover rents (which are up), taxes (which are up) and bank fees (which are up).

To cut his costs, Joe said, he must change the way he prepares his food. Now he's offering his customers — most of whom are older people on fixed incomes — two homemade entrees a day, instead of the 10 he once offered. He's buying pre-cut onions instead of slicing his own, and using frozen vegetables and soups instead of fresh.

By using more prepared food, he has eliminated a job that a woman had held for five years. He has split her duties among three people, including himself .

Joe, who says he has "some really great minimum-wage employees and treats them good," calls his payroll his No. 1 "headache and my No. 1 monthly expense." He already was having trouble meeting his payroll before the minimum wage went up 20 percent.

"There's no way I can make it up in higher meat sales or lottery ticket sales," he said. "Unless I see an equivalent increase in sales or decrease in taxes and operating costs, I have to address the Oct. 1 deadline and dig into my own pockets. But there's nothing there.”