CHICAGO, IL - APRIL 14: Demonstrators demanding an increase in the minimum wage to $15-dollars-per-hour march around a McDonald's restaurant on April 14, 2016 in Chicago, Illinois. The demonstrators marched to and protested in front of several locations during a day-long effort to draw attention to low-wage jobs. The demonstration was one of about 300 scheduled to take place nationwide today. (Photo by Scott Olson/Getty Images)
Protests for pay: demonstrators in Chicago call out McDonald's © Getty

The entrance to McDonald’s Chicago headquarters was transformed into a tent community in May when Fight for $15 campaigners camped out in protest at low wages at its shareholder meeting.

But inside the sprawling, red-brick complex in the Oak Brook suburb, the representative of a shareholder of the world’s largest fast-food chain saw matters differently.

“At last year’s meeting McDonald’s crowed about artificially increasing the minimum wage for some of its workers. Well look, the barbarians are back at the gate demanding more,” said Justin Danhof referring to McDonald’s entry-level wage increase to $10 an hour at its company-owned restaurants.

As general counsel for the National Center for Public Policy Research, a conservative think-tank, Mr Danhof was speaking on behalf of Amy Ridenour, his boss and McDonald’s shareholder. “They didn’t see your concession as a victory for workers. They saw it as a sign of weakness that they could exploit and are trying to right now,” he added, his voice rising in indignation.

Mr Danhof’s remarks and the Fight for $15 campaign represent polar opposite views with which many US companies are having to grapple. As US workers lobby for higher wages and some politicians demand that America is given a raise, investors are watching corporate profits warily. Following a period of record profits as a share of the economy, margins are being whittled away.

One key measure of non-financial companies’ collective profit margins — the net operating surplus as a share of net value added — has fallen to 19.8 per cent, the lowest since the end of 2009, and well down on the peak of 23 per cent in the second quarter of 2013, according to JPMorgan Chase analysis.

Michael Feroli, the bank’s chief US economist, said the trend may have further to go, with workers’ share of economic output remaining low looking back in history. “There is room for some further margin compression,” he argued. “It is a pretty big issue.”

Driving the trend is rising wages, which are coming at a time of poor productivity growth in the private sector. Unit labour costs, which measure how much companies need to pay their staff to deliver a unit of output, rose 3 per cent in the 12 months ended in the first quarter of 2016. Business output prices rose only 1.2 per cent in the same period, suggesting companies struggled to hold on to their margins.

Chart: Profit margins for US businesses

The Federal Reserve has suggested this trend has further to go. With the Brexit vote roiling global markets, the US central bank is even less likely to be lifting short-term interest rates in the coming months, a dovish stance that could give further room for wage demands.

Average hourly earnings rose 2.5 per cent in May on the same month a year earlier — still well below the growth rates of more than 3 per cent before unemployment hit 10 per cent during the recession. The Atlanta Fed’s wage tracker, which focuses on people in continuous employment, is running at a much quicker pace of 3.5 per cent.

Companies are experiencing further pressure because of rising minimum wages. While the federal minimum wage has remained stuck at $7.25 an hour since 2009, 15 states mandated increases in their minimums at the start of 2016. California, the biggest state by population and economic size, introduced a law in April that will boost its minimum wage gradually from $10 to $15 an hour by 2022. New York has introduced rules that will boost its minimum to $15 an hour.

Companies ranging from Walmart and McDonald’s to Costco and TJ Maxx have felt sufficient pressure to increase their entry-level wages voluntarily. Following growing customer complaints about store cleanliness and service, Walmart, America’s largest private-sector employer, is spending $2.7bn on increasing wages and training over a two-year period.

Chart: US hourly wages

The company estimates that this spending, combined with increased investments in store improvements and ecommerce, will translate into higher profits in three years, as more motivated staff encourage consumers to spend more in their stores thanks to a better service and improved shopping environment.

The trend towards higher wages comes as Walmart’s founding family, worth a net worth $130bn according to Forbes, has been a target in the debate over inequality, which has gained traction in this presidential election year. It has also highlighted the extraordinary wealth of one family while many of its staff struggle to make ends meet.

Nita Fischer, a single mother, says she was coerced into leaving her Walmart job paying $10.14 an hour when she was pregnant and to reapply after three months. She said she is earning $9 an hour and is reliant on the US government to pay her $294 a month in food stamps — which are spent at Walmart.

“I do want something to change,” she said. “Walmart is treating some people like dirt.”

Walmart said its store “worked with Ms Fischer during her pregnancy to provide appropriate accommodations, including providing her with light duty work. Unfortunately she didn’t always work all of the hours she was scheduled, causing extra work for the other associates in her store.”

The Conference Board, a think-tank, has predicted further increases in wage growth to 3-3.5 per cent in the coming years as the working-age population stagnates and unemployment hovers comfortably below 5 per cent. Lines of work that face significant labour shortages include occupational therapists, nurses, plant operators and machinists, while the states with the tightest labour markets include Texas and Colorado.

Chart: Selected US corporate earnings

Craig Donohue, executive chairman of Options Clearing Corp, a financial services company, also expected upward pressure on salaries in his sector, particularly in areas such as enterprise risk management. OCC has hired more than 100 people in the past 18 months and plans to hire up to 100 more.

“There’s definitely been a change to competition for candidates . . . as everyone is looking for people with these backgrounds,” Mr Donohue said. “Given we’re a financial services sector firm, we’re very attentive to that.”

Each 100 basis point acceleration in US labour costs above 3 per cent growth drags on earnings across the S&P 500 by 0.7 per cent, according to Goldman Sachs. Companies in the consumer discretionary sector may prove most vulnerable to margin compression because they are labour-intensive and may not be able to sharply lift prices.

Chart: Revenue generation per employee

Revenue generated by each employee in the consumer discretionary sector is $245,000 as opposed to the $432,000 earned across companies in the S&P 500 index, according to analysis from JPMorgan. Restaurant chains, retailers and leisure businesses are the most sensitive to rising labour costs across the sector. Manufacturing, airlines and healthcare services companies are also vulnerable to higher labour costs.

This was highlighted this week when workers in the home healthcare sector were handed a victory, when a court upheld a law requiring the payment of overtime.

Fight for $15 is showing no signs of letting up on the pressure on McDonald’s and US companies across the country. George McCray, 36, a McDonald’s cashier in Chicago, has joined the campaign as he struggles to feed his family of six and also relies on food stamps.

“Technically there’s three of us with jobs but we don’t make a consistent enough amount of money to survive as a family,” Mr McCray said. He feels his hours have fallen since he joined the campaign. “[Colleagues] feel the same way as me, but I’m not afraid to go out there on the front line.”

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