After Walmart, will fast-food wages rise also?

With Walmart's (WMT) announcement yesterday that it will raise the wages of 500,000 employees, the public spotlight is shining on other employers, such as restaurants, that rely on low-wage workers to see if they follow suit.

The pressure is coming at in inopportune moment for the $709 billion restaurant industry, which has resisted efforts to raise the federal minimum wage for years because it says high commodity prices are squeezing profit margins. Fast-food or quick-service eateries, though, may be forced to act since they may compete against Walmart, the largest U.S. private sector employer, to attract the same workers.

"Restaurants will likely feel pressure from current and prospective staff," wrote Darren Tristano, executive vice president at Technomic, a research firm that focuses on the restaurant industry, in an email to CBS MoneyWatch.

"With Walmart raising the bar on pay scale, the employee recruitment pool will become tighter for good, qualified employees," he wrote. "The increase will also create retention pressures with minimum wage staff looking to move to Walmart to increase pay. Many fast-food restaurants will have to consider getting to the $10 threshold and developing opportunities for growth and training so the higher pay is warranted and earned."

Wages in the fast-food industry have come under fire in recent months after a series of strikes demanding $15 per hour wages occurred in cities around the country. A job action organized by the Service Employees International Union that occurred in December attracted participants in nearly 200 cities.

At the time, the National Restaurant Association (NRA) denounced the event as a publicity stunt attacking an industry that employs millions. More than two-dozen states have minimum wages above the federal minimum. The industry bristles at the notion that its workers are poorly paid.

"Only 5 percent of restaurant employees earn the federal minimum wage and those who do are predominantly working part-time and nearly half are teenagers," according to a statement the NRA gave to CBS MoneyWatch. "On average, restaurants operate on razor thin profit margins of 3-5 percent. With any dramatic increase in labor costs, which currently represent one-third of a restaurant's total costs, there will be tradeoffs, such as limiting job opportunities, particularly for those looking to get their start in the workforce and learn critical skills."

Under Walmart's new plan, employees will earn at least $9 per hour, $1.75 above the current $7.25 federal minimum wage, starting in April. Current associates will be paid at least $10 per hour starting Feb. 1, 2016. Many economists praised the plan, though critics argued that the raises weren't generous enough.

"Even $10 an hour year-round is still below the poverty line," said David Cooper of the Economic Policy Research Institute, in an interview.

Both Walmart and the restaurant industry are facing a changing job market as the economy continues to rebound from the Great Recession. The employment picture is brightening even for young people, who often work in lower-paying jobs in sectors such as restaurants and retail.

According to data from ADP, the annual turnover rate for workers under age 25 was 49 percent in 2014, more than double the 23 percent nationwide average. Wages for this demographic also grew twice as fast as those for any other group.

"Their pay level is lower, so they're moving to a higher rate," said Ahu Yildirmaz, a vice president at ADP, in an interview. "All the data indicates that the job market is tightening, which leads to higher wages."

The pressure to raise wages may be especially tough on McDonald's (MCD), which is under pressure from Wall Street to boost its lackluster sales and recently announced that CEO Don Thompson would be stepping down. Like most fast-food chains, McDonald's businesses model is based on franchisees, independent business owners who own most of the restaurants that bear the company's name.

Many McDonald's franchisees are angry because the fees they pay to the corporation are rising while their profits have fallen. In response to their concerns, the chain is trimming poorly selling items from its menu, which critics say has become bloated in recent years.

Judi Conti of the National Employment Law Project noted that the fast-food chains have such sway over their franchisees' costs that the companies also control wages even though they don't pay workers directly.

Moreover, McDonald's has many locations inside Walmart stores, which will pressure the Oakbrook, Illinois, firm even further.

"Don't you think that every McDonald's employee is going to be looking at the Walmart job board and be applying there as soon as they can?" Conti said in an interview.

McDonald's didn't respond to requests for comment for this story, neither did Burger King, which is part of Restaurant Brands (QSR); Yum (YUM), owner of Taco Bell and KFC; or Wendy's (WEN).

  • Jonathan Berr On Twitter»

    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.