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Will Striking Fast-Food Workers Hit Franchises Where It Hurts?

This week, fast-food workers are expected to walk out of their jobs en masse. Here's what their wage war means for small businesses across the U.S.

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One of the worst positions you can be in as a business owner is having to hold firm on costs, especially where employees are concerned. Many franchise owners in big cities across the U.S. now find themselves in this unenviable spot.

Since last November, when more than 200 fast-food workers engaged in a one-day strike at roughly 20 restaurants in New York City, some owners have experienced similar walkouts and others have followed the events anxiously. Yet another strike this Thursday--this time involving workers in 100 cities and coordinated protests in 100 additional cities--is expected to be the biggest yet.

Fast-food workers are teaming up with labor groups, including the Service Employees International Union, and retail workers at companies like Walmart to ask employers for a "fair wage" of $15 an hour, up from the federal minimum wage of $7.25. That represents a $15,000 annual raise for a fulltime worker.

"Workers are going on strike tomorrow because [many of them] are making at or close to the minimum wage, and it's not enough to survive on in a city like Chicago, where they are getting hit by rising costs for everything from housing to transportation to food," says Deivid Rojas, a spokesman for Fight for 15, a group that's organizing workers in Chicago. "A lot of them have families to sustain, and the minimum wage--or what they call the 'poverty wage'--isn't enough."

These efforts, which are part of a national push to raise wages and unionize low-income earners, are splashy and getting plenty of newspaper ink. But it's unclear whether they could actually pass muster.

Without new legislation enforcing an enhanced minimum wage, franchises would need to implement the policies on their own. And many of those franchises are owned by franchisees, or individual business owners, not giant franchisors (a.k.a. the McDonald's and Wendy's of the world). Of the 36 percent of U.S. restaurants that identify themselves as franchises, 75 percent are owned by franchisees and only 25 percent are owned by corporations, according to the International Franchise Association (IFA), a trade group.

The workers' requests are unlikely to be met for a variety of reasons. Few would disagree that workers ought to be able to feed their kids without having to rely on government assistance. But broaching the subject now--at a time when price competition has only intensified in the fast-food industry and many businesses still struggle after the recession--may be ill advised.

What's more, the wage hike itself would be significant--a more than 100% boost for many workers. Though you could argue that inflation has eroded the value of employees' wages over the last few decades, on the face of it, ponying up substantially more in overhead costs would be a bitter pill for any company to swallow--let alone one run by an individual franchise owner.

If wages are allowed to rise, wave sayonara to the dollar menu, as costs would skyrocket and jobs would disappear, business groups say. "What the unions and their allies fail to realize is that raising the minimum wage will only hurt those it is intended to help," says Matthew Haller, a spokesman for the IFA. "Increasing the cost of labor in the current economy would lead to higher prices for consumers, lower foot traffic and sales for franchise owners, and, ultimately, lost entry-level jobs."

Scott DeFife, executive vice president of policy and government affairs at the National Restaurant Association, a trade group, echoed that sentiment: "Business owners already face great uncertainty due to a lack of a clear economic plan from Washington and the health care law’s implementation. Calls to double the minimum wage only intensify the challenges faced by job creators." 

Higher wages might also push the fast-food industry to replace workers with automated systems. Just as retailers, including CVS and Lowes, have introduced self-service kiosks in recent years, it's likely that fast-food employers facing added overhead costs would institute similar measures. Transactions that take place at self-service kiosks in North America are already expected to launch past $1 trillion per year through the devices by 2014, according to a September report from Franklin, Tenn.-based researcher IHL Group.

Still, many economists argue that higher wages will not hurt businesses. There has been much research pointing to the benefits of a wage hike to $10.10 an hour, a policy that Congress is now toying with adopting. In his column this week, New York Times columnist and Nobel laureate Paul Krugman cites an Economic Policy Institute study estimating that a roughly $3 hourly wage hike would directly benefit 30 million workers. The theory goes, a higher wage minimum would aid workers making less than $10.10 an hour and also push up the wages of workers who currently make more than that. Those workers would then potentially up their spending on everything from health care and education to possibly even buying more meals out. Studies have shown that low-wage earners receiving a windfall are less likely to save than their higher-earning counterparts.

In the end, the effect of higher wages could wind up a wash, but that result might take years to come about. "We are in uncharted territory," says Mark Price, a labor economist at the Keystone Research Center, a policy think tank in Harrisburg, Pennsylvania. "If fast-food employers started going in this direction, I would expect to see a lot of innovation as these employers seek out the mix of business practices necessary to be profitable at higher wages."

IMAGE: Getty
Last updated: Dec 4, 2013




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