One of the most controversial contemporary debates is that one surrounding the minimum wage. Nowadays you often hear workers agitating for the minimum wage to be set at $15, and cite the profits of corporations such as McDonald’s, so as to say that companies can afford to pay the higher wage. In this article I’d like to address the economic problems with a minimum wage in the larger economic context, and then discuss McDonald’s and its profits, as it has apparently become the posterboy representative of a company with enough money to give raises across the board.
The Minimum Wage in Theory
Essentially, the minimum wage is a price control – on the price of labor. It should thus essentially have the effect of any price control:
- Raise the price of a good or service, then people won’t buy it or look for substitutes (surplus)
- Lower the price of a good, then everyone will use more and there will not be enough to go around (shortage)
As the minimum wage forces businesses to pay higher wages than they would otherwise pay, businesses are in effect encouraged to hire less, or look for substitutes.
The response you’ll get from pro-minimum wage proponents will generally be:
- That low wage workers work for large corporations that have plenty of profits to pay their workers a higher wage;
- The increase in wages for workers will lead to them having more purchasing power, and will thus be a stimulus to the economy;
- That service jobs are easier to raise the minimum wage, because they can’t be moved overseas (you’re not going to fly to China for your lunch at McDonald’s)
- That an increase in wages is fiscally responsible because it will lead to low wage workers getting less assistance from the government;
- They may even point you to this “MythBusters” page from the Department of Labor which uses a single study to act as the refutation of a myth;
- That the higher wage will lead to more productive workers.
So in response to these points:
- As seen in Seattle, while you can’t export some service jobs, consumers can find alternatives to higher prices, causing those jobs to disappear;
- That in Seattle people voluntarily cut their own hours after the minimum wage increase so they could continue to qualify for government assistance;
- Seattle has seen a drop in restaurant employment;
- That there are plenty of studies that show problems caused by the minimum wage, meaning the debate over wage control isn’t settled;
- It is true that a higher wage will lead to a more productive workforce. But the reason for that is more so because if employers have to pay more, people with higher qualifications will apply to the job, and the employer can hire them and phase out the lower skilled employees;
- I’ve already shown how Walmart’s profits aren’t enough to give all its employees a bump in wages, and below I’ll do the same for McDonald’s (the second largest employer next to Walmart).
The thing about McDonald’s is you have to separate corporate McDonald’s from the McDonald’s franchises. Unlike a company like Wendy’s which owns all of its locations (which is reflected in its much lower profit margins), McDonald’s does not own most of its locations. They are franchises.
With a franchise a separate business (the franchisee) owner buys a right to open a certain number of stores under the brand of the main corporation (the franchiser). The franchiser not only supplies the franchisee with the brand, but also with the systems, supplies, and assistance to make the business successful (think like a business in a box).
So the profits of the franchiser comes from services it sells to franchisees (higher margin) while the profits of the of franchisee comes from operating the franchise locations (lower margin, because they pay the operating cost).
So generally a McDonald’s employee doesn’t work for the McDonald’s Corporation, but for some other company who paid for the right to own and run that location. The money that would be used to give them a raise would not come from the profits of McDonald’s but from that specific franchisee.
What are profit margins? The amount of profit a company gets for every dollar of sales. So then what are the margins for a franchisee, since this is the important number for paying a higher minimum wage?
According to the image above the average McDonald’s franchise has a 6% margin (meaning 6 cents of profit for every dollar of revenue). Let’s assume that the average franchise had $1.000.000 in revenue per year (which in many locations should be about right). The profit would be $60.000, which would normally be used by the franchisee for emergency expenditures and expansions in the following year.
So let’s assume the workers are already working at $9 per hour, thus $15 would be a $6 per hour increase. This would mean that $60.000 would be enough to bring 10.000 hours (192 hours per week) worth of work time up to $15 per hour. Doing this would leave no profits at all to the franchisee, which would make it pointless for them to operate the store and likely close it.
But what about the McDonald’s Corporation?
The McDonald’s Corporation has about $4.7 billion in profits. Let’s say governments around the world decide to change all the laws so they could take those profits from the company to subsidize the franchisees’ payrolls (which they would love because they can hire better employees and have the Corporation foot the bill).
$4.7 billion over 1.9 million worldwide employees:
This would result in each employee getting an extra $2400 per year; about a $1.23/hy raise (based on a 2000 hour work year).
$1.23 is far from the universal $15 per hour these minimum wage proponents would like, and McDonald’s is the second largest employer behind Walmart. We have now shown that neither are able to pay their employees what the left would like them to.
So what about the Plight of Low Wage Workers?
There is a sincere issue regarding the quality of life for low wage workers. Part of this has to do with the broken healthcare system, as low wage workers are less likely to get healthcare benefits. Many people, even those who have a college education, become low wage workers because of a broken higher education system.
McDonald’s and Walmart aren’t the culprits behind our healthcare and education system. They are just serving affordable food and products to a world that needs affordability as a result of many bad economic policies.
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