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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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Welcome to the discussion.

4 comments:

  • Ted Lauchland posted at 12:08 pm on Wed, Dec 11, 2013.

    Ted Lauchland Posts: 256

    A quick answer to the CEO rate question is simply the potential of being a business owner or not. "Piece work" so to speak. You take a risk. Make big or lose your shirt. Something my experience tells me a risk that the average wage earner is not willing to take. At least not on that scale. The people I have asked to become supervisors refuse because they do not want to be the person that will ultimately be responsible for what happens. I do not normally ask a person unless I believe they are capable of doing the job. They say no because it would now be management. Can't be friends with coworkers once you cross the line.

    CEOs to my understanding are sometimes set up to share in the successes of the company. Maybe put on a percentage as an incentive. Of course corruption is always part of the risk. As a small business owner your success is more directly involved in the entire process. Customer relations, employee relations, pricing, paying of bills, etc.. You can build your business if you want depending on margins. Bigger means you can hire more people. All it takes is an imagination and nerves. Mr. Trump proves it exists and it doesn't bother him to lose his shirt. He just puts another one on.

    CEOs are in charge of successes or failures. Their skills are directly reflected in the company existing. Comparing them to an average wage earner is a mistake.

    Even in my own business there are swings in the market. If I do not prepare for them I will quickly be done. There are investors that come and go when the market is good. They are part of the swing. They are also part of huge price differences in a swing period that force crops to come out of the ground to replant with something more profitable. The only problem with that is it takes as much as five years to adjust so it needs to be more of an anticipated adjustment. In that it helps stabilizing the market.

    In a free market system all prices rising the same happens within itself. There is usually lag time involved. If the market supports it it will exist. If it doesn't it won't. Huge price swings throws it off the roller coaster. Rising the same otherwise is known as a monopoly. Unsupported prices create bedroom communities from one area to the next and smog on our highways. What a life - huh! Spending your life on the road searching for that pot of gold.

     
  • Jeff Tillett posted at 11:21 am on Tue, Dec 10, 2013.

    Jeff Tillett Posts: 548

    Yes, prices and costs and pay go up, but why did they not all increase around the same?

    "In 1978, CEOs took home 26.5 times more than the average worker. They now make roughly 206 times more than workers."

    "From 1978 to 2011, CEO compensation (in 2011 $) increased more than 725 percent, a rise substantially greater than stock market growth and the painfully slow 5.7 percent growth in worker compensation (in 2011 $) over the same period."

    http://www.epi.org/publication/ib331-ceo-pay-top-1-percent/

     
  • Brian Dockter posted at 7:51 am on Tue, Dec 10, 2013.

    Brian Dockter Posts: 2839

    Joe,

    I'm a skilled worker. It's taken me years to master the art of clock repair and restoration. If the minimum wage increases to 15 dollars per hour for unskilled workers it's a slap in the face to millions of skilled workers who only would make 1to 5 dollars more an hour than the proposed minimum wage hike. Since the backbone of this country is the small business which couldn't afford a 15 dollar minimum wage, there only choice would be to raise their prices on their services and merchandise they sell. Of course most large corporations have a huge amount of cashflow. But not always. Grocery stores operate on a 2 percent profit margin. A good part of them are part of a huge corporation. Where does the money come from in this instance? There are other examples of huge corporations where their profit margins are very slim. Most people are familiar with the grocery store example. I think you know where I'm going with this.

     
  • Ted Lauchland posted at 5:21 pm on Mon, Dec 9, 2013.

    Ted Lauchland Posts: 256

    And so goes the flawed plans on how to price something. It's what other cities are paying so to attract we have to bump. It's what the book says. It's what the numbers say. It's what they want. It's what they will pay and on and on.

    I remember my small business management class book saying if you can not see your original investment in your start up business come back in three years you should not do it. None of us would be here working if you stuck to that model.

    I will not defend McDonalds margins however their successes were based on fast food, multiple stores and entry level jobs with high turn over using typically teenagers. They are not the only business that sets the model as such. The benefit to the consumer was lower priced meals. " Change back from your dollar". Now the cost comparisons are times five or six since the 60s or 70s. Minimum wage I remember to be at about $1.75/hr. in the late 60s to over $8 now. We can do the numbers thing all day long. What was the price of a house way back when compared to five years ago and now? People used to pay their doctors with chickens too.

    There are entry level jobs never meant to be full time nor family supportive simply because of market values, skill level and the turnover rates prove it was only intended to be a temporary interim job. The problems arise when the 29 year old does not move on. - As far as it being supportive of a family it never has been other than from a teenager level. "Subsidizing"? - You might say you got it back in paying less for a burger than you would have at another higher end restaurant whose margins are minimal to begin with. Those higher ends rely heavily on waitress tips to keep going. Can't say I see that at McDonalds.

    I have a friend who opened a higher end. He said if you are thinking about it - don't. You work your blank off on the prospect that you still might be able to open again tomorrow if you are lucky. One of the service industries that is barely there.

    College towns do better - subsidized by the parents.

     

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