Minimum Wage Jobs are allowing Teenagers to afford Smartphones and Tablets

Posted by PITHOCRATES - April 12th, 2014

Week in Review

There’s a lot of talk about raising the minimum wage on the left.  As they are running out of ways to buy votes.  And they feel they can buy a lot by paying unskilled and inexperienced workers closer to what people with a college education make.  But minimum wage jobs are entry level jobs.  They’re the first rung on the career ladder.  The left loves to point to grown adults trying to raise their families on a minimum wage. As sad as that is the minimum wage isn’t supposed to raise families.  It can supplement a family’s income by allowing a parent to work part-time while the kids are at school.  But this is extra money.  To help cover some other expenses.  Like these (see More than 60% of U.S. teens have their own iPhone and iPad, prefer Apple products to the competition: study by AFP RELAXNEWS posted 4/9/2014 on the Daily News).

Over 60 percent of teenagers already own an iPhone and excitement is growing over the much-rumored launch of an ‘iWatch…’

… teens with an average age of 16.4 years and reveals that gadgets and electronics currently account for just 8 percent of their spending, with games systems and games accounting for a further 7 percent.

And of that small percentage, Apple products appear to account for the largest outlay. Not only do 61 percent of teens say that they own an iPhone (up from 55% in Spring 2013), 67 percent say they’re planning to purchase an iPhone within the next six months. And it’s a similar story with tablets. Piper Jaffray says that 60 percent of US teens currently own a tablet and of that group, 66 percent are using an iPad. When asked, 66 percent of non-tablet-owning teens have earmarked an iPad as a future purchase…

Over recent years, branded headphones have exploded in popularity and 56 percent of teens are planning to purchase a set over the next six months.

According to the BLS, approximately 2.5% of all workers earn at or below the minimum wage (people who get tips can be paid less than the minimum wage as their tips plus their wages takes them over the minimum wage).  And about a third of these workers are teenagers.   Yet over half of these teenagers can afford costly smartphones and tablets.  And the very expensive monthly cellular charges that make them work.  Also, over half of all teenagers are going to buy an expensive set of headphones.  Which can only mean one of 3 things.  The minimum wage is sufficient to buy all of these things.  They have a parent working a second (and perhaps, a minimum wage) job to help their kids pay for these.  Or 60% of all teenagers have rich parents.  Is it worth raising the cost of small business owners (who will hire fewer people when people are more costly) so about a third of all minimum wage workers can more easily afford their toys?

As far as single parents struggling to raise their family on a minimum wage, is it right to diminish the value of a higher education by paying unskilled and inexperienced workers more?  Will people still put in the extra work to get an education or training and delay having fun (our young people, not those who find themselves by circumstances beyond their control working a minimum wage job due to a divorce, death in the family, etc.) to earn the skills necessary for a higher paying job when they can get nearly the same amount by taking the easy way?  People say they hate these jobs.  Will paying them more so they have no incentive ever to leave these jobs make them hate them any less?  Or will they be locked into these miserable jobs for the rest of their miserable lives?  A lot of people take pay cuts to leave jobs they hate.  So getting paid more for a job they hate isn’t going to make them hate that job any less.

Raising the minimum wage is not going to change anything.  Other than reduce the amount of jobs available for the unskilled and inexperienced.  No.  The best way to help people earn more is to create more jobs.  For when the economy is creating jobs there will be fewer people available to fill them.  Which will cause employers to bid up wages so workers choose their jobs out of the many that are available.  But when the economy is so bad that only minimum wage, entry level jobs are available there will be few people moving up the career ladder.

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Minimum Wage, Obamacare and Unintended Consequences

Posted by PITHOCRATES - February 3rd, 2014

Economics 101

The Affordable Care Act greatly increased the Cost of Unskilled and Inexperienced Workers

The Affordable Care Act has changed the employment landscape.  In particular it changed a lot of people from full-time employees to part-time employees.  Especially at entry-level jobs.  Or minimum wage jobs.  Jobs that may be physically demanding but require minimum skill or experience.  Making them ideal for unskilled and inexperienced teenagers entering the workforce.

Not everyone, though, is a teenager in these minimum wage, entry-level jobs.  Some adults find themselves in them, too.  Older adults.  Single parents.  Widows.  Widowers.  People whose circumstances have changed.  And who don’t have the skills or experience for other employment.  So they find themselves struggling to get by on their entry-level, minimum wage job.

Then the Affordable Care Act (i.e., Obamacare) made their struggle more difficult.  For it required employers to offer health insurance to anyone working 30 hours or more per week.  Greatly increasing the cost of unskilled and inexperienced teenagers.  And their other entry-level, minimum wage workers.  So they did the only logical thing.  They cut their hours below 30 hours per week.  Shrinking the paychecks of both teenager.  And those who are struggling to live on their minimum wage paychecks.

The Unintended Consequences of Obamacare changed Full-Time Workers to Part-Time

We call it unintended consequences.  When a government program to solve one problem creates another problem.  In an attempt to give people with insufficient income to buy health insurance Obamacare forced their employers to provide health insurance for them.  This caused employers to cut hours for these employees.  To keep the cost of their entry-level, minimum wage workers from rising.  Thus reducing their insufficient income even further.

The rollout of Obamacare did not go well.  In the effort to give people affordable health insurance a lot of people actually lost the health insurance they liked and wanted to keep.  Another unintended consequence.  (Unless the Democrats designed the Affordable Care Act to destroy the private health insurance industry as many believe then things are going exactly as planned as people may soon start demanding that the government step in and provide national health care).  Causing a bit of a problem for the political party that gave us Obamacare.  The Democrats.  In the upcoming midterm elections.

It’s one thing causing people with individual insurance policies to lose their health insurance that may or may not have voted for you.  But to further impoverish the impoverished working those entry-level, minimum wage jobs was another.  For thanks to endless class warfare the Democrats put the impoverished into the Democrat camp.  So they needed to do something to replace the income they lost when Obamacare changed them from full-time to part-time employees.  And chose further class warfare.  By forcing those ‘rich’ employers to pay their entry-level, minimum wage workers a ‘living wage’.  By increasing the federal minimum wage.

Obama wants to Raise the Minimum Wage to replace Earnings lost when Obamacare made Full-Time Workers Part-Time

In the State of the Union address President Obama said he wanted to raise the federal minimum wage to $10.10.  But why $10.10?  The current federal minimum wage is $7.25.  And if you earned that working 40 hours each week for 50 weeks (assuming you take 2 weeks off over the year for personal reasons, holidays and vacations) that comes to $14,500 per year.  Raising the minimum wage to $10.10 brings those annual earnings to $20,200.  Or $5,700 more at the higher wage rate.  It’s a lot of money.  But probably not enough for someone to quit a second job.  For if someone is working 20 hours a week at a second job that would come to an additional $7,250 a year.  If they work 30 hours a week in a second job that would come to an additional $10,875 a year.  And some people have to work 70 hours or more a week to approach a ‘living wage’ when they don’t have the skills or experience for a job that pays more than an entry-level, minimum wage job.  So raising the minimum wage to $10.10 an hour probably won’t solve everyone’s financial woes.  But it will do something else.

If people who were working 40 hours a week went to working only 29 hours a week after Obamacare they would lose 11 hours of pay.  At the current minimum wage that comes to $79.75 less in their paycheck each week.  A significant amount for someone struggling to make it on something less than a ‘living wage’.  But look at what happens when we raise the minimum wage to $10.10 for those 29 hours.  If we multiply the additional $2.85 per hour to those 29 hours that comes to an additional $82.65 a week.  Which is a little more than the $79.75 they lost when Obamacare cut their hours.  So it would appear that the new push to raise the minimum wage to $10.10 is to put the money the Obama administration took out of these workers’ paychecks back into their paychecks before the fall midterm elections.  So they still won’t be angry and vote Republican because of what the Democrats and their Affordable Care Act did to their paychecks.

They want to sound compassionate to those with insufficient income by wanting to raise the minimum wage to replace what they took away from them with Obamacare.  To give these people a ‘living wage’.  For the current minimum wage is actually worth about 20% less than it was during the Reagan administration.  When it was $3.35.  Wait a minute, you say.  How can $7.25 be worth less than $3.35?  Because of the Democrats’ embrace of Keynesian economics.  The government wants to print money to spend.  To provide economic activity when the private sector is not.  And when President Nixon decoupled the dollar from gold in 1971 they ramped up those printing presses.  And have been depreciating the dollar ever since.  Because they made the dollar worth less and less over the years the purchasing power of the federal minimum wage fell.  Even when people were earning more dollars.  And raising the minimum wage won’t address this problem.  Only voting the Keynesians out of office will.

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The Minimum Wage Debate

Posted by PITHOCRATES - December 16th, 2013

Economics 101

A Fall in Economic Activity follows a Surge in Keynesian Stimulus Spending

The minimum wage argument is a political argument.  Because it’s a partisan one.  Not one based on sound economics.  Such as the classical school of economics that made America the number one economic power in the world.  Thrift.  Savings. Investment.  Free trade.  And a gold standard.  Then you have the politicized school of economics that replaced it.  The Keynesian school.  Which nations around the world accept as sacrosanct.  Because it is the school of economics that says governments should manage the economy.  Thus sanctioning and enabling Big Government.

Keynesian economics is all about consumption.  Consumer spending.  That’s all that matters to them.  And it’s the only thing they look at.  They completely ignore the higher stages of production.  Above the retail level.  They ignore the wholesale level.  The manufacturing level.  The industrial processing level.  And the raw material extraction level.  Which is why Keynesian stimulus fails.  Just putting more money into consumers’ pockets doesn’t affect them.  For they see the other side of that stimulus.  Inflation.  And recession.  And they’re not going to expand or hire more people just because there is a temporary spike in consumer spending.  Because they know once the consumers run through this money they will revert back to their previous purchasing habits.  Well, almost.

Keynesian stimulus is typically created with an expansion of the money supply.  As more dollars chase the same amount of goods prices rise.  And people lose purchasing power.  So they buy less.  Which means following a surge in Keynesian stimulus spending there follows a fall in economic activity.  Which is why the higher stages of production don’t expand or hire people.  Because they know that for them the economy gets worse—not better—after stimulus spending.

A Stronger Economy would help Minimum Wage Workers more than Raising the Minimum Wage

Increasing the minimum wage shares the Keynesian goal of putting more money into consumers’ pockets.  And many of the arguments for increasing the minimum wage mirror those arguments for Keynesian stimulus.  Even to reverse the consequences of previous Keynesian policies (see Everything You Ever Needed to Know About the Minimum Wage by Jordan Weissmann posted 12/16/2013 on The Atlantic).

The federal minimum wage is $7.25 an hour, which means that depending on the city you’re in, 60 minutes of work will just about buy you a Chipoltle burrito (without guac). By historical standards, it’s fairly low. Thanks to inflation, the minimum wage is worth about $3.26 less, in today’s dollars, than when its real value peaked in 1968.

It’s a Keynesian argument that says putting more money into people’s pockets will increase economic activity.  That’s the rebuttal to the argument that a higher minimum wage will reduce economic activity (by raising prices with higher labor costs).  For they will take those higher wages and spend them in the economy.  More than offsetting the loss in sales due to those higher prices.

The whole concept of Keynesian stimulus is predicated on giving consumers more money to spend.  Like raising the minimum wage.  Either with stimulus money raised by taxes.  From borrowing.  Or printing.  Their favorite.  Which they have done a lot of.  To keep interest rates low to spur housing sales in particular.  But with this monetary expansion comes inflation.  And a loss of purchasing power.  So the Keynesian policies of putting more money into consumers’ pockets to stimulate economic activity has reduced the purchasing power of that money.  Which is why the minimum wage in real dollars keeps falling.

According to the Bureau of Labor Statistics, 1.57 million Americans, or 2.1 percent of the hourly workforce, earned the minimum wage in 2012. More than 60 percent of them either worked in retail or in leisure and hospitality, which is to say hotels and restaurants, including fast-food chains.

…Almost a third of minimum-wage workers are teenagers, according to the Bureau of Labor Statistics.

Some in retail sales get a commission added on to their hourly wage.  Many in the food and leisure industry earn tips in addition to their hourly wage.  So some of those who earn the minimum wage get more than the minimum wage.  Those who don’t are either unskilled entry level workers.  Such as students who are working towards a degree that will get them a higher-paying job.  Those working part-time for an additional paycheck.  Those who work because of the convenience (hours, location, etc.).  Those who have no skills that can get them into a higher-paying job.  Or because these entry-level jobs are the only jobs they can find in a bad economy.

A stronger economy could create better jobs.  And higher wages.  For it is during good economic times that people leave one job for a better job.  And employers pay people more to prevent good employees they’ve already trained from leaving.  So they don’t have to start all over again with a new unskilled worker.  This would be the better approach.  Creating a stronger economy to allow unskilled workers to move up into higher skilled—and higher paying—jobs.  For you can’t have upward mobility if there are no better jobs to move up into.

On one side of the debate, you mostly have traditionalists who believe that increasing the minimum wage kills some jobs for unskilled workers, like teens…

On the other side, you have researchers who believe that increasing the minimum wage doesn’t kill jobs at all and may even give the economy a boost by channeling more pay to low-income workers who are likely to spend it.

The Automotive industry has long fought for tariff protection.  For the high cost of their union labor made their cars costlier than their imported competition.  The legacy costs of an aging workforce (health care for retirees and pensions) required a government bailout to keep General Motors and Chrysler from going belly-up.  And it was this high cost of union labor that caused the Big Three to lose market share.  Shedding jobs—and employees—as they couldn’t sell the cars they were making.

So higher wages raise prices.  And reduce sales.  Leading to layoffs.  And reduced economic activity.  The unions believe this.  That’s why they fight so hard for legislation to protect themselves from lower-priced competition.  You would have to believe that the economic forces that affect one part of the economy would affect another.  And those economic forces say that higher wages kill jobs.  They don’t increase economic activity.  They just help the lucky few who have those high-paying jobs.  While many of their one-time coworkers found themselves out of a job.

When the minimum wage goes up, the theory says, businesses shape up. Managers find ways to make their employees more productive. Turnover slows down, since people are happier with their paychecks, and the unemployed snap up jobs elsewhere in town. Meanwhile, Burger King and McDonald’s can raise their prices a little bit without scaring off customers.

Managers finding ways to make their employees more productive?  Do you know what that means?  It means how they can get more work out of fewer employees.  No worker wants to hear management talk about productivity gains.  For that usually means someone will lose their job.  As the remaining workers can do more with less because of those productivity gains.  So that’s a horrible argument for a higher minimum wage.  Because fewer people will have those bigger paychecks.  Made possible by reducing costs elsewhere.  As in laying off some of their coworkers.

Based on data from 80s and early 90s, Daniel Aaronson estimated that a 10 percent increase in the minimum wage drove up the price of McDonald’s burgers, KFC chicken, and Pizza Hut’s pizza-like product by as much as 10 percent. Assuming that holds true today, it means that bringing the minimum wage to $10.10 would tack $1.60 onto the cost of your Big Mac.

McDonald’s will never win the award for having the healthiest food.  And that’s fine.  People don’t go there to eat healthy.  They go there for the value.  As it is one of the few places you can take a family of four out for about $25.  Adding another $1.60 per burger could add another $6.40 to that dinner out.  For a family living paycheck to paycheck that may be just too much for the weekly budget.  Especially with inflation raising the cost of groceries and gasoline.  Thanks to those Keynesian economic policies.

Raising the Minimum Wage will not Result in any of the Lofty Goals the Economic Planners Envision

There is a lot of anger at these minimum wage companies paying their employees so little.  Some of their minimum workers have gone on strike recently to protest their low pay.  As they are apparently not working at these companies because they love the work.  So suffice it to say that no one is yearning to work at these companies.  And that some may outright hate these jobs.  So why in the world would we want to punish them by paying them more?  Removing all ambition to leave the jobs they hate?

If you raise the minimum wage what happens to other jobs that pay what becomes the new higher minimum wage?  Putting their earnings on par with unskilled entry-level jobs?  Jobs that require greater skills than entry-level minimum wage jobs?  Will they continue to work harder for the same wage as unskilled workers?  Will they leave their more difficult jobs for an easier entry-level job?  Will they demand a raise from their employer?  Keynesians would say this is a good thing.  As it will drive wages up.  It may.  But to pay these higher labor costs will require cost cuts elsewhere.  Perhaps by shedding an employee or two.

Raising the minimum wage will not result in any of the lofty goals the economic planners envision.  For if putting more money into consumers’ pockets is all we need to create economic activity then we wouldn’t have had the Great Recession.  The stagflation of the Seventies.  Or the Great Depression.  Keynesian stimulus spending didn’t create new economic activity to prevent any of these.  So why would a rise in the minimum wage be any different?

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California raises their Minimum Wage, condemning some to Remain in Dead-End Entry-Level Jobs Forever

Posted by PITHOCRATES - September 28th, 2013

Week in Review

Those who don’t understand economics always want to raise the minimum wage.  Because they think it will help unskilled workers.  But it actually hurts unskilled workers.  For a couple of reasons.  It will increase the cost of business.  Especially for small business owners who survive on thin margins.  If they have a few minimum wage workers an increase in the minimum wage may force the owner to lay off one of them.  Or more.  It is often that or working at a loss.

Another way minimum wage workers get hurt by a higher minimum wage is that it will keep them in a minimum wage job.  Where they never will earn much.  Causing them to struggle throughout their life.  You see, minimum wage jobs are entry level jobs.  Unskilled jobs for the unskilled.  So they can get some working skills when they have little to offer an employer.  Which is why historically high school kids and college students work these jobs.  Gaining useful job skills to apply to a future career.  Where they will earn a lot more.  Allowing them to raise a family.  It’s why people go to college.  To earn more money.  As they didn’t expect to get a ‘living wage’ without this higher education.

So raising the minimum wage is not in the best interest for minimum wage workers.  Unless they want to remain in dead-end jobs for the rest of their life.  After all, these jobs are often referred to contemptuously as ‘hamburger-flipper jobs’.  But state governments are always willing to keep people in these ‘hamburger-flipper jobs’.  Why?  For the votes.  Which is why California is raising their minimum wage (see California raises minimum wage to $10 by Melanie Hicken posted 9/25/2013 on CNNMoney).

The state’s minimum wage will gradually rise from $8 to $10, under the law signed by Governor Jerry Brown Wednesday morning. The hourly rate will increase to $9 on July 1, 2014 and to $10 on Jan. 1, 2016…

More than 90% of minimum-wage workers in the state are over the age of 20, while nearly 2.4 million of the state’s children live in a household with a parent who earns minimum wage, according to the statement. The pay bump would boost a full-time worker’s income by about $4,000 to around $20,000 a year.

The next time you go to a McDonald’s count the people working there.  There are a lot people.  Sometimes 8 or more.  Let’s look at that additional $4,000 in a worker’s income.  Which if you add taxes and other employee expenses let’s say it costs the employer $6,000 per worker.  If there are 5 employees that’s an additional $30,000.  Most McDonald’s are franchises.  Basically small business for one single small business owner who pays a whopping franchise fee.  For the privilege of having to do no marketing to get people to walk through their door.

Let’s assume an owner clears $100,000 in profits for his or her own salary.  And works 80 hours a week to earn that.  So his or her spouse can be a stay-at-home parent for their children.  Who bought the business so the two of them didn’t have to work.  Each earning $50,000 to make the house payment in a nice neighborhood with an excellent school system.  With the raise in the minimum wage this business owner will take a $30,000 pay cut.  Making it difficult to pay his or her bills.  Which will force them to lay off some workers and work more hours.  Or close the restaurant.  So they can get a job.  The spouse, too.  So they can afford to stay in the house they worked so hard to afford.  And keep their kids in the school they worked so hard to put them in.  Turning their kids over to daycare as they become working, part-time parents.

Business owners are not all getting rich.  More businesses fail than succeed.  Some make a lot of money.  Some lose a lot of money.  While every month is a struggle to meet their cash-flow needs.  And increases in the minimum wage won’t make this any easier.  It will just increase their costs.  Making it harder for them to stay in business.  And if they go out of business then that higher minimum-wage won’t help those minimum-wage workers.

Of course the question that just begs to be asked here is this.  Why is it that so many families have to rely on entry-level jobs to raise their families?  Is it because the Californian educational system failed them and they’re unable to go on to college?  Is it because the taxes and regulatory costs in California are so onerous that it is hindering job creation in better paying industries?  Or is it because people are so sexually active in high school that they’re having babies before they have an established career?  Or is it because they choose to remain in these hamburger-flipper jobs because the minimum wage plus a generous welfare state is enough to make life comfortable?  This is the more important problem to resolve.  What is putting these people in these dead-end hamburger-flipper jobs to begin with?  For these people would be far better off advancing out of these entry-level jobs than staying in them forever.

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Ashton Kutcher didn’t ask for a ‘Living Wage’ when he was Working Entry-Level Jobs

Posted by PITHOCRATES - August 18th, 2013

Week in Review

Ashton Kutcher made a speech the other day everyone is talking about.  Conservatives.  And liberals.  It’s become very political.  Especially for this part (see Ashton Kutcher Channels Steve Jobs In The Best ‘Teen Choice Awards’ Acceptance Speech Ever by Kyle Russell posted 8/12/2013 on Business Insider).

“I believe that opportunity looks a lot like work,” he began. He goes on to describe his first jobs: helping his dad carry shingles to the roof, washing dishes at a restaurant, working in a grocery store deli, and sweeping in a factory.

I never had a job in my life that I was better than. I was always just lucky to have a job. Every job I had was a stepping stone to my next job and I never quit my job before I had my next job.”

Could the repeating of the word ‘job’ have anything to do with his new movie “Jobs?”  Perhaps.  It’s something Greg Gutfeld pointed out on one of his umpteen television shows.  I think this comment was from The Five.  Funny guy.  And poignant.  In a warm, festering canker-sore of a way.  (Yes, you respect him.  Then you insult him).  One of my favorite libertarians.  But I digress.

Some on the left who reported this left out those earlier jobs he had.  Suggesting to the unaware reader he was talking about his acting jobs only.  And not those minimum wage jobs he was “lucky to have.”  That were merely a stepping stone to his next job.  These entry-level jobs gave him important work skills for his next job.  That’s what these jobs do.  They are not supposed to provide for a family of four.

The fast-food workers are striking to double their pay.  So they can remain in these entry-level jobs forever.  Which is not the point of these jobs.  These jobs are for kids entering the workforce.  Like Ashton Kutcher when he was a kid.  If they are unhappy they aren’t earning a ‘living wage’ in an entry level job then they should complain about the economic policies of the Obama administration that has left them behind in an entry-level job.

Anti-business policies like Obamacare have frozen new hiring.  And pushed people from full-time to part-time.  Or out of a job completely.  Leaving only entry-level jobs for many.  Who work one or two to replace the better and higher paying job the anti-business policies of the Obama administration destroyed.  This is what these people should be fighting for.  Repealing Obamacare.  And undoing all of President Obama’s anti-business policies that have left so many people working in entry-level jobs because they’re the only jobs available in the Obama economy.

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McDonald’s 2012 Annual Report

Posted by PITHOCRATES - August 6th, 2013

History 101

The Benefit of a McDonald’s Franchise is getting the Benefit of their Years of Building their Brand

Recently a late-night comedy show attacked McDonald’s for being greedy.  Because they don’t pay their minimum wage workers a living wage.  Because what were once entry level jobs are now the primary support for some families.  And why have entry level jobs come to support families?  Because the anti-business policies of the current administration have destroyed better-paying jobs.  But they don’t attack that on late-night television.  They attack a company actually providing jobs in a jobless economy.

Today McDonald’s is huge.  You can find them pretty much anywhere in the world.  Which can be a welcome site for a weary traveler.  For they know they can walk into a McDonald’s wherever they are and have the comfort of a meal exactly like that at home.  Which is pretty amazing if you think about it.  And why McDonald’s is so successful.  The sight of those Golden Arches can attract a foreigner in a strange land or a construction worker on a new project in a distant city.  They know exactly what they can get at that McDonald’s.  What it will taste like.  And what it will cost.  Even if they’ve never been in that McDonald’s before.

This is because McDonald’s has very successfully built their brand.  Which is one of those intangible things.  It has great value.  But you can’t physically touch it.  Those who own a McDonald’s franchise can enjoy a thriving business.  From day one.  Without doing any marketing to get people to walk into their restaurant.  They don’t have to.  Because McDonald’s has already done it.  And continues to do it.  This is the benefit of the franchise.  You get the benefit of all those years of hard work McDonald’s did to build their brand by simply paying a franchise fee (see Restaurants and Franchises posted 8/5/2013 on Pithocrates).  It’s not cheap.   But it’s such a fair deal for both franchiser and franchisee that McDonald’s had 27,882 franchised stores in 2012 (see McDonald’s 2012 Annual Report, page 11).

Owning a McDonald’s Franchise allows you to own a Restaurant that has been Successfully in Business for 72 Years

In addition to the intangible value of the brand the franchise fee also includes rent.  For McDonald’s “owns the land and building or secures long-term leases” for the franchisee’s store (see McDonald’s 2012 Annual Report, page 11).  While the franchise needs to foot the bill for the “equipment, signs, seating and décor.”  This makes sure all stores are modern and up to date and uniform.  Helping to maintain that comfortable familiarity for the customers.  While splitting the capital costs between the franchisee and franchiser.  So both parties have a major investment in the business.  And each shares in the profits of the business.  Perhaps the best of the deal for the franchisee is getting a mentor.  And a detailed operating manual telling them everything they need to know and do.

Owning a McDonald’s franchise is costly.  But you get to step into a restaurant that has been successfully in business for 72 years.  Give or take.  Considering that half of all restaurants fail within the first five years of business this is a HUGE benefit for the franchisee.  And something well worth the franchise fee.  As evidenced by 27,882 franchised stores in 2012.  So what is that franchise fee?  And how much money does the franchisee get to keep after paying the franchise fee?

Well, if you do a little number crunching with the financials included in the 2012 annual report you can get an approximate number.  McDonald’s also has stores they own and operate.  In 2012 they had 6,598 company-owned stores.  The average per store revenue was $1,358,594 (calculated by dividing the total revenue from the company-owned stores by the number of company-owned stores).  A similar calculation gives an approximate $667,205 franchise fee per franchised store.  Subtracting the typical franchisee fee from the typical store revenue (assuming all stores have the same average revenue as the company-owned stores) gives the franchisee an annual income of $691,389.  From this income the franchisee has to pay for food, labor and overhead.  And whatever is left over is profit.

High School Kids and College Students work at McDonald’s because they need no prior Restaurant Experience

The rule of thumb in restaurants is that costs are broken down into thirds.  One third is food cost.  One third is labor cost.  And one third is overhead and profit.  So if we divide that $691,389 by 3 we get an annual food cost per franchised store of $230,463.  Ditto for labor.  And overhead (gas, electric, water, insurances, taxes, licenses, fees, waste disposal, light bulbs, toilet paper, soap, garbage bags, etc.) and profit.  Let’s look at the labor cost more closely.  To see if McDonald’s is greedy when it comes to paying their employees.

The benefit of owning a franchise is that it comes with very explicit instructions.  A McDonald’s distributor delivers prepared food ready for the grill and fryer.  As delicious as it is, though, it doesn’t take a highly skilled chef to prepare it.  As the franchisee operating manual has it down to a science.  Which is why high school kids and college students work at McDonald’s.  They need no prior restaurant experience as it is an entry level job.  Typically their first job.  Where they learn what it’s like entering the workforce.  The importance of being on time.  Following instructions.  Being responsible.  Skills that they will use in later jobs.  Which most do.  As there is a high turnover of employees at McDonald’s as there is for all fast food.  Because these are entry level jobs for unskilled workers.  Who learn the skills they need on the job.  So let’s assume a restaurant that is open 24 hours a day, 7 days a week.  Assuming an hourly rate of $8.50 and an overhead of 40% for direct labor costs (workers’ compensation insurance, unemployment taxes, health insurance, uniforms, training, etc.) the average hourly labor cost comes to $11.90.  Dividing the labor cost of $230,463 by this hourly cost gives us 15,758 annual labor hours.  Or about 53.06 hours per day.  Or 17.69 hours per 8-hour shift.  Giving us an average of 2.21 workers per 8-hour shift.

During the breakfast and lunch rush a typical McDonald’s may have between 5-8 people working.  With fewer working in the evening.  And a skeleton crew over night working the drive-thru.  So the labor fluctuates during the day to correspond to the amount of business.  Which is why there are a lot of part-time workers at McDonald’s.  Ideal for high school and college kids.  In addition the owner typically works during those busy periods to help with the rush.  And works on paperwork during the slower times.  Putting in about 12 hours a day.  If you assume an overhead rate of 18% and multiply that to the franchisee annual income of $691,389 we get an overhead expense of $124,450.  Subtracting that from the $230,463 (overhead & profit) leaves an annual owner income of $106,013.  Or, based on a work week of 84 hours (12 hours a day X 7 days a week), the owner earns about $24.27 an hour.  A rate a lot of people can earn working for someone else without the headaches of owning a business.

That late-night comedy show attacked McDonald’s for being greedy.  Saying they should increase their pay rate to a living rate.  Like picketers were asking for.  $15/hour.  A labor cost increase of 82.6%.  Or an additional $190,382 each year.  Which would bring the franchisee’s annual income from $106,013 to an annual loss of $84,369.  So are these McDonald’s franchisees greedy because they refuse to pay a living wage?  No.  They simply can’t afford to pay more than the minimum wage for these minimum wage jobs.  Unless they can get people to spend $6-$7 for a Big Mac.  They are delicious.  But are they $6-$7 delicious?  And can a low-income family afford to take the family to McDonald’s when they are charging $6-$7 per burger?  Probably not.  No.  McDonald’s is just fine.  What we need to do is to un-do the anti-business policies of this administration that is killing those higher-paying jobs.  And forcing the primary earner in some families to work a minimum wage job.  Because that’s all that is available in this jobless economy.

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Upward Mobility

Posted by PITHOCRATES - December 6th, 2012

Politics 101

When Old Enough not to Violate Child-Labor Laws we worked After School at the Local Hardware Store or Supermarket

Once upon a time one of our first jobs was delivering newspapers.  We used to call these people paperboys.  Then girls said they wanted to earn money, too.  We called them papergirls.  Boys and girls would fill up a bag full of newspapers slung on their bike and start peddling through the neighborhood.  Raising a little spending money while they still were in school.  They didn’t make much.  They couldn’t keep doing this as a career and raise a family.  But they made a lot of money for a 14-year old kid.

When these kids grew old enough to get a job without violating child-labor laws they went to work after school at the local hardware store or bagged groceries at the supermarket.  Or worked at McDonald’s, Burger King, Wendy’s, Dairy Queen, Baskin Robbins, Big Boy, etc.  During the summer they flocked to vacation areas and worked in the tourist economy.  Anxious to earn money to put gas into their cars.  Or go to the mall.  Again, they weren’t making big bucks.  Nothing that they could raise a family on.  But they earned more than delivering papers.  And were able to buy the things that were important to them.

Once we graduated high school some got jobs at factories.  Some went into the skilled trades.  While some went on to college.  Working as waitresses to pay their way.  Pressing clothes at a dry cleaner.  Working as a short order cook.  Or working their summers in construction.  As well as working some odd jobs on campus between classes.  Saving every penny to pay for their books.  Room and board.  Even their tuition.  While still finding time to study.  These kids worked very hard between their studies and their jobs.  Using their earnings to pay their bills.  While leaving them less spending money to have fun with than those paperboys and papergirls had.  Who weren’t paying for books, room & board and tuition.

The American Dream is Being Free to Work Hard and Sacrifice to make a Better Life

These jobs we worked during our high school and college years were entry level jobs for the unskilled.  Which is why they didn’t pay much.  To reflect that skill level.  But they gave us job experience.  And a little spending money.  Which was fine during those years because our spending needs were modest.  Besides, these jobs weren’t our careers.  They were just stopping points on our career paths.  Where we learned some important job skills (be on time, work hard, how to work with other people, that the customer is always right, etc.) that helped us in our next jobs.  And we moved from job to job.  Gaining skills.  And income.  Until we could afford to raise a family.

Many started college after working for awhile.  Or returned to college.  Taking a couple of classes at night after work.  To gain additional skills to advance in the company.  Or to gain the skills to make a career change.  So they could earn more money.  To afford more things in life.  Like a better home.  In a better neighborhood with better schools for their children.  Living the American Dream.  Having whatever they want simply by working extra hard to have it.  Which they could if they chose to put in the effort to increase their value in the market place.  Which has always been the way to achieve our goals.  Working hard and sacrificing to make a better life.  Which is what brings others to our shores.  To be free to live the American Dream.

Immigrants coming to this country often took menial jobs.  Such as sweeping the floor in a factory.  Saving every penny.  Improving their language skills.  If they needed to increase their language skills.  Working hard.  And when they acquired some skills they moved up.  Earning enough to bring their wives over from the old country.  Who also started working a menial job upon their arrival.  To help earn enough money to buy a house to raise a family in.  The husband’s hard work took him further up in the company.  Or he set off on his own.  Going into business for himself.  Working even longer hours to provide for his family.  Living out the American Dream.  Working hard so their children can have a better life.

In the US People can go from being Poor to Middle Class to the 1% back to Middle Class and even back to Poor

Sara Blakely tried to be a lawyer but couldn’t pass the LSAT law exam.  She spent some time as a ride greeter at Disney World.  After that she tried selling fax machines door-to-door.  Seeing a lot of doors slammed in her face.  Not exactly the life she dreamed of.  And if that wasn’t bad enough there was something else that bothered her.  The way she looked in white pants from behind.  And set out to do something about it.  Starting with $5,000 Sara Blakely created Spanx.  A company selling slimming bodywear that she invented.  And about a decade later Spanx is now worth $1 billion.  Pleasing some 6 million women.  Who helped her give some $20 million to charity.

Currently in America there is a war on the rich and successful.  Those on the Left are attacking those with money.  Those who have worked hard and have earned wealth.  Claiming that they got their wealth unfairly.  And aren’t paying their fair share in taxes.  That contemptible 1%.  Those people they rile up the masses to hate.  As if this 1% is a monolithic permanent upper class.  As if every millionaire today has always been a millionaire.  As if none of them ever failed the LSAT law exam.  Worked as a greeter at Disney World.  Or sold fax machines door-to-door.

But the 1% is not a permanent monolithic upper class.  As people like Sara Blakely prove.  And the others like her who have worked hard.  Starting with little more than an idea.  And a few years of savings.  We call it upward mobility.  Those in the 1% were likely at different income levels throughout their lives.  Starting out poor.  Working their way up to middle class.  And the lucky few like Sara Blakely breaking into the 1%.  Who earned every dime she has.  And just as people can work hard to rise up to the 1% they can just as easily fall from the 1%.  For there are no monolithic classes in the United States.  Anyone can succeed here.  And anyone can fail.  So here people can go from being poor to middle class to the 1% back to middle class and even back to poor.  Because in America you can live the American Dream.  Where you’re free to do anything you want to try.  You can work hard to succeed.  And you can fail trying.  But the key is this.  Here you can try.  Which is a lot more than people in many parts of the world can ever hope to do.

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FT90: Minimum wage jobs are entry level jobs.

Posted by PITHOCRATES - November 4th, 2011

Fundamental Truth

There is Income Disparity because it Takes a While to Get Good in Whatever you Do

Minimum wage jobs are entry level jobs.  People need to remember this.  A minimum wage job is not to raise a family on.  It’s for the children of that family to get their start in the workplace.  To help college students pay their expenses.  Or it’s simply an unskilled job for an unskilled, inexperienced worker.  So he or she can become a skilled worker.  And gain experience.

So, yes, there is income disparity.  We pay people with less skill and experience less than those with more skill and experience.  That’s why a garage band doesn’t make as much money as U2.  It takes a while to get good.  In whatever you do.

Is this income disparity bad?  No.  It provides incentive.  Because everyone wants to get rich.  U2 did.  Even became tax exiles to escape the confiscatory tax rates of their country.  Everyone wants more money.  Whether they admit it or not.  Thant’s why people buy lotto tickets.  And go to casinos.  They’re not spending money to stimulate the economy out of the goodness of their hearts.  No.  They’re trying to get rich.

If the Minimum Wage is a ‘Living Wage’ what Incentive is there to Work Harder?

So the profit motive exists.  We do things because we’re greedy.  Whatever we have we want more.  That’s why we work hard.  To earn money.  To have more.  So our kids can have more.  It’s a great system.  Because we get a lot in return for this greed.  Doctors.  Nurses.  Engineers.  Skilled trades.  And a lot of neat stuff.  Like iPads.  Smartphones.  Computers.  Cameras.  DVDs.  Buildings.  Cars.  Trains.  Airplanes.  Etc.  And we’d have none of this if the minimum wage was a ‘living wage’.  A wage to raise a family on.

If you could make, say, $75,000 a year flipping burgers at McDonalds would you go to college to become a doctor?  With massive student loan debt, the high cost of malpractice insurance, the lawsuits, the long hours, the constant reduction in Medicare reimbursements, etc., probably not.

Would you work in the skilled trades?  Spend 4 years as an apprentice?  Became a journeyman?  Then a master?  Work long and hard to master your craft only to see a kid out of high school with no skill and no experience ‘earn’ the same wage?  Probably not.  Because we just don’t voluntarily work harder if there is no financial gain.  If you don’t believe this ask some of your friends if they would work overtime without additional pay.

Raising the Minimum Wage is just a Political Ploy so Democrats can Gain Votes

You know what a higher minimum wage does?  It makes your work less valuable.  The more we pay unskilled people the smaller the income disparity gets.  And the closer skilled workers get to unskilled pay.  When there is no gap there will be no one doing the harder jobs.  Because when a janitor can earn what a doctor can earn people will want to be janitors instead of doctors.  Because it’s easier.

Raising the minimum wage is just a political ploy.  So Democrats can gain votes.  Because a higher minimum wage favors the young.  And organized labor.  Two large Democrat constituencies.  The young get more for doing less.  And have no reason NOT to stay ignorant.  Keeping them loyal Democrat voters for the indefinite future.  Whereas unions don’t have to compete against lower wages.  And without any wage competition they can enjoy the high wages the lack of competition gives.

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