, , , , ,

Recently, McDonald’s workers have created quite a stir with their demand for a minimum wage of $15. From an economic standpoint, the debate is centered on how the rising cost of labor will impact prices and employment. Firms in the industry already have a relatively high portion of costs attributed to labor due to little need for expensive machinery and other technology. With labor accounting for so much, one of three scenarios would likely happen:

  1. McDonald’s fully absorbs the cost increase by maintaining prices. It sees a decrease in profits and, since employees already have little to no fringe benefits,  overall employee compensation will increase. Employment remains constant.
  2. McDonald’s fully passes on cost increases to consumers, increasing the price of its products. Employee compensation rises, McDonald’s profits and employment remain constant.
  3. McDonald’s finds some compromise between fully absorbing and fully passing on cost increases. This likely involves some sort of change in production technology and/or employment shift to reduce labor costs and minimize price increases.

As you can imagine, neither of the first two options are really viable. Falling profits would force many franchisees out of the industry and McDonald’s would dramatically reduce its market share. And if prices were to increase many customers with elastic demand, whether for reasons of income or taste, might remove McDonald’s from their diet. To minimize the burden of each of these scenarios McDonald’s would most likely reduce its employment through labor-saving technologies. Workers who stay would be better off, but at what cost to the thousands who lose their jobs?

As many conservatives will argue (and rightly so) economics shows that a high minimum wage could actually hurt the population it is seeking to help. In this I agree: our economy operates on principles of freedom and self-interest that idolize so-called “efficiency” over equity and stability. But what about the humanitarian issues here – poverty and all the issues that come with it like hunger, poor access to education, etc.?

Let me present a very simple, numbers example of the kind of issues we face with our current minimum wage practices.

Map of state minimum wages relative to the federal minimum wage of $7.25/hr.

Map of state minimum wages relative to the federal minimum wage of $7.25/hr.

Net pay of a federal  minimum wage worker.

Net pay of a federal minimum wage worker.

Scenario 1: Single Parent, 1 child, working at federal minimum wage. Assume no state income tax (for simplicity). Working 40 hours per week. 52 weeks per year. Approximate annual salary, after taxes: $13,418.

I choose a two person household example because it means something very real to me. It is not abstract, like the infamous and highly variable scenarios for a four family household (who is working, how many kids need day-care, etc). My mother and I were this two family household and we struggled to get by. With an older child the parent is free to work and need not pay for day care; with a younger child the scenario is even worse.

According to federal definitions of poverty, the poverty line for a two person household is $15,510. This family is $2,092 below the poverty line. And that does not even consider the widely accepted belief that the poverty line systematically underestimates the true costs of living (more on this another day).

I think the Huffington Post put it best when it mentioned McDonald’s workers on public assistance such as food stamps and Medicaid:

Subsidize McDonald’s? For health care? With that food it should be hit with a surcharge.

Read more about McDonald’s and the minimum wage: McDonald’s Budget Journal The Atlantic on McDonald’s Sample Budget | Forbes on the Minimum Wage | Huffington Post & the “McManifesto” | US Department of Labor on Minimum Wage | State Minimum Wage Chart | State & Federal Minimum Wage Graphic | Federal Poverty Line |

Oh, and I don’t know about other people, but reading the reader comments on articles like the ones I linked to here genuinely pisses me off.