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Joe Guzzardi: Taxpayers are subsidizing fast food companies’ profits

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Posted: Saturday, December 7, 2013 12:00 am

The big-box stores and fast-food franchise workers’ nationwide demonstrations demanding higher hourly pay reached California during the Thanksgiving Black Friday weekend.

The clash between workers and management represents the classic economic debate. Each side has compelling reasons to support their arguments. The huge retail chains want to keep wages at their current level, while the workers understandably want higher pay. Who’s right?

First, the cases for both.

The 7 million fast food restaurant employees demand a salary increase to $15 an hour from the $7.25 federal minimum wage that many currently receive. That salary yields less buying power than their peers had in the mid-1950s. Those whose paychecks are bigger gross only a few pennies more an hour. Most don’t work a 40-hour week, an increasingly elusive goal. The typical work week is 24 hours with an $11,000 annualized salary.

The workers’ average age is 29, and about 25 percent of them are raising families. To provide at the basic subsistence level, thousands rely on food stamps, earned income credit and federal housing. In other words, taxpayer subsidies provide what employers should — a salary that allows for a decent standard of living.

According to one estimate, a family of four that lives in Washington, D.C. requires an annual $90,000 income, the equivalent of which translates into nine minimum wage jobs. McDonald’s has established an in-house service, the McResource Line, that helps its needy employees apply for benefits.

On the other hand, the corporations insist that paying high salaries would, in the long run, hurt employees. Thinner profit margins would force lay-offs and encourage companies to expedite automation that would permanently displace workers.

The late Nobel economics laureate Milton Friedman questioned the consequences of raising the minimum wage without a corresponding increase in employees’ skill levels. Without more ability, Friedman says that lower wages are appropriate and what the market will bear.

I’m siding with the workers. In a petition titled “Economists in Support of a $10.50 U.S. Minimum Wage,” financial analysts concluded that McDonald’s could recoup about half the cost of a salary bump merely by increasing a Big Mac’s price from $4 to $4.05. Other menu items adjusted upward by 1 percent would also help offset increased salaries.

In October, McDonald’s announced that its third quarter profits hit $1.5 billion — which is, coincidentally, close to the sum taxpayers shell out to subsidize the company’s employees’ public assistance costs. Last year, McDonald’s had annual revenues of $27.5 billion and profits of $5.5 billion. Earlier this year, CEO Don Thompson received a $13.8 billion salary package, up $4.1 billion from 2011. Recently, McDonald’s bought a $35 million Bombardier Challenger 605, a 12-seat corporate jet.

With all McDonald’s millions and billions floating around, no rational argument can be made that front line employees shouldn’t get a raise. I suggest a return to the old Ben and Jerry’s salary guidelines. Thirty-five years ago, Ben Cohen and Jerry Greenfield decided that there would be no more than a 5-1 differential between the highest executive and the lowest staffer’s salaries. If McDonald’s used that scale, Thompson’s annual income would be about $65,000.

Ben and Jerry’s policy lasted for 16 years. Then, when Cohen retired, the bar was raised to 7-1 to attract qualified leadership. Six years later, the scale increased again to 17-1. Then, after Unilever USA acquired Ben and Jerry’s in 2000, incoming executives unceremoniously dumped the plan.

Management consultant Peter Drucker had the best idea. Drucker advised companies to stick to a ratio of about 20 to 1 between the pay of the CEO and that of the average worker. That represents the limit beyond which corporations cannot go without creating worker resentment and falling morale.

If Drucker were to suggest his idea in today’s corporate America, he’d be laughed out of the room.

Joe Guzzardi retired from the Lodi Unified School District in 2008. Before he became a teacher, he had a 25-year career as an investment banker. Contact him at guzzjoe@yahoo.com.

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