Prices, Profits and Minimum Wages

English: A Big Mac sandwich taken at Velika Go...

I tend to think of myself as politically progressive, but I am not entirely sold on minimum wages.

First, the idea seems a little simple-minded and arbitrary.  Put aside the debate about what it does to a business’s bottom line and investment decisions.  Setting a universal minimum wage is problematic.  Exactly how do you set it?  Based on what?

Earned income tax credits and other public policy — formerly known as welfare — makes better economic sense.

I also believe you can expect some of the increased cost of labor imposed by a higher minimum wage to pass down to consumers.  This is the side of the ledger that investors will let trickle down.

However, saying that, there hardly seems to be an alternative solution today and the arguments, especially on the part of big business, that higher wages will kill business look dubious.

Increasingly the poorest wages and benefits are paid by large employers such as WalMart and McDonalds.  Recently workers, especially fast food workers, have reacted with protests demanding for higher minimum wages.  Big corporations oppose the idea, claiming higher minimum wages will hurt business.

McDonald's Dollar MenuBut let’s look at it, especially with an eye on current profits.  Profits are better than steady, they have risen to record levels.  Looking at fast food as our example, the cost of a Big Mac and a Coke (and their peers), continues to drop in real dollars since the 1970s.  We have falling prices and rising profits.  Those dollars have to be generated somewhere, right?  Much of it is simply is economies of scale.  The science and industry of agriculture has also reduced costs.

But fast food is still an industry that has for the most part not yet been moved off shore.  Rising profits and efficiencies…that’s suppose to trickle down, right?  Isn’t that the supply side argument?

McDonald’s, for example, enjoys a profit margin around 20%, an outstanding rate of return for any investor.  While businesses like McDonald’s like to say that paying their workers more would mean higher prices to consumers, that isn’t necessarily true.  It certainly isn’t the whole story.

chart-corporate-profits-employee-wagesThose “dollar menus” are subsidized in part by low wages and those low wages add to profits.  Currently McDonald’s profits are at about $5 billion on $25 billion in revenues.  If the cost of labor went up it is highly unlikely that all of that cost would show up on the cost of a hamburger.  It also is unlikely that the higher cost of labor would be matched by corresponding layoffs.

I found numbers for franchises that are not as impressive as 20%, but instead show franchise profits at that level just below 5%.  But those numbers are about double what they were when the economy slipped in 2009.  True, it is hard to see how a franchise could double worker pay on these margins, but there is growth in profits which — surprise, surprise — do not trickle down to the worker.  (That’s the conservative supply side argument, remember.)

So profits are on the rise, in some cases at record levels, and yet wages remain stagnate and we’re told this is the case because the industry — and you, the consumer — cannot afford the cost of a wage increase.

Instead if McDonald’s, Burger King, Wendy’s and all the other fast food businesses faced higher prices, business would do what it does to succeed and find its best, most creative, and most efficient competitive advantages to maintain and grow business.   Higher wages really would only be an issue if it were imposed by fiat in one sector or region and not another, giving one competitor and advantage over another.

Nevertheless, higher wages would mean some higher prices and hiring might decline or reverse, at least in the short run.  But the price increases would likely be modest and the quality of the worker and his place in the economy greatly improved.  Most importantly, for investors anyway, profits will not disappear and a large enterprise like McDonald’s, by sheer size and economy of scale, will remain viable.  Wages are only one cost factor and increasingly an exploited one.


2 thoughts on “Prices, Profits and Minimum Wages

  1. Henshaw

    I think you’ve pretty much summed up this debate. Personally, I think the minimum wage should be abolished, but even if it’s raised it’s not going to help or hurt that much. There will be few jobs for low skilled workers and like you say there would perhaps be price increases.

    We can wish away the Law of Demand, but it’s not going away.

    I would rather see 16 years olds working $6 an hour jobs where they acquire skills they can use for the future. I worked minimum wage jobs when I was younger and they offered valuable experience as I worked myself up the ladder. We should encourage more job opportunities.


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