Roosevelt Institute | Cornell University

Your Cashier at McDonald’s is Earning MoreHere’s Why You Should Be Concerned

By Abigail CundiffPublished November 18, 2018

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The US is experiencing a historically tight labor market, which has resulted in increased wages and benefits for low-skilled employees. This trend, however, is ultimately unsustainable.

On the last business day of August 2018, the Labor Department reported 7.136 million job openings—outnumbering unemployed Americans by 902,000 [1]. Prior to March, job openings had not exceeded unemployment in more than 17 years [1]. This labor shortage has generated a 3.1% increase in wages from last year [2]. The average job-seeker certainly benefits from the current market, but low-skilled workers are the biggest beneficiaries. As Harry Holzer, a professor of public policy at Georgetown University, states, “In a recession [low-skilled workers] are often the first to be laid off, and in the recovery they can be the last to be rehired,” so they are benefitting immensely from the strong economy and reaping the same wage and benefit growth that their white-collar counterparts have experienced in the years since the recession [3].

These benefits have a cost, though. In the beginnings of the “war for talent,” fast-food companies are especially hard hit. The Labor Department’s compensation survey showed that salaries this past year grew fastest for low-skilled workers—3.8% in the leisure and food service industry and 3.7% in sales and transportation [4]. In August 2018, the food service industry saw 146,000 more open positions (898,000) than August 2017 [5]. Due to the large amount of job openings across the economy, the supply of workers willing to take “low-end” jobs is decreasing, leading to competition among fast-food employers in the form of increased wages and benefits to retain employees and attract new workers. Fast-food companies with low employee satisfaction ratings, like Wendy’s, Sonic, KFC, McDonald’s, and Dunkin’, are more likely to lose dissatisfied employees as they trade up to “higher-end” jobs or leave fast food for comparable ones, like retail [6]. Subsequently, fast-food companies, especially these lower ranked ones, will find it increasingly difficult to hire new workers, who would rather take a higher paying job or one with a better work environment.

Some franchisees are now finding it difficult to fill all positions, so fast-food companies now fear both a decline in customer satisfaction and a cap on their sales potential, both of which deter investors and further lower employee satisfaction ratings [6]. The COO of Dunkin’, Scott Murphy believes it’s about the little things when it comes to combatting labor shortages, like “making sure people have the proper training, offering a flexible environment,…new uniforms,…making the stores cleaner and more hospitable, and reducing complexity behind the counter” [7]. Likewise, many brand name fast-food companies are taking action to improve employee conditions. McDonald’s, for instance, is increasing funding for career readiness programs and tuition assistance[5]. Jack in the Box and Dunkin’ are investing in automation and Panera is revamping recruitment and training [5]. Overall, fast-food employees benefit from better wages and working conditions as companies fight to retain them and reach maximum profitability despite the “war for talent.”

The labor shortage fast-food companies are facing is only one part of a larger problem within the US economy. The current economic expansion, which began in June 2009, is the second longest on record but might end soon [8]. During a labor shortage, competition for employees becomes more aggressive, as has already been seen, and puts inflationary pressures on the economy—companies raise wages and then try to reconcile increased costs of production by raising prices. At the moment, inflation hovers around 2%, the accepted benchmark level [9]. Unless the labor supply shifts outward or the amount of human labor required to perform tasks decreases, both of which would diminish effects of the “war for talent,” the labor shortage will inevitably accelerate inflation above 2% to unsustainable levels, thereby overheating the economy. The US economy has essentially hit the maximum. In desperate need of laborers to continue the boom US should be more open to immigration since doing so would alleviate the pressure from insufficient levels of human capital. This would be the best and most immediate solution to the issue, however, the amount of visas given out has declined over the past two years, so it is unlikely that the supply of foreign laborers will increase [10]. The implementation of automated systems, which companies can undertake themselves and have already begun doing, would reduce labor demand and cut costs; however, some companies cannot get the equipment quickly enough to prevent profit losses as capital is fixed in the short run [11].

Since the obvious options to correct the market fail to offer results, the Fed’s monetary policy is the surest way to stave off rampant inflation. The Fed is subject only to presidential admonishment instead of political pressure and has a dual mandate to maximize employment and stabilize prices. Raising interest rates will gradually slow growth and decrease inflationary pressure. The Fed expects to raise rates in December and thrice more in 2019 [12]. If inflation accelerates due to the labor shortage, though, the Fed may need to raise rates by more than expected to keep rapid inflation under control. The combination of an overheated economy and more aggressive rate hikes by the Fed could bring a recession, but only time will tell.

Works Cited

1. https://www.wsj.com/articles/u-s-job-openings-topped-7-million-this-summer-1539702755

2. https://www.wsj.com/articles/wages-rise-at-fastest-rate-in-nearly-a-decade-as-hiring-jumps-in-october-1541161920

3. https://www.wsj.com/articles/low-income-workers-see-long-awaited-wage-gains-1538771475

4. https://www.wsj.com/articles/the-growth-dividend-for-workers-1541201213

5. https://www.businessinsider.com/mcdonalds-adds-career-perks-for-workers-2018-10

6. https://www.businessinsider.com/war-for-talent-hits-restaurant-industry-2018-9

7. https://www.cnbc.com/2018/10/25/dunkin-ceo-says-its-modernizing-stores-faster-than-expected.html

8. https://money.cnn.com/2018/01/30/news/economy/us-economy-boom-history/index.html

9. https://www.forbes.com/sites/pedrodacosta/2018/11/08/fed-officials-may-soon-clash-on-need-for-further-interest-rate-rises/#22ca9fb26dc8

10. https://www.usatoday.com/story/news/world/2018/06/12/donald-trump-cutting-legal-immigration/692447002/

11. https://www.nytimes.com/2018/11/02/business/economy/jobs-report.html

12. https://www.cnbc.com/2018/11/09/dick-bove-theres-a-60percent-chance-of-recession-by-the-end-of-next-year.html

Image: https://www.wsj.com/articles/u-s-job-openings-topped-7-million-this-summer-1539702755