How US fast food chains can raise wages without raising prices

Do wage increases come at a cost?
Do wage increases come at a cost?
Image: AP Photo/Gene J. Puskar
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It turns out offering people more money gets them to apply for jobs. Wage increases at fast food chains like McDonald’s and Chipotle have largely solved their labor shortages, according to the companies’ latest earnings calls.

The staffing challenges in the US are “getting better,” said Chris Kempczinski, McDonald’s CEO, on a conference call with analysts and investors July 28. “I don’t want to declare by any means that it’s easy, but we’re certainly seeing some improvement. We’re seeing applications have increased pretty significantly.”

In May, the chain said it was raising hourly wages for its US company-owned restaurants by 10% over the next several months, where entry-level workers will make $11 to $17 per hour, and shift managers will make $15 to $20 an hour, based on location. On the earnings call, Kempczinski said McDonald’s franchises have also raised wages by about 5%. About 93% of the company’s restaurants are operated as franchises. Meanwhile, in June, Chipotle raised its average hourly wages for its restaurant workers to $15 an hour.

But there’s another contributing factor: Applications climbed in states that ended the extra unemployment benefits provided during the pandemic, said Kempczinski.

It’s hard to say how much of the uptick in hiring is due to workers going after higher wages and how much of it is due to the extra unemployment benefits wearing off, and workers “returning to jobs in many cases that pay less than the benefits that they were drawing, which is the unfortunate downside to all of this,” says Daniel Alpert, a senior fellow in macroeconomics and finance at Cornell Law School.

The tight labor market also led employers to boost other benefits. McDonald’s has deployed free childcare at some franchises. Yum Brands, owner of Taco Bell and Pizza Hut, said it has rewarded employees with more paid time off and free family meals. Thousands of fast-food workers in the US are receiving better pay and work conditions.

The price increases are modest

Business leaders often like to say that any increase in wages will lead to higher prices. But is that happening?

So far, price increases have been modest. McDonald’s raised them only by 0.5% in the second quarter. While Chipotle raised wages from $13 to $15 an hour, or 15.4%, menu prices, on the other hand, were hiked between 3.5% and 4%.

Price increases are generally quite small relative to the increase in workers’ wages, wrote Ben Zipperer, an economist at Economic Policy Institute, a left-leaning think tank, in an email. There are three major ways businesses respond to higher labor costs after raising wages, he says. First, companies receive some cost savings, as higher wages help retain workers, reducing the need to spend on recruiting and training them. Businesses also see some reduction in profits, and pass along some small price increases, he says.

But there’s another reason businesses are resisting hiking prices. In the fast food industry, particularly, businesses do not want to risk reducing demand, says Alpert. With the flood of government subsidies in the US ending, potential customers will have less money to spend, he says.

More broadly, while fast food chains have been raising pay for its hourly workers, many of the wage gains in low-paying sectors have been in the form of signing bonuses. It suggests employers see the worker shortage as a temporary problem likely to get resolved as vaccinations continue, schools reopen, and emergency unemployment benefits expire.