Wednesday, April 08, 2015

McDonald’s Minimum Raise

A recent editorial in the New York Times by Stephanie Strom shows how little the Ms. Strom and, by implication, the New York Times understands about economics.  In particular, here are a two excerpts from the editorial (in italics) and my comments.

The increase follows moves by other low-wage employers but is more limited. It covers 12 percent of the McDonald’s work force and costs an amount equal to about 2 percent of profits in 2014. The recent raise at Walmart, to at least $10 an hour, covered nearly 40 percent of workers at a cost of about 6 percent of Walmart’s 2014 profits.

Clearly, if the McDonald’s raise were a response to the competition for workers, it would be bigger. And it does not come close to meeting protesters’ demands for $15 an hour, though the movement to improve fast-food workers’ pay has helped to push McDonald’s to this point.

Since Walmart is a different business than McDonald's, why is a comparison meaningful?Presumably, McDonald's want's to maintain an appropriate staff.    McDonald's decision reflects a detailed understanding of its situation and what it needs to pay workers.  But how would Ms. Strom know any of the myriad of details that are required to know what wage will accomplish this for McDonald's?  Ms. Strom's "clearly" is, at best, silly rhetoric, not fact.

Protesters' demands for $15 per hour has nothing to do with what is an appropriate wage for McDonald's to pay.  Ms. Strom's intimating that it does suggests either a serious misunderstanding or deception.

McDonald's wage is appropriate if it enables McDonald's to retain the staff it wants.  If McDonald's workers are worth more than McDonald's pays, then other firms will offer them more and they will leave McDonald's, forcing McDonald's to up the ante.  If other firms do not offer them more, then McDonald's is their best deal.

A fair wage for all McDonald’s workers would be one that allowed them to get by without food stamps and other public assistance.Research indicates that half of fast-food workers rely on public aid, with an estimated $1.2 billion a year in taxpayer dollars going to supplement low wages at McDonald’s. That is money that should be coming out of corporate coffers and going into worker pay.

A fair wage is what workers are worth.  A firm offering less will not attract workers because they will find other firms who pay more.  If some workers' worth is too low for their pay to allow them to live in the style Ms. Strom thinks that they should, then the remedy is charity, e.g., either public aid or private.  What is clear is that Ms. Strom's view of what a suitable standard of living is has nothing to do with what is an appropriate wage.  What Ms. Strom really wants is to have firms provide charity, through the equivalent of a tax, instead of the Government or private charities. One result would be lower employment, if firms acted rationally.

In principle, a firm should expand its workforce to the point that the wage required to hire more workers equals the value of their marginal product. There is nor assurance that this wage allows a standard of living acceptable to the Ms. Stroms of the world.  That the world is as it is, not as Ms. Strom would like it to be,  does not imply it is unfair.

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