McDonald's pressured to hike pay as Wal-Mart raises, economy improves

(Reuters) - McDonald's Corp and its franchisees may have few options but to begin raising hourly wages as an improving U.S. economy creates competition for good workers and as mega-employer Wal-Mart Stores Inc sets a higher bar on pay, according to labor experts.

The pressure comes at a particularly difficult time for the world's biggest fast-food chain. McDonald's and its roughly 3,000 U.S. franchisees are fighting to break a long streak of lackluster sales that has made it virtually impossible to boost prices on its famous hamburgers and french fries to cover higher labor costs.

McDonald's declined comment. It referred reporters to a December statement saying that franchisees set wages for roughly 90 percent of the chain's more than 14,000 U.S. restaurants. McDonald's Corp says it can increase pay only in the small number of restaurants it operates.

Wal-Mart on Thursday said it would increase entry-level pay to $9 an hour, a move it estimated would cost $1 billion and affect some 500,000 employees.

Gary Chaison, professor of industrial relations at Clark University in Worcester, Massachusetts, said there is substantial overlap between fast-food and Wal-Mart workers in smaller communities.

    "They are going to have to raise their wages," Chaison said of the fast-food chains in those locations. "They cannot afford to be unstaffed."

Wal-Mart, the world's biggest retailer, and McDonald's have been the target of frequent protests by union-supported hourly workers demanding that their pay be increased to $15 per hour from an average that is closer to the federal minimum wage of $7.25 per hour.

While supporters of those campaigns declared victory following Thursday's Wal-Mart announcement, economists said it reflected an improving U.S. economy that has added more than a million jobs over the past three months, a performance unmatched since the late 1990s.

"It's finally happening. The strengthening economy is putting some upward pressure on wages," said Wally Hopp, a professor at the University of Michigan's Ross School of Business.

"For the first time in five or six years you're seeing 'Now Hiring' signs" in fast-food restaurants, said Richard Adams, a former McDonald's franchisee who is now an adviser.

Adams and others said that in most parts of the United States Wal-Mart tends to attract older, more seasoned employees than McDonald's, which mainly competes with other fast-food chains for younger, entry-level workers.

Experienced fast-food workers would be the most likely to see their pay rise over time as employers seeking to boost productivity and service quality fight over them, he said.

McDonald's executives last month warned that labor-related costs would grow "a little faster than normal" and squeeze profits in 2015, due to state and local minimum wage increases and new federal healthcare costs.

But while more experienced McDonald's workers may see their wages rise, Allen Sanderson, a senior lecturer in economics at the University of Chicago, said entry-level fast-food workers face dim prospects for wage hikes.

"If somebody quits, they can hire somebody else and teach them to make french fries in an hour," he said.

(Additional reporting by Nathan Layne in Chicago; Editing by Leslie Adler)