Oct 5, 2018

McDonalds Isn't Amazon

Wage Levels That Work for One Company May Not Work for Others

Senator Bernie Sanders (I-VT), following his apparent victory in pushing Amazon to increase workers' wages earlier this week, sent an open letter to the CEO of McDonald's yesterday asking that the fast food giant's minimum wage be raised to $15 per hour.

While I appreciate—and share—Senator Sanders' regard for those people struggling to make ends meet on low wages, his proposal would counter-intuitively reduce the purchasing power of low-income workers by decreasing job opportunities available to them while increasing the prices of they face. There are a few facts of reality that need to be accounted for:

  • The average wage for a McDonald's crew member is around $8.50/hour, although there's significant regional variation and the median wage is higher (over $9/hour). This means that a $15/hour wage represents at least a 76 percent increase in the labor cost to serve customers. Since labor costs account for around 25-30 percent of a fast food operation’s total operating cost, Sanders is proposing around a 20 percent increase to the total operating cost at McDonald's restaurants.
  • Academic research has shown that increasing prices is one of the key channels of adjustment that fast food restaurant operators use to accommodate rising wages. For each 10 percent rise in the minimum wage, food prices rise around four percent, suggesting that McDonalds’ prices could rise by as much as 30 percent in response to Sanders’ proposal. In other words, the average cost of a Big Mac could rise from $5.50 to $7.15. But a 76 percent increase is far outside of the scope of previous research, meaning that the consequences of this change would be in uncharted territory.
  • Even if McDonald's acquiesced to Sanders' proposal, 90 percent of McDonald's workers would be unaffected. McDonald's Corporation only operates around 1,500 restaurants in the US—barely 10 percent of the over 14,000 domestic McDonald's restaurants (most are franchise operations).
  • Automation is already on the rise in many low-wage industries—increasing wages will simply hasten the investments that companies make to research and develop new technologies to lower their labor costs.

A better path to raising wages for fast-food workers would be to encourage customers—rather than store managers—to increase the price they're willing to pay for restaurant food. This is because lower wages are actually caused by price-sensitive customers, not miserly and misanthropic business owners. The tyranny of the customer in a market economy drives business decisions and striving to satisfy customers’ desire for affordable food pushes restaurant operators to find ways of reducing costs, including wages.

But the social movement toward “fair trade” goods offers a way forward that should be pleasing to all sides of the low-wage controversy. Seen from an economic perspective, the concept of fair trade simply adds on a charitable bonus to the market-determined price of a good or service—similar to tipping a delivery person—because the buyer places a premium on ensuring that his trading partners aren’t living a hand-to-mouth existence. Changing cultural values in this way is a much more realistic and sustainable route to increasing wages for lower-income workers than constantly lobbying government to enforce higher wages (which simply causes a political battle) or trying to shame businesses to pay higher wages (because they’re focused on satisfying price-sensitive customers).

Fair trade goods are admittedly a luxury only realistic for those people who have already achieved some degree of economic security, but the benefit of this approach is that it doesn’t preclude businesses from offering affordable goods and services to low-income families. And that’s exactly the outcome that will occur if Senator Sanders and the Fight for $15 movement succeed in artificially raising the price of labor.

As an aside: At the same time Amazon trumpeted their starting wages would increase to $15 per hour, they quietly announced the end of performance and stock bonuses that workers had previously received, meaning that Senator Sanders might have been too swift to proclaim his success in pressuring Amazon to raise wages.

Photo credit: Nam Y Huh/AP/Shutterstock

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