Fast-food firms 'keeping wage growth down' in US

Experts point to clause preventing hiring competition among outlets

NEW YORK • The American fast-food industry is built on two pillars: cheap hamburgers and cheap labour. As economists try to understand why wages have stagnated across the country's economy, they are examining the cheap labour part of the equation closely.

A few have zeroed in on an obscure clause buried in many fast-food franchise agreements as a possible contributor to the problem.

Some of fast food's biggest names - including Burger King, Carl's Jr, Pizza Hut and, until recently, McDonald's - prohibited franchisees from hiring workers away from one another.

The restrictions do not appear in a contract that employees sign, or even see.

Instead, they are typically included in a paragraph buried in lengthy contracts that owners of fast-food outlets sign with corporate headquarters.

The provisions can keep employees tied to one spot, unable to switch jobs or negotiate for a higher pay.

A lack of worker mobility has long been viewed as contributing to wage stagnation because switching jobs is one of the most reliable ways to get a raise.

Defenders of the practice argue that the restaurants spend time and money training workers and want to protect their investment.

But two lawsuits, filed this year against McDonald's and Carl's Jr's parent firm, CKE Restaurants Holdings, argue that such no-hire rules violate antitrust and labour laws.

McDonald's said its policies did not violate any laws. It recently removed the language from its contract, and declined to say whether the lawsuits played a role in that decision. CKE declined to comment.

The no-hire rules affect more than 70,000 restaurants - or more than a quarter of the fast-food outlets in the United States - according to Princeton University economist Alan B. Krueger.

The provisions, he said, were "ubiquitous" among the firms and appeared to exist mainly to limit both competition and turnover.

The fast-food industry has been one of the biggest sources of job growth since the recession. More than 4.3 million people are now dipping frier baskets and flipping hamburgers, a 28 per cent rise since 2010 that is almost double the increase in the overall labour market.

But the average fast-food worker takes home just US$300 (S$408) a week before taxes, about a third of what the average private sector worker earns.

Other industries also forbid franchisees from hiring one another's workers. The practice is more common when turnover rates are high, according to research by Professor Krueger and Professor Orley C. Ashenfelter, also from Princeton.

Prof Krueger and Prof Ashenfelter examined 156 companies in 21 industries, selecting businesses with more than 500 franchise stores in the US. More than half of the firms imposed some kind of restriction, according to their franchise disclosure documents for last year.

The prevalence of no-hire agreements in franchise contracts suggests that "many employers do try to combine to restrict competition in the labour market," said Prof Krueger and Prof Ashenfelter.

"It might help explain a recent puzzle in the US job market," the two said in their report. "Unemployment has reached a 16-year low and job openings are at an all-time high, yet wage growth has remained surprisingly sluggish."


A version of this article appeared in the print edition of The Straits Times on September 29, 2017, with the headline 'Fast-food firms 'keeping wage growth down' in US'. Subscribe