Mandating higher minimum wage will hurt employees and economy

Last week, labor unions and their allies staged protests at quick service restaurant franchises, attempting to pressure companies to increase wages. Debates and public displays such as these can provoke strong emotional reactions, but these efforts do not change the fundamental facts surrounding how franchising works or the predictable unintended consequences of a higher minimum wage – less job opportunities for lower-skilled workers and slower economic growth.

Small businesses can jump start this economy and create jobs in 2014 if given the opportunity, but yet another regulatory burden on top of the costs of Obamacare, recent tax hikes through the fiscal cliff deal, and now the potential of raising the minimum wage will only serve to hold us back, while negatively affecting the very employees it is intended to help.

{mosads}Even before considering the economics of a higher minimum wage, some proponents incorrectly argue that the CEO of a franchise can simply mandate higher wages for workers at franchised stores. This reflects a gross misunderstanding of how the franchise business model actually works. While the franchisor provides marketing, administrative, technical and in some cases, supply-chain support, wages are set on a store-by-store basis by franchisees. Supporters of these protests may believe they are sticking it to the big corporate giant but they are in fact miscued on the fundamentals of the franchise business model. In reality, they are just protesting a local small business owner, who is already facing mounting regulatory costs and a weak economy with already thin profit margins.

Many of the jobs that pay close to the federally mandated minimum wage are entry-level jobs, not intended to provide a so-called “living wage.” As entry-level workers gain valuable skills and experience, their wages steadily increase. Two-thirds of minimum wage workers receive raises within a year. More than nine out of 10 managers start as hourly employees. The minimum wage is, by design, the floor of a worker’s earning potential, and franchisees work hard to equip their employees to move up the economic ladder. Many franchise restaurant brands have training programs that enable team members to rise into management and ownership.

Still, calls continue for an increase to the federally mandated minimum wage as a way to boost worker compensation. Increasing the cost of labor in the current economy would lead to higher prices for consumers, lower foot traffic in stores and lower sales for franchise owners, which will ultimately lead to the loss of entry-level jobs.

This is confirmed by a recent International Franchise Association (IFA) and U.S. Chamber of Commerce survey of business decision-makers at companies between 40 and 500 employees; 86 percent of decision-makers in franchise businesses and 72 percent of decision makers in non-franchise businesses indicated they would have to make personnel decisions to adjust to a “living wage.” Recent history bears this out as well. The most recent minimum wage hike resulted in 550,000 less part-time jobs, according to economist Michael Hicks of Ball State University. The increase also caused nearly 60 percent of restaurant owners to raise prices, cut hours, and postpone hiring. This is exactly the kind of rational business behavior one might expect, and precisely the kind of outcome that will prolong our still weak, uneven economic recovery. The factual and unfortunate irony is that arbitrarily raising the minimum wage would only reduce the number of entry-level jobs that help workers gain the skills to move up the employment ladder, leaving many without jobs, much less career growth opportunities.

As labor unions unabashedly stage “walkouts” in an effort to generate headlines and boost their consistently declining private-sector membership, policymakers should keep in mind that the franchising and restaurant industries remain a valuable job creator in this country. There are more than 189,000 franchised restaurants, which employ more than 4 million U.S. workers today. The small business health exchange has been delayed and 64 percent of franchise decision makers report that the employer mandate will hurt their business, while only 5 percent say it will help, according to the recent IFA and U.S. Chamber of Commerce survey.

With Senate Majority Leader Harry Reid (D-Nev.) likely to allow consideration of Senator Tom Harkin’s (D-Iowa) bill that would raise the minimum wage to $10.10/hour, members of Congress should focus on helping small business owners, not a flawed policy rife with unintended consequences, especially with a mid-term election around the corner.

Caldeira is the president & CEO of the International Franchise Association.