McDonald's, that iconic brand founded by entrepreneur Ray Kroc, is rooted in the phenomenal prosperity of the 1950s. Now it wants to create greater prosperity for its workers too.

The hamburger chain that serves billions and billions around the world announced Wednesday it'll soon boost the minimum wages it pays workers in the U.S. stores it operates directly. Even if you're not a McDonald's franchisee, you need to pay attention to that move, because it signals that the cost of labor, even for entry-level workers, is going up.

McDonald's said it will increase its minimum wage by $1 above the locally mandated minimum wage in 1,500 stores, starting July 1. That's expected to lift the incomes of 90,000 workers, the company said in a press release. By the end of 2016, the average wage of McDonald's workers should be $10, well above the federal minimum of $7.25, noted the company in the release.

Additionally, McDonald's announced it will allow workers who have a one-year tenure at the company to accrue paid vacation time of up to 20 hours per year.

"We are acting with a renewed sense of energy and purpose to turn our business around," Steve Easterbrook, the company's newly appointed president and CEO said in a statement on Wednesday. "We know that a motivated workforce leads to better customer service, so we believe this initial step not only benefits our employees, it will improve the McDonald's restaurant experience."

The McDonald's pay increase takes place amid a tumultuous national debate about raising the minimum wage, and it follows moves by other large companies, such as Walmart, which announced it is increasing its entry wage level to $9 starting in April, and to $10 by February 2016.

President Obama has made increasing the minimum wage to $10.10 an hour part of his national agenda. In June 2014, he issued an executive order raising the minimum wage for employees of federal contractors to $10.10. Raising the minimum wage also featured prominently in the president's State of the Union address in January.

But Congress has pushed back against the federal wage increase, with legislation to increase the minimum wage to $10.10 an hour stalling in the Senate last April.

Currently 29 states have raised their minimum wages above the federal minimum. Numerous cities, such as Chicago, San Francisco, and Seattle also have minimum wages higher than either their state or federal wage floors.

Economists say McDonald's is operating proactively, to head off criticism and the prospect of organizing from groups like Fight for $15, the union organizing fast food workers to demand higher wages.

"This is a classic example of union avoidance," says Mark Price, a labor economist for the Keystone Research Center, a nonpartisan policy think tank in Harrisburg, Pennsylvania.

Putting on the pressure.

Even so, smaller businesses will also feel the affects of minimum wage increases by large corporations, Price says. The economy is now in full recovery mode, with labor data suggesting a return to historical norms around employment. In such circumstances, wages inevitably go up, creating pressure to keep the best workers, even if they are entry-level ones.

So, while McDonald's is also just paying attention to what's happening in the labor market and paying more for its workers to avoid costly turnover, that will necessarily affect McDonald's 3,100 franchisees, who employ the bulk of McDonald's 750,000 employees. The franchisees operate independently of the corporate parent, pretty much as small businesses. They are also left to set wages as they please, within legal bounds. But when the corporate parent raises wages, that will put pressure on them to do the same.

And other small business owners will soon experience similar pressure with their own entry-level workers.

"You'll be in a difficult position if you don't raise wages," because such workers will have more options for better pay--for example at the local McDonald's or Walmart, Price says.

In the end, though, raising entry-level wages isn't necessarily a bad thing. Adjusted for inflation, the lowest-wage workers today make about 4 percent less pay than they did 35 years ago, according to the Economic Policy Institute, a non-partisan think tank. And McDonald's, and entrepreneurs like Ray Kroc and Sam Walton of Walmart, helped create the low-wage service economy.

"Those companies have been around for a long time and have been part and parcel of the problem of falling wages for low-wage workers," Price says.

Published on: Apr 2, 2015