On Monday, the Huffington Post published an article claiming that McDonald’s could double its wages and it would only increase the price of their offerings by 17%. So instead of a McDouble being $1.29, it would be $1.51. The understandable response to this was, “That doesn’t sound that bad to provide a living wage to McDonald’s workers.” It turns out that it isn’t quite so simple, but as you will see, I’ll show that it still works out about the same.
The original article was called “Doubling McDonald’s Salaries Would Cause Your Big Mac To Cost Just 68¢ More.” Unlike most news outlets, however, instead of just adding an update, they’ve replaced that article with a full discussion of what was wrong with the article. In the simplest terms, the whole thing was more or less a prank. A student at the University of Kansas did a back of the envelope calculation. McDonald’s entire employment costs are indeed only 17% of their operating budget. The problem is that most of the workforce costs are not due to the corporation but rather the 80% of all the stores that are franchises. Of these franchises, roughly a third of their expenses are due to workforce costs. So that $1.29 McDouble would cost $1.72.
But again, it isn’t that simple. Huffington Post quotes Dean Baker on two related issues. First: doubling wages would doubtless cause some layoffs. That’s not necessarily a bad thing. Increased work costs have a tendency to make employers more efficient in how they use their labor force. What’s more, the increased wages would attracted better employees. The second issue is more important. Increased labor costs are generally shared between increased prices and decreased profits—with profits getting hit twice as hard as the prices. (I talk about this all the time!) So if labor costs go up by one dollar, the cost will go up 33 cents and profits will go down by 67 cents.
If that’s the case, then a 33% jump in labor costs (double the current cost) would cause an increase in McDonald’s food prices of 11%. So our McDouble would go up from $1.29 to $1.43. That would be even better than the Kansas prankster suggested. But again: it isn’t that simple. I suspect that McDonald’s is already extremely efficient with a very low profit margin. So that rule of thumb 1-2 costs-profits number may be a little or even a lot optimistic. But it most certainly isn’t the case, as the Huffington Post now claims, that the price of McDonald’s food will go up a full 33%.
The real question here is not if McDonald’s can afford to pay all of its employees double the minimum wage. Strikers are asking for this, but it is clearly a negotiating tactic that President Obama would be smart to study. What all of this math shows is that McDonald’s could increase their pay rate. In fact, raising it up to $10 per hour would probably have a negligible affect on prices and business viability.
H/T: The Young Turks
Update (10 September 2013 10:09 pm)
Dean Baker did a much more careful analysis of this problem and found that fast food prices would increase by about 5%. It is very interesting and well worth reading.