A Minimum Wage Disaster

By: Julian Hassan

Did you know that the average fast food business only makes 3 percent annual profit? I certainly didn’t. The Heritage Foundation tells the story in a recent report on higher fast food wages:

The Bureau of Labor Statistics reports the average cook in a fast-food restaurant earned $9.04 an hour in 2013. The SEIU’s push for $15 an hour would consequently raise fast-food wages by at least 66 percent. Paying $15 an hour would raise fast-food restaurants’ total costs by approximately 15 percent.

Fast-food restaurants could not pay this additional amount out of their profits. The typical restaurant has a profit margin of just 3 percent before taxes. That works out to approximately $27,000 a year—less than the annual cost of hiring one full-time employee at $15 an hour. In order to raise wages, fast-food restaurants must raise prices.

It is often easy for us to overlook how much risk entrepreneurs and business owners take on. Business owners hire employees, pay salaries, pay upkeep costs, and take on countless other responsibilities that don’t promise an automatic benefit. In the case of fast food franchises, owners can make $27,000 a year per establishment. An owner with several establishments could very well make a fortune, but only by taking on more risks. Five stores in different locations come with many more risks than one store in one location.

Workers seek employment at establishments like McDonalds or even big-box stores like Walmart, because they don't consider taking the risk of owning a business in their current plans. Presented with the idea, many would still not necessarily desire to be a business owner given the risks. Fast food business owners may have to take out loans in order to put down the money for a franchise, money that they are putting on the line.

Like the average person, an entrepreneur would prefer to earn and spend income in the present. We all prefer to consume things sooner rather than later, an insight on human motivation made by the Austrian school of economics called “time preference.” An entrepreneur must be willing to forgo this natural preference by choosing to invest most of their savings instead of spending their paychecks. Most people are not willing to do that (even myself currently at age 24—I prefer to enjoy my money sooner rather than later).

The employee benefits from such an arrangement much more than the employer does. How? Because they get most of the benefits of the employer’s risk without taking on the risk themselves. Cooks are more productive in industrial kitchens, which they don’t have to insure or lease. Workers earn more than they would without the signature drive-thru windows and fast food arches, which they don't have to borrow money in order to build, advertise, and immortalize as cultural icons.

Unless you live in Detroit, chances are you don’t want to go to “Joe’s Kitchen” in his garage in order to buy a DIY hamburger. Enter a fast food kitchen and suddenly Joe has a marketable skill, thanks to the risk Joe’s employer took by investing in an establishment. The owner bets that once built, people will come, so that he can both profit and pay Joe.

Although the Heritage Report focuses on runaway prices, customer flight, and job losses that would result from raising fast food wages, I hope to move the discussion to entrepreneurs in this post. The Austrian school underscores the fundamental role of risk-taking entrepreneurs in an economy. They are the ones who provide countless free benefits to us all.

What free benefits do consumers receive? If you think free food, you’re missing out on an important economic point.

You only have to pay a buck for a hamburger on a value menu, but the entrepreneur had to pay thousands of dollars for the machines that made its cheap price possible for so many—a cost you (and most people) never have to pay. When you look at it that way, those “Buy 1, Get 1 Free” coupons are just the icing on the cake, a Super Sized act of generosity, from an entrepreneur who has already given the world so much.

If fast food wages are forced upwards, Heritage estimates that store-owner profit would reduce to an average of $6,100 per year per store before taxes. Although Heritage ends the discussion there, it should be a moral outrage that this number is well below the poverty line. A family would have to run four stores (an average profit of $24,400) in order to surpass the 2014 poverty line set at $23,850 for a family of four.

When considering all of the free benefits that workers and consumers get from the risk-taking entrepreneur, it’s inhumane to add servitude to what entrepreneurs already face.

What does servitude mean? Raising the fast food minimum wage. That would sentence an entrepreneur who runs three restaurants at great personal risk—a huge, productive effort—to a life of poverty with no quick way out.

In comparison, fast food workers already have high upward mobility:

“When employees leave, they quickly find higher-paying jobs. Two-thirds of minimum-wage workers earn a raise within a year—with a median raise of 24 percent.”

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