Should McDonald’s Supersize Wages?

Spurlock

Spurlock

Corporations are the scapegoats of our time. One much vilified is McDonald’s. A basic complaint is that we like its products too much.

This was the point of Morgan Spurlock’s 2004 film, Supersize Me. He proved that eating nothing but McDonald’s for a month is unhealthy. What a shocker. I wonder how his health would fare if he ate nothing but broccoli for a month.

Now there’s a new complaint, by McDonald’s employees, demanding to be paid more than minimum wage – more than double, at $15 an hour. Their beef has gotten much sympathetic attention (on The Daily Show and Colbert Report at least). images-3We’re told McDonald’s profits are over $5 billion annually, so surely they could pay workers more, if they weren’t so greedy and heartless.

So I’m thinking if profits are so obese, buying McDonald’s stock should be a ticket to Fat City. Unknown-5Let’s see, a share is around $95 lately. Back in January 2012 it was . . . $100. Oops. And the $5+ billion in profit works out to around 5 bucks a share, or about 5%; but only around 3% is paid out in dividends (the rest being reinvested). Hmmm . . . more like Skinny City.

I’m actually quite sympathetic to McDonald’s workers. I honor anyone toiling as a productive member of society, whose work makes others’ lives (except for Morgan Spurlock’s) better. It makes mine better when (disclosure) I occasionally eat there. I know it’s tough getting by on minimum wage; and maybe in a world of ideal justice everyone would be paid according to how hard they work. (And how smart. Oops, now you’ve got problems already.)

Unknown-3But should McDonald’s stop being scroogy and just pay more? Workers say this would benefit the whole economy because they’d have more consumer dollars of their own to spend. That’s true; however, unfortunately, a $15 wage would (I did the math) turn McDonald’s $5 billion profit into a loss; the company would be cooked, with its workers then actually earning . . . zero.

So McDonald’s can’t significantly raise wages without raising prices. And that would take a bite out of the wallets of its customers – many of them low income. There’s no free lunch (or happy meal).

But actually McDonald’s has very little power to set either its wages or its prices. Both are dictated by larger economic forces. This (like most) is a fiercely competitive business. And McDonald’s doesn’t compete just against the likes of Burger King. Consumers have a vast array of food choices and alternatives. McDonald’s competes against them all, including cooking at home. It’s been successful because its products, in relation to price, make them attractive to consumers. Change that relationship and consumer choices will change. Unknown-1If McDonald’s prices rise, then not only will Burger King become a comparatively more attractive alternative, but so will upscale restaurants, and so will home cooking. That too could topple the golden arches.

This is how the entire economy works. Some people decry it, seeing McDonald’s wage levels as exemplifying the system’s rottenness. Yet it’s exactly this system that gives all of us as much as we have – this system of a market allocating resources and the production and consumption of goods and services by price and competition throughout a universe of alternatives. McDonald’s ability to profit by serving burgers at prices people willingly pay creates wealth not only for its owners (shareholders) but also for its employees and the customers. All would be worse off if McDonald’s can’t stay competitive.

The same is true for every part of the economy. The auto industry thrives by pricing products where people find them attractive relative to all other transportation alternatives. Likewise the airline industry (though actually airlines barely make money, with the bulk of their wealth creation benefits captured instead by workers and consumers). And without this economic system, where would anybody’s livelihood come from? (The Soviet Union tried doing it all by government. That didn’t work so good.)

Unknown-4Maybe Morgan Spurlock’s heart is so big (or cholesterol swollen) that he would say he’d willingly pay double for burgers if that meant McDonald’s workers getting higher wages. But I bet he’d actually eat fewer Big Macs and more broccoli.

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5 Responses to “Should McDonald’s Supersize Wages?”

  1. Bumba Says:

    Why do you call corporations scapegoats?

  2. rationaloptimist Says:

    Because many people blame them for many problems of society.

  3. Scott Perlman Says:

    If McDonalds raised wages to $15/hour there would be an immediate and severe impact on corporate financial performance, as you indicate. This, in turn, would have a dramatic impact on the value of the stock for several reasons. At best dividends would have to be reduced and at worst, they would have to be completely suspended. This makes the stock less attractive to own. It would increase the perceived risk of owning the stock because of the significant reduction in financial performance and their inability to reinvest for the future. Finally, if an investor likes the space there would be more attractive alternatives with other fast food providers who have not raised wages to $15.

    The reduction in the stock’s value would then impact all who owned it including pension funds, individuals’ 401K investments, and private shareholders, to name a few. This is another unintended consequence of the increase in labor rates. And of course, not all of these shareholders are of the dreaded “1%’” Many are retirees and middle income investors.

    This assumes, of course, that they do not raise prices and that they stay in business. If they raise prices and are alone in doing so, you have identified that this would be the beginning of the end for them because of competitive forces. If the entire industry raises wages and prices, reduced overall demand would have similar impact on the entire industry.

  4. frank S. Robinson Says:

    Thanks, Scott. Advocates of the wage increase talk as though the money can, in effect, come from the sky — or just from rich people. The economy doesn’t work that way, as your comment shows.

  5. Tory Burch バッグ 購入 Says:

    メンズ サイフ

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