Paying Above the Minimum Wage

by Dave Schuler on December 6, 2013

Many years ago I did a study of bowling alleys. I went all over the country, surveying sites, interviewing proprietors and the staffs, observing operations, analyzing what made them tick. At the time there were about 10,000 bowling alleys nationwide and about half of them were very small. There were a few large chains, a significant number of small chains, and a lot of single unit operations.

One of the things that I observed was that there appeared to be a natural limit to the size of a small chain—something around six to eight stores. I don’t think that’s unique to bowling. I think it’s a sort of practical rule of thumb. That’s just about the limit that a single individual can operate as a hands-on manager.

Above that number requires professional management and specialization. There’s another plateau at a couple of dozen stores.

You’ll never get rich with a single bowling alley. Or book store or restaurant. You might be prosperous with a small chain but it’s an enormous amount of work. No, to make a lot of money you need to have a lot of stores.

My point in all of this is that it’s not just the income of the owner that varies among a single unit operation, a small chain, and a large chain or franchise operation. It’s the ambitions and preferences of the owner or owners. That was brought home to me quite powerfully in conversation with a guy who’d started what by the 1980s was a Fortune 500 company on his kitchen table in the 1950s. There were big differences between running a small company and running a big one, in particular what the owner did. Jeff Bezos’s ambitions are different from those of a guy who owns a single bookstore.

That’s what came to mind when I read this article by Daniel Gross about a small chain of restaurants in Detroit that’s paying $12 an hour to its employees:

Around the country Thursday, fast-food workers and their allies demonstrated to call attention to the plight of low-wage service workers. One of the demands is that highly profitable, massive enterprises like McDonald’s and Burger King should pay employees $15 an hour, which is more than double the legally-required minimum wage in most parts of the country.

Many observers regard such a suggestion as absurd on its face— “economic fantasy at its most delusional and counterproductive,” as my colleague Nick Gillespie put it here on Wednesday. These are low-end jobs in a generally free labor market. Nobody is forcing anybody to work at McDonald’s for $7.50 an hour. Besides, these companies couldn’t function if their labor costs were to double. I mean, who can make money on fast food while paying $15 an hour?

But if you look hard enough, you can find some enterprising souls who are doing just that. I first wrote about Moo Cluck Moo this spring, when the high-quality fast-food burger-and-chicken joint on a hardscrabble location in Dearborn Heights, Micighian, was paying $12 an hour. Even in a weak labor market, with plenty of people willing to work for less, the owners decided they’d construct their business model so that they would pay significantly above the market. In September, Moo Cluck Moo raised wages to the unthinkable level of $15 an hour.

I think there’s definitely a niche for Moo Cluck Moo but, frankly, I’m skeptical that we’ll ever see a sign over a Moo Cluck Moo store reading “Over 6 billion sold”. Unless the ambitions and preferences of the owners and operators of the store change in ways of which I suspect Mr. Gross would disapprove, there will be limits to its growth.

The article does touch nicely on the critical success factors for a restaurant. The first is location. The second is controlling your rent. You can’t operate a store with a low price point in neighborhood in which the rent is prohibitively expensive.

Controlling wages comes after that somewhere. Interestingly, the cost of food is even lower—that’s why so many restaurants offer huge portions. There isn’t that much difference in cost between four ounces and eight ounces and large portions convince many people that they’re getting a good deal on what is actually pretty insipid food.

McDonalds is an exception to that rule. They’re obsessive about inventory and portion control. I suspect it’s to control shrinkage and they know their employees better than I do.

{ 17 comments… read them below or add one }

... December 6, 2013 at 11:33 am

Taking a brief break from Christmas cleaning/decorating, so no time to read the articles. But I’m guessing that neither this article or the two linked in your previous post discuss immigration or labor supply in any meaningful way. (I did a page search for ‘immig’ and only got one hit, which was apparently irrelevant to the article.)

Amazing how the laws of supply and demand never seem to get mentioned in these debates.

PD Shaw December 6, 2013 at 11:36 am

The Moo Moo Cluck story seems to suggest critics of a minimum wage are correct. To pay a higher wage, everything else gets shifted.

They locate away from high-traffic areas where rents are lower (and demand lower).
Limited parking;
No seating;
Smaller portions;
Higher prices;
Vinyl Banner Signage and limited dumpy decor;
Long waits due to low staffing (A 3 out of 5 star review at Yelp: “One counter person who is expected to: make shakes, take a counter order(& the phone order waiting) and distribute the food being put up in the window simultaneously. Clearly, this can’t be done. So, everyone sits: waiting & waiting for the counter person’s attention to turn to them. One time, the kitchen had to come to the front to distribute food that had been sitting there for 5 minutes… clearing out the place as we had all just been sitting there waiting for our names to be hollered.”)

What they do appear to have gotten is a lot of favorable free press, so they didn’t need advertising, and they may have as many customers right now as they can serve.

Just looking at the reviews, which average 4 out of 5 stars, there appear to be some people very supportive of the ideals of the restaurants (they’re yummy ideals!!!), but for the most part, the reviews are simply above average, with some striking flavor profiles that are not everybody’s cup of tea. Strikes me as a niche product, best located near college campuses.

Dave Schuler December 6, 2013 at 12:47 pm

Ellipsis:

A considerable amount of the scholarship on the effects of immigration on employment could probably be described as “advocacy scholarship”. The emphasis is on proving your political point rather than discovering the truth.

My own view of immigration in an environment of slow job growth is that it pushes wages down. Immigrants don’t “steal jobs”. A massive advent of immigrant labor into the market just converts jobs into “jobs that Americans won’t do”.

... December 6, 2013 at 12:49 pm

If it’s near a campus, it had either better be a small one or one that caters to the professors. (Likely, given higher prices.)

I can’t imagine a restaurant with that kind of service working near the UF campus in Gainesville. They’d be destroyed by the Burrito Brothers of the world. 50,000+ students at lunch time want to be fed, damnit!

... December 6, 2013 at 12:52 pm

These days it might be best construed as “Immigrants: Doing the jobs Americans just can’t get.” I believe Steve Sailer phrased it that way first.

Jimbino December 6, 2013 at 12:55 pm

Here in Texas, I could hire a great Cuban or Mexican private cook at $7.25/hr (tax-free of course) to make me lunch and dinner for what I’d pay for a couple of those high-priced burgers. No waiting time either.

michael reynolds December 6, 2013 at 10:07 pm

In-N-Out does quite well near college campuses. They always pay above minimum wage. 281 locations. Costco – 622 locations. Trader Joes – 399 locations.

Labor cost is typically 25-30% of a restaurant’s costs. Raising labor cost across the board 25%, from minimum to $10 would raise the cost of a 6 dollar Big Mac meal, (2 dollars of which is labor cost,) to $6.50, tops.

Yeah, the world would end if the value meal cost another 50 cents.

Of course you’d retain workers longer and spend less on training (In-N-Out leads the field on retention) and have fewer errors, fewer accidents, less theft, fewer sick days. . . And the increases wouldn’t have to be across the board since we’re not talking management salaries that do figure into labor costs. And fast food workers would actually be able to afford to eat at fast food restaurants, increasing your potential customer base. And then there’s the fact that McDonalds, to take the obvious example, has somehow managed to sell a whole lot of burgers in every country on earth, regardless of local minimum wages.

But sure, if you end slavery, why ah declare, it’ll be the end of the cotton industry! And if we can’t hire 9 year-olds to work in the mines they’ll be no more coal and we’ll freeze to death!

Companies pay lousy wages because they can get away with it and they’re run by rapacious assholes. That’s why. Now, why people who aren’t McDonalds executives argue for their fellow Americans to be treated like shit, that I’ll leave to the psychologists.

Ben Wolf December 7, 2013 at 7:28 am

Michael, I’m not a psychologist but I pretend to be one because no one can stop me.

I’m America it’s a combination of Calvinist you-get-what-you-deservism, conservative belief in karma and Puritan fear that people might be paid enough to find some contentment in life. What H. L. Mencken labeled the haunting fear that someone, somewhere is happy. It’s all an argument based on moral sentiment, that nothing good comes from being kind because it makes people lazy. They have to be continually beaten until it makes them better people, otherwise they don’t deserve what they get.

Of course those making this argument will completely ignore that billionaires like the Kochs come from an old and wealthy family and never had to be knocked around to earn it. They’re just specialand God loves them, which is where the Calvinism comes back into their thinking.

I’ve also noticed a group among those who already earn $15 per hour adamantly opposed to “hamburger-flippers” earning as much as they do. This reflects contemporary America’s obsession with status, where the nearly poor dump on the actual poor so as to make themselves feel better about being just above the poverty line.

In short Americans have been Randized into feeling hatred and contempt for those with a dollar less in income, jealousy and adulation for those with a dollar more. “What do you do?”, “How much do you make?”, who occupies the superior social position are almost always established immediately when we interact with each other.

Our society is rather putrid.

Dave Schuler December 7, 2013 at 8:32 am

it’s a combination of Calvinist you-get-what-you-deservism

Minor quibble: classically, Calvinism isn’t “you-get-what-you-deservism” but the belief that God bestows his favor on whom He will, regardless of desert. The corollary is that you can identify those who have God’s favor by how prosperous they are.

I’ve also noticed a group among those who already earn $15 per hour adamantly opposed to “hamburger-flippers” earning as much as they do.

In this post I outlined what I thought were the likely outcomes of an increase in the minimum wage to $15, including the outcome above. In the case of the fast food franchises I’ve published a balance sheet which pretty clearly shows that there just isn’t the money for the franchisees to absorb the difference. It’s possible that some of that will be made by increasing prices but the effect of that will depend to at least some degree on location. Some franchises may close. There may be some attempt to operate the stores with fewer workers. It will probably be complicated.

Rather than an increase in the minimum wage, a sort of meat-ax approach, I’ve suggested a range of approaches from federally-subsidized jobs, possibly labeled as “apprenticeships” to a WPA-style program. None of these alternative approaches gain any traction whatever from either Republicans or Democrats. I believe they’re stuck in positions that hardened decades ago.

In short Americans have been Randized into feeling hatred and contempt for those with a dollar less in income, jealousy and adulation for those with a dollar more.

Not a new phenomenon. Ayn Rand hadn’t been born when that attitude arose. “Randism”, objectivism didn’t create the attitude but feeds on a pre-existing point-of-view. It goes back to the very foundations of the country. We’re still working out the conflicts among those who settled the country three, four centuries ago. It’s reflected in today’s voting patterns.

PD Shaw December 7, 2013 at 9:39 am

“I’ve also noticed a group among those who already earn $15 per hour adamantly opposed to “hamburger-flippers” earning as much as they do.”

I’ve also noticed that if you scratch the surface of those who want to double the minimum wage that they also believe that high unemployment rates are the new normal, either because of skill/technology changes are inevitable illegal immigration from poorer countries. They don’t care about lost jobs, because they think they are already lost.

I think we need to keep and grow low skill jobs, particularly if the educational system is in the process of abandoning the non-college track.

Dave Schuler December 7, 2013 at 9:52 am

I think we need to keep and grow low skill jobs, particularly if the educational system is in the process of abandoning the non-college track.

Yeah, me too. Especially because a) in our cities half of the kids don’t even graduate from high school and b) about half of the population are incapable of doing college-level work. The only way everybody’ll get a college degree is by decreasing the standard of what is meant by “college-level work” which doesn’t sound like progress to me.

College is for pre-professional or pre-managerial training. Will everyone become a professional or a manager?

Red Barchetta December 7, 2013 at 2:00 pm

Here’s what I say:

Raise labor cost across the board 125%, from minimum to $18 which would raise the cost of a 6 dollar Big Mac meal, to $8.50, tops.

Yeah, the world would end if the value meal cost another 2.50 cents.

Of course you’d retain workers longer and spend less on training than even In-N-Out and have fewer errors, fewer accidents, less theft, fewer sick days. . . Probably drive In-N-Out out of business. And the increases wouldn’t have to be across the board since we’re not talking management salaries that do figure into labor costs. And fast food workers would actually be able to afford to eat at fast food restaurants (certainly the best and highest use of the precious food dollars they have), increasing your potential customer base. And then there’s the fact that McDonalds, to take the obvious example, has somehow managed to sell a whole lot of burgers in every country on earth, regardless of local minimum wages.

Reynolds only wants to companies pay barely more than lousy wages because they can get away with it and they’re run by rapacious assholes, not to mention Michael’s cruelty and miserliness. That’s why. Now, why people who aren’t McDonalds executives like Reynolds argue for their fellow Americans to be treated like shit, that I’ll leave to the psychologists.

In fact, screw it, $25/hr.

Red Barchetta December 7, 2013 at 2:07 pm

PD -

Its actually a subset of the term “niche product.” Its a cult product, like In-N-Out or Apple.

Note that Apple products are made in China, and if planned obsolescence ever existed they would represent it in spades. But Jobs was a folk hero and there is almost no criticism, just adulation. I’ll leave it to psychologists to figure out why McDonalds execs are rapacious assholes, but Apple and Jobs have saint-like status.

Red Barchetta December 7, 2013 at 5:06 pm

BTW –

The span of 4-7 locations isn’t some law of physics but a fairly generalized valid empirical observation. You can see it in numerous Ma-Pa ops and highly fragmented industries.

A certain B Rauner and current Guv candidate came out of a local PE firm specializing in rolling up fragmented businesses where managerial control, operational standardization and overhead economies were perceived to exist. (They don’t in all fragmented industries.) Its actually very difficult to retain the entrepreneurial spirit while centralizing admin. VERY hard. But they did well at it.

Dave Schuler December 7, 2013 at 5:23 pm

My observation is that the limit is created by the need for the owner to spend significant time at each location for it to continue functioning well. 4-7 is about the limit for doing that.

PD Shaw December 7, 2013 at 6:11 pm

Who would of thunk? The average American eats three hamburgers a week.

Red Barchetta December 7, 2013 at 7:23 pm

Dave

Just personal experience. Management span of control and a real flaw in great but narrow entrepreneurs: they don’t know how to hire a team (or rely on the processes and controls), even if they have the temperament to relinquish that control. That can be a gating factor for many entrepreneurs who desire to grow.

IMHO the only businesses that can’t (intrinsically) cross this threshold are those where the owner is simply indispensable in managing customer relationships. Relationship/entertainment issues, or, rarely, some extremely unique technological/design expertise.

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