Wal-Mart and McDonald's: A Case Study in Wage Exploitation

Introduction

Recent years have seen increasing resistance to the corporate strategy of reducing workers' wages to the lowest level possible. This resistance has become particularly acute in an era in which unions have become very limited in their ability to organize new workers. At the same time, globalization has continued to exert tremendous downward pressure on wages in the US. As such, firms such as Wal-Mart and McDonald's, both of whom have grown to become powerful transnational companies, have become targets of a growing movement of labor activism in the retail sector. Those who criticize these firms argue that both have the resources to offer better pay to their workers. This paper will examine this issue of improving wages for workers in the retail sector through an examination of the worker policies of Wal-Mart and McDonald's. At the same time, it will argue that both firms should raise wages for their workers. However, certain constraints imposed on them by their business models, and the nature of the industry in which they function, may prohibit that.

This paper will be organized into four sections. The first and current section is the introduction. Section two will examine the worker benefits policies, typical of the two firms, through a discussion of such policies McDonald's. Section three will look more closely at how the business model each firm employs limits their options in terms of fair wage policies. This section will attempt to illustrate this through a comparison of Wal-Mart with one of its main competitors, Costco. Section four provides the conclusion of the paper.

McDonald's Overview

In conducting the research for this study it was found that the working conditions in both Wal-Mart and McDonald's were so similar that what is true of one is largely true of the other. So this section will focus on issues related to labor practices at McDonald's.

First, McDonald's is a highly successful corporation. Its 2007 equity returns were twice the industry average with 26 percent versus 10 percent. The firm employed more than 1.6 million workers in over 31,000 fast food outlets around the world (Royle 2010, 250-251). The firm also had sales turnover of over $23 billion. McDonald's is also the nation's largest buyer of beef, pork, and potatoes (Royle 2010, 250). The firm's purchasing habits can have a tremendous impact on the price of meat products, both driving up or down prices depending on the relative volume of its purchases.

Recent years have seen a movement away from overconsumption of the kind of unhealthy fast food purveyed by McDonald's. However some reports have noted that the global economic downturn, that began in 2008, led to an increase in consumption of all kinds of fast food, including McDonald's (Royle 2010, 251). Indeed, McDonald's posted a record year in the UK in 2008 along with a 7 percent rise in worldwide profits. The US fast food industry projects a 17 percent increase in the volume of hiring over the period 2010-2020. This suggests that this sector will continue to generate robust job growth for the nation's economy (Royle 2010, 251). All of this is to point out that, despite the fluctuations in demand in the overall economy, the fast-food sector continues to maintain strong long-term growth prospects.

It should also be noted that most McDonald's profit accrues not from selling fast food but from collecting rents from its franchises. This likely explains the aggressive worldwide expansion plans of McDonald's, and also of other firms in the retail sector, such as Wal-Mart. The number of directly owned McDonald's outlets is actually quite small relative to the number of franchises, which are around 70 percent (Royle 2010, 251).

McDonald's and Worker Rights

Although the fast-food business is good for shareholders, conditions for the average worker at McDonald's is not. Turnover over in the fast food retail industry is quite high and estimated to average around 150 percent per year. However, turnover at some McDonald's outlets is reportedly twice that. The bulk of the firm's workers are employed on an hourly contract basis and this includes workers who are considered as management. Production at McDonald's follows the Taylor principle of heavy automation with routinized operations. This allows the company to hire mainly unskilled workers. At the same time, the firm employs a high degree of worker surveillance. As Royle notes, the work is routinized but also very demanding and many workers feel it is not worth it for the money they are being paid (Royle 2010, 252). This explains the high turnover at the firm's restaurants.

Although McDonald's offers opportunities for advancement, a worker typically has to stay at the firm for a very long time to even position themselves for a promotion. This suggests that the few workers who advance to management have stuck with the firm despite the exploitive working conditions. Even when promoted, workers find they have little freedom as managers and the pay is also not that much better (Royle 2010, 253). Indeed most in-store decision making rests with the firm's software programs, automated tills, and very detailed procedure manuals (Royle 2010, 253). Nor are there really that many management opportunities in the firm's outlets. Thus advancement opportunities for long-term employees are in actuality quite bleak.

McDonald's acknowledges that their wages are low. But the commonly heard counter-argument is that most of its staff are very young, just starting their careers, and will eventually switch to better-paying jobs. Thus the low pay and exploitive working conditions are justified because it's only a temporary entry-level job for most workers. However, Royle (2010) reports research which suggests that workers in unskilled, low-paying jobs tend to remain locked in to this type of employment for the long term. Thus in many instances, the job shift tends to involve a lateral move rather than a move up to a job with better pay and working conditions. Also not all McDonald's workers are young. There are older workers with few employment options besides lower-skilled retail sector work who are in the fast-food industry (Royle 2010, 253). Migrants from other, poorer countries may seek employment at McDonald's as well. They may also view its pay scale as an upgrade and such workers may come from across the age spectrum from young to middle-aged (Royle 2010, 253).

Most retail enterprises pay very little. In the case of both McDonald's and Wal-Mart, pay is either set at the minimum wage or very close to it. One worker at a Wal-Mart remarked that she had been with the firm for four years and made less than $12 per hour (Greenhouse 2011). This is particularly concerning when one realizes that wages for average workers, when adjusted for inflation, have been flat since 1973 (Royle 2010, 254). It's also said that in the US only migrant agricultural workers earn less income than workers in the fast-food industry. The pay differential between the shift worker and the top executives is also quite large at these firms. McDonald's sometimes advertises that it offers stock options and company vehicles to its employees. But these benefits are only an option for senior management (Royle 2010, 254).

There has been much discussion of unionizing the workforce at McDonald's and Wal-Mart to raise wages through collective bargaining. But it is notable that all efforts to do so have to date have so far failed (Royle 2010, 257-258; Greenhouse 2011). When management at either firm learns of such organizing drives workers are subjected to a campaign of harassment that may lead to termination or willful resignation if there's no compliance. There is thus considerable push back against any attempts to raise wages at these firms.

Instead of raising wages both firms would rather engage in a type behavior modification through positive reinforcement that offers little in the way of cost to shareholders. Such tactics include giving away free movie tickets or employee of the month type celebrations, designed to boost morale without involving any real cost to the firm (Royle 2010, 255). Workers can also be harassed by management for taking sick time or working extra hours. They may even be compelled to work off-the-clock during what should be break time. Managers who want to impress their superiors will try to reduce labor costs as much as possible. This, unfortunately, involves labor practices that are sometimes illegal and have resulted in lawsuits (Royle 2010, 255-256).

Labor Impacts: Wal-Mart and McDonald's

But some would argue that firms like Wal-Mart and McDonald's actually have done a considerable amount of good. Hicks (2007) and Keil and Lee (2007) reported studies of the impact of Wal-Mart stores in various locations. Keil and Lee (2007) found that in counties where Wal-Mart opened a new outlet between 1980 and 1990, unemployment decreased and wages increased. Hicks found reported similar outcomes. But he also acknowledges that the changes he found were relatively marginal and could be due to other factors. Both Keil and Lee (2007) and Hicks (2007) suggest that Wal-Mart's entrance into a local economy increased job opportunities for unskilled workers, including a disproportionate number of black workers, who might have otherwise remain unemployed.

Wal-Mart and Costco

Wal-Mart's critics usually turn to Costco as an example of a firm that pays its workers well and also provides consumer goods at a low price. Cascio (2006, 28) points out that the average wage of Costco employees is about $17 per hour. In contrast, the author (2006, 28) notes, that Wal-Mart employees are estimated to make only about $10 per hour. Also turnover at Costco is only 17 percent in the first year and 6 percent afterward. However, turnover at Wal-Mart averages 44 percent for the first year.

The difference between the two firms is most critically the type of customer base. The average annual income of a Costco customer is estimated at $74,000 per year (Cascio 2006, 27). This allows the firm to target much higher-end consumer items such as diamond jewelry, which one would not find at either Wal-Mart or its affiliate Sam's Club outlets. Costco also stocks a smaller selection of the same brand name items than at Wal-Mart. It consequently spends less on inventory and can thus afford to charge less. Also as of its items sell the firm usually lower its prices to levels that are very competitive with the low, low prices of Wal-Mart.

Conversely, Wal-Mart targets the much lower-end customer and is able to remain profitable only by keeping labor costs low (Cascio 2006, 26). This is because labor costs are the largest single expense at firms like Wal-Mart and McDonald's. If labor costs were to increase the ability to pay shareholders and turn a profit would decline considerably. Thus this explains the well-known hostility of these firms to any sort of pay equity for its workers.

Conclusion

In conclusion, the topic question of this paper was should Wal-Mart and McDonald's raise their wages? It is this paper's contention that this is not a simple question to answer based on the available evidence. It appears that the nature of each firm's customer base, and business model, doesn't provide much flexibility in providing fair wages. Indeed one of the difficulties in raising wages for workers is that it's often seen as a zero-sum tradeoff. In such a tradeoff dividend payments to shareholders and bonuses and salaries to senior management are always prioritized. The only way in which a fairer and more equitable distribution of wages could be possible is if their business models shifted away from servicing poor and lower-middle-income consumers. It may be an unfortunate facet of economic reality in the retail sector that wages will remain depressed. Government policy-makers might consider mitigating this situation by providing more generous welfare benefits to the working poor.

Works Cited

Cascio, Wayne F. "Decency Means More than “Always Low Prices”: A Comparison of Costco to Wal-Mart’s Sam’s Club." Academy of Management Perspectives, August 2006, 26-37.

Greenhouse, Steven. "Wal-Mart Workers Try the Nonunion Route." NYTimes.com, June 14, 2011.

Hicks, Michael. "Job Turnover and Wages in the Retail Sector: The Influence of Wal-Mart." Journal of Private Enterprise, 22(2): Spring 2007.

Keil, Stanley R., Spector, Lee C. "The Impact of Wal-Mart on Income and Unemployment Differentials in Alabama." The Review of Regional Studies, 35(3): 2005, 336−355.

Royle, Tony. "‘Low-road Americanization’ and the global ‘McJob’: A longitudinal analysis of work, pay and unionization in the international fast-food industry." Labor History, May 2010, 51(2): 249-270.