Fast food workers in my city joined protests around the country last week to push for higher wages for their work:
St. Louis fast food workers are calling for a wage of $15 an hour. Missouri’s minimum wage is $7.35 an hour…
When asked how the wage increase would affect consumers buying lunch Rafana asked, “Would you mind paying 25 cents more for your number two so that somebody can have a fare wage and be able to take care of their family?”
The local paper stoked the class warfare fires with its write-up:
Nobody seriously thought the industry would bow to moral suasion and start paying a living wage… If McDonald’s did that, it might not have been able to triple its CEO’s pay package to $13.8 million last year.
Now I support the right of workers to voluntarily negotiate better higher wages or better working conditions with their employers. But any discussions that ignore economic and mathematical realities don’t have any chance at improving that reality. So let’s look at some numbers.
Can You Double Wages At The Bottom By Paying Less At The Top?
We’ve all heard how inequality is growing, how the rich are getting richer, how the top 1% or whatever have nabbed 93% or whatever of the economic growth in the last five years or whatever. Here, we see claims that McDonald’s CEO’s pay was tripled. Yet the starting crew’s pay was not. How unfair!
Well, hold on a minute. Wikipedia says McDonald’s has about 1.8 million employees. If you fired him and split his entire pay package among every employee, they could get paid an extra $7.63….. per year. The decision to triple the CEO’s pay may be bad signaling, without getting into how much he “deserved” it, but it doesn’t imply that McDonald’s has enough money to double everyone’s pay.
To do that, we have to look at overall profits.
Can You Double Wages At The Bottom By Reducing Profits?
McDonald’s annual report is complex, especially because it looks like they have more data on company-operated stores than franchise stores, and it’s possible I’m reading some of this wrong. But it looks like “payroll and employee benefits” were $4.7 billion last year for company-operated stores, and if we assume a similar proportion for franchise from their sales, that gives a total labor cost of about $7 billion.
So let’s say we want to double that and increase McDonald’s labor costs by $7 billion. Their total profit last year before taxes was $8.1 billion. Now I’m assuming this includes payroll taxes (I don’t see a line item anywhere else) and that those taxes are not progressive, but I’m also assuming we’re not doubling benefits and maybe not even doubling pay for those in the middle and higher management tiers.
Wow. It looks like McDonald’s actually could double everyone’s wages from its existing profit margins. I honestly did not expect that to be mathematically possible, but it looks like it is, at least in theory.
Of course, that would reduce profit margins from around 20% to 3%, which would probably send the stock price plummeting. Now I know it’s trendy for liberals to scoff at high profit margins and paying investors and all that, especially at the expense of “living wages” for workers, and I admit it does look a little unnecessary.
But I think it’s a little more complicated than that. If you only have profit margins of a couple percent and/or no money from investors, you are an extremely vulnerable company. Minor fluctuations in supplier pricing could tip you into the red. It’s harder to expand or upgrade restaurants. It’s harder to handle debts (while I didn’t read the report closely enough to understand it all, it sounds like McDonald’s has debts).
All of these things make it harder for McDonald’s to hire employees and keep them around. So while McDonald’s might mathematically be able to double wages today, it might mean there’s a much higher risk of firing a lot of those people tomorrow. And I don’t think that’s quite what the living wage folks have in mind.
Can You Double Wages At The Bottom By Increasing Prices?
There’s an obvious way to keep profit margins at healthy enough levels to ensure the long-term stability of a company (and the jobs that come with it). Just increase prices. Some of the folks above seem to think that “paying 25 cents more for your number two” is enough to double wages and keep the company sustainable.
That would increase revenue about 5% and bring the margins back up to about 8% (although by now the assumed calculations are starting to pile up so please increase the size of your grain of salt and double-check my work). That’s better, though I’ve never run a business and I don’t know if that’s enough for sustainability. You could always add another quarter, but now you’re starting to hit another limitation – customer demand.
If you increase prices too much, more customers will go to another fast food restaurant, and you’ll have to get by with fewer employees. If all the fast food restaurants increase their wages and prices, more customers will go to nicer restaurants or buy their own groceries (which would actually probably be better for their health). Etc, etc.
This is why I definitely don’t support mandated attempts to regulate these wages. There are too many ways forced distortions in the market can backfire and destroy the very jobs you were trying to improve.
So How Do You Double Your Wages If You’re At The Bottom?
But if mandated wage increases are off the table, and voluntary negotiations don’t work, what’s left? What do you do to make more money if you’re stuck at the bottom tier of a fast-food restaurant?
Simple. Get out of the bottom tier.
Restaurants like McDonald’s have such ridiculously high turnover that pretty much anybody can become a manager if they want to – that’s one way to get higher pay. Or you can get work experience there and take it to a better restaurant with better pay. Those are some options available to almost anyone without even leaving the restaurant industry.
I know, I know, liberals can come up with all sorts of reasons those options aren’t available to certain people in certain circumstances and blah blah blah. But in my opinion, those options provide more opportunities to more people than mandated wage increases actually would.
Low-wage jobs are only supposed to be worked by teenagers who need experience more than they need a “living wage” at that point in their lives. Remember, you can’t make all jobs pay a living wage; you can only eliminate all jobs that are worth less than a living wage. Is it fair to deprive teenagers of the chance to work such a job? Unfortunately, adults with few opportunities will always compete for those jobs, too. But is it fair to tell them they can’t?
So in my opinion, if you want to help folks stuck in low-wage jobs, don’t tell them you’ll work to double their wages while putting some of them out of work. Instead, help them find more opportunities. That’s a more sustainable path for both current and future generations.
This is a good summary of the fallacies and unintended consequences of minimum wage mandates. I would like to see more discussion of the effect of such requirements on teenage employment, which was touched on here. Teenagers entering the job market at minimum wage generally see increased wages (my last minimum wage job was Burger King at age 16). But the onerous requirements of youth employment (I walked all over town seeking employment before age 16 and could not get hired) and ever-increasing minimum wage requirements, it seems that the age of entry into the labor market is continuously pushed upward (would like to see stats on this) and hence the average age at which people earn minimum wages or just lower wages. Once that age is pushed so high that minimum wage earners are likely to be parents, the government has created an enormous problem.
Thanks. There is definitely more that could be said on the effects on teenage employment, and the effects of that on those teenagers and the labor market in general as they grow up. For starters, Mark Perry has a powerful chart on Carpe Diem regarding that.
To be frank, the assertions made in this post are ridiculous. The solutions you provide are not methods of solving large scale problems through efforts of policy. Do you really think that simply telling people to “work hard and you’ll get there!” is a viable economic solution for ensuring “a more sustainable path for both current and future generations”? The only significant thing that political ideology has power over is the government. When we argue what’s best for the country, simply saying “people should just work harder” is not a solution for a more sustainable path. Jobs at McDonald’ are SUPPOSED to be for teenagers, but that doesn’t mean it’s actually like that. Granted, you see a lot more teenagers there, but jobs with just about the same low wages are filled with adults. Who says they can’t work at the jobs? Let’s let them work there, but require better pay and better benefits. Who’s to say that we shouldn’t do that? Why shouldn’t we provide low interest rates and take a more demand-side approach to help these people save more money? I don’t seem to remember when telling people to do things has been a more effective strategy than actual economic action. Now, don’t say “raising minimum wage hurts the economy” through inflation or by hurting businesses. The minimum wage has been shown to actually have much better effects in areas with a higher one than in areas with lower minimum wage (mainly the damn South). There is no substantial argument that a high minimum wage causes inflation or hurts small businesses. Isn’t it immoral for there to be such a concentrated amount of wealth invested in such a small amount of the population? Especially when they hurt other people through monopolistic tactics to decrease wages and increase prices? You could say that these guys earned it, but that’s no excuse for allowing them to hurt our economy. Isn’t an economy best stimulated by increasing spending (whether in the private or public sectors)? And lessening the inequality gap would be the most efficient way to increase spending. Telling people to work hard has always been a poor approach to anything- especially now, when we are recovering from A RECESSION.
Oh shit, I didn’t realize that this was one big blog post. My previous post was basically only a response to the last part of the blog post. My argument still is, however, an argument that corresponds to the other parts also.
Harold: Do you think there is a particular point (in dollars) at which raising the minimum wage will negatively affect a business?? It seems you don’t, but if so, what is it? How could it ever be economically possible or desirable to have a minimum wage greater than the revenue generated by the worker? How could there possibly be a “one wage fits all” mandate since not all businesses are the same and not all employees are the same? Looking forward to your comments.
Hi Harold, thanks for your comment. I think we both want to help people at the bottom, we just disagree on the best way to do that. I don’t think I ever said to just “work hard” to get out of the bottom tier, but I provided two actionable steps to do so that are not perfect, but are at least potentially better than the unintended consequences of the alternatives. If we require better pay and better benefits (in a way, “telling people to do things”), I believe that could lead to fewer of those jobs, which hurts both the present adults who lose those jobs and the teenagers who are permanently missing that potential work experience. From what I have read the studies on minimum wage are inconclusive at best (see my earlier thoughts here), though I would love to check out the sources for your claim that it has better effects in areas with a higher one.
Moving beyond low wages and improving one’s standard of living and income is not about “working harder,” although hard work is an important part of it. It is about gaining more skills and assuming more responsibility. One cannot expect to stay in a low-wage position, while continuing to increase their income. Fast food workers, like others, can move up or move on. It does not seem ethical to implement policy that incentivizes people to remaining at the bottom by increasing their wages on the bottom. A better policy would be to incentivize youth employment, so that people can start early. This, of course, ignores all the other elements of policy that prevent personal development (occupational licensing and other barriers to opening businesses, for example).
This is a good summary of the fallacies and unintended consequences of minimum wage mandates. I would like to see more discussion of the effect of such requirements on teenage employment, which was touched on here. Teenagers entering the job market at minimum wage generally see increased wages (my last minimum wage job was Burger King at age 16). But the onerous requirements of youth employment (I walked all over town seeking employment before age 16 and could not get hired) and ever-increasing minimum wage requirements, it seems that the age of entry into the labor market is continuously pushed upward (would like to see stats on this) and hence the average age at which people earn minimum wages or just lower wages. Once that age is pushed so high that minimum wage earners are likely to be parents, the government has created an enormous problem.
Thanks. There is definitely more that could be said on the effects on teenage employment, and the effects of that on those teenagers and the labor market in general as they grow up. For starters, Mark Perry has a powerful chart on Carpe Diem regarding that.
Moving beyond low wages and improving one’s standard of living and income is not about “working harder,” although hard work is an important part of it. It is about gaining more skills and assuming more responsibility. One cannot expect to stay in a low-wage position, while continuing to increase their income. Fast food workers, like others, can move up or move on. It does not seem ethical to implement policy that incentivizes people to remaining at the bottom by increasing their wages on the bottom. A better policy would be to incentivize youth employment, so that people can start early. This, of course, ignores all the other elements of policy that prevent personal development (occupational licensing and other barriers to opening businesses, for example).
To be frank, the assertions made in this post are ridiculous. The solutions you provide are not methods of solving large scale problems through efforts of policy. Do you really think that simply telling people to “work hard and you’ll get there!” is a viable economic solution for ensuring “a more sustainable path for both current and future generations”? The only significant thing that political ideology has power over is the government. When we argue what’s best for the country, simply saying “people should just work harder” is not a solution for a more sustainable path. Jobs at McDonald’ are SUPPOSED to be for teenagers, but that doesn’t mean it’s actually like that. Granted, you see a lot more teenagers there, but jobs with just about the same low wages are filled with adults. Who says they can’t work at the jobs? Let’s let them work there, but require better pay and better benefits. Who’s to say that we shouldn’t do that? Why shouldn’t we provide low interest rates and take a more demand-side approach to help these people save more money? I don’t seem to remember when telling people to do things has been a more effective strategy than actual economic action. Now, don’t say “raising minimum wage hurts the economy” through inflation or by hurting businesses. The minimum wage has been shown to actually have much better effects in areas with a higher one than in areas with lower minimum wage (mainly the damn South). There is no substantial argument that a high minimum wage causes inflation or hurts small businesses. Isn’t it immoral for there to be such a concentrated amount of wealth invested in such a small amount of the population? Especially when they hurt other people through monopolistic tactics to decrease wages and increase prices? You could say that these guys earned it, but that’s no excuse for allowing them to hurt our economy. Isn’t an economy best stimulated by increasing spending (whether in the private or public sectors)? And lessening the inequality gap would be the most efficient way to increase spending. Telling people to work hard has always been a poor approach to anything- especially now, when we are recovering from A RECESSION.
Oh shit, I didn’t realize that this was one big blog post. My previous post was basically only a response to the last part of the blog post. My argument still is, however, an argument that corresponds to the other parts also.
Hi Harold, thanks for your comment. I think we both want to help people at the bottom, we just disagree on the best way to do that. I don’t think I ever said to just “work hard” to get out of the bottom tier, but I provided two actionable steps to do so that are not perfect, but are at least potentially better than the unintended consequences of the alternatives. If we require better pay and better benefits (in a way, “telling people to do things”), I believe that could lead to fewer of those jobs, which hurts both the present adults who lose those jobs and the teenagers who are permanently missing that potential work experience. From what I have read the studies on minimum wage are inconclusive at best (see my earlier thoughts here), though I would love to check out the sources for your claim that it has better effects in areas with a higher one.
Harold: Do you think there is a particular point (in dollars) at which raising the minimum wage will negatively affect a business?? It seems you don’t, but if so, what is it? How could it ever be economically possible or desirable to have a minimum wage greater than the revenue generated by the worker? How could there possibly be a “one wage fits all” mandate since not all businesses are the same and not all employees are the same? Looking forward to your comments.