McDonald's Wage-Hike Experiment Pays Off For All

Recently, McDonald's decided to raise wages for many of its hourly restaurant workers. The rise is modest, from about $9 to about $10, but already the company's executives claim that they are seeing improvements in service quality:

"It has done what we expected it to — 90-day turnover rates are down, our survey scores are up, we have more staff in restaurants," McDonald's U.S. president, Mike Andres, told analysts at a UBS conference. "So far we're pleased with it."

So far, the company's financial results haven't suffered. Just the opposite; sales are rising.

With stagnant wages one of the hottest topics these days, and calls to raise minimum wages resounding across the country, stories like this one are obviously eye-catching. If raising wages improves worker performance enough to help the bottom line, then there's no trade-off between how much companies can afford to pay workers — at least within reason — and how many workers they can afford to employ. Obviously if you raise wages high enough — imagine mandating $1,000 an hour! — a lot of people will be put out of work. But it could be that most American companies are in a safe zone, where hiking wages modestly makes economic sense.

But if it helps the bottom line to raise wages, why haven't companies done it already? Many minimum-wage boosters, when asked this question, point to the theory of "efficiency wages." This just says that paying workers extra may make economic sense, because it will make the employees feel valued and loyal, as well as encouraging them to work harder to keep their jobs.

This theory probably does apply to many industries. But it can't explain experiences like McDonald's. Efficiency-wage theory says that companies pay employees more than the bare minimum they can afford, but it assumes that companies do, in fact, pay enough to get the productivity and loyalty boost. If employers like McDonald's aren't catching on to the benefits of paying workers more, we need to look beyond efficiency-wage theory.

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http://www.courant.com/opinion/op-ed/hc-op-wire-smith-companies-raising-minimum-wage-0320-20160318-story.html