Another Way to Put Wages in Context

fastfoodworker1Often people arguing against minimum wage adjustments — or arguing wages generally — don’t understand the significant difference between real and nominal dollars.  We hear the mistake so often that the debate often skims over it.  But it is significant.

Recently caller to The Agenda with Ari Rabin-Havt seemingly tried to make the point that wages have been rising steadily and in fact were much lower in the past.  He explained that in 1970 he earned $1.60 on his first job, describing it as a fair wage.  However a $1.60, in real dollars — that is, adjusted for inflation — is the equivalent of $9.82 today, more than $2.50 an hour higher than the current Federal minimum wage.

A lot of people don’t seem to be able to grasp what this means.  To old timers and not-so-old timers $7.25 looks like a reasonable wage for flipping burgers, never mind that many jobs outside of fast food joints pay minimum wage.

Perhaps we need to talk of wages in terms of what it buys.  The buying power of the dollar has changed over time.  Making things very simple, prices have risen.  If I give you $1.60 today it won’t buy what $1.60 did in 1970.  We all understand that, right?

$1.60 today looks the same as it did 44 years ago, it is still called “a dollar-sixty”, nominally — literally “in name” — it has not changed.  However in real terms — what it will really buy — it has changed.  What was $1.60 in 1970 really buys about the same as a quarter today.

(There is a formula for this — Real Wage = Nominal Wage/1 + % increase in prices since the base year — but you can go to Bureau of Labor Statistics Website Inflation Calculator and get your numbers easily.  Let’s do that by looking at the prices of things and consider the changes in wages from a price of products context.)

The same day I heard the caller defend today’s low minimum wage because he got by on only $1.60, thousands of fast food workers striked to protest their low wages.  Let’s ignore the arguments in this debate for a minute and just look at the prices in that industry.

West St. Paul McDonalds 1980The photo I posted here is from a McDonald’s in West St. Paul, Minnesota.  The date is some time in 1980, maybe 1981.  Look at the price of the hamburger.  It is $0.30.  If the price of that hamburger had kept pace with overall inflation, it would cost about $0.87 today.  I went into a McDonald’s (and today it is hard to find just a hamburger on the menu!) and  hamburger costs only $0.89.  Barely changed in real terms.  That looks good.

But look at the Quarter Pounder.  In 1980 it is priced at $0.80 which would be $2.32 in today’s dollars.  However, something similar, a double cheeseburger (along with things like a “McDouble”, “McChicken, and even “Bacon McDouble and more) is on the menu today for only $1.00.  One could get a large sandwich, a drink, and a desert for $3.00.  If I take similar items off the 1980 menu and convert into today’s real dollars the amount is almost $4.50 or 50% more than the cost of today’s dollar menu.

Pricing strategies are complicated and never static, but the dollar menu gives us an idea of what McDonald’s can afford to charge.  The truth is they sell a lot more “value meals” at $5.oo or more.  These are tangible clues.  Putting together a value meal from the 1980 menu shows a 50% increase in the price of the products sold.

In other words, the price of fast food that most people buy — and indeed are incented to buy — is significantly lower today.  If all prices remained low like this, then the real value of today’s minimum wage remained on par, it would be phenomenal, about $18.00.  But it isn’t.

Instead we are increasingly widening the divide between have and have-not in this country.  While the buying power for the working class and poor has decreased, some items — fast food — have become not a convenience or a treat, but a primary source of meals.

(I know this won’t tug on the heart strings of conservatives, but it should.)

Labor's Share of Corporate Sector IncomeSo let’s look at the prices versus wages in another way.  To compete, does McDonald’s need to keep its burgers nearly at 1980 prices?  How does it make all those profits?

Dollar menu items — and so-called value meals generally — are possible in large part because the cost of labor is kept low.  More specifically, low wages and few, if any, benefits.

People have a choice.  They can go and buy their food and prepare it and serve it to themselves or they can go to a restaurant and get everything but the eating done for them.  Restaurants won’t be in business long if they don’t at least cover their costs and most people won’t go into the restaurant business unless they earn a profit.  We can agree on this, right?  So let’s take a look at what is happening in fast food.

First of all, let’s be fair to McDonald’s.  (We can be fair and still make a point about prices, profits, and wages.)  Not long ago, for example, it was argued that McDonald’s could raise the price of a Big Mac modestly and double (double!) the pay of everyone at McDonald’s.

That was a flawed assessment.  It isn’t true.  Moreover, we often pick on McDonalds, the corporation.  Keep in mind when you look at the company’s financial reports that the McDonald’s corporation has relatively low labor costs.  Most McDonald’s restaurants are franchises.  So to some extent franchise owners are caught in the middle here.

Nonetheless, McDonald’s sets price parameters for its franchisees and collects fees from them, thereby setting the balance sheet — perhaps indirectly — that will determine wages.  Nonetheless, I would argue that low-cost labor makes the low price items possible and corporate McDonald’s has a hand in this, a grabby hand.

So let’s keep this in mind and look at the numbers below.  Would the company and its franchises really need to raise prices to keep wages on par with prices of its products?  One might argue that it depends on McDonald’s priorities.  If those priorities are exclusively to maximize profits — and that’s the way we roll today — then those priorities do drive wages down.

In 1972 McDonald’s surpassed $1 billion in annual sales.  In 2013 McDonalds had more than $27 billion in sales and operating income of more than $8.5 billion.  The company’s profit margins hover around a 20%-22%.  (Franchises earn about half this margin, but brought in about $31 billion in sales in the United States last year.)  This is a profitable business.

In this comparison we also need to remember that the company today is not the same company it was in 1972.  They sell a lot more stuff today with different margins.  And the company has grown physically so you can’t really say that the same company in 1972 has quadrupled its earnings.

However, even without raising prices for its products, is there room in the increasing profit margins to increase wages?  Or could you perhaps incorporate a mix of price increases and slightly lower profits to cover the increase in wages?  You certainly could.  The simple economies of scale dictate that you can.  We’re working with billions in profits, consistent growth, and high profit margins.

Vintage McDonald's Big Mac Ad

When a big meal was a big deal?

Here is were the “modest increase” in prices argument makes sense.  You need to look at the profit margins.  A point or two off of  of those margins might still look safe to investors and give room to commit some revenues to wages.  True, McDonald’s is competing with other fast food businesses, but they — and the restaurants with which they compete — compete on the back of workers, keeping wages low to keep prices low.

But that doesn’t erase the increase already built into the price of so-called value meals.  It doesn’t erase the profits that run 20% or more on the dollar.  If a low working wage was more or less on par with expenses in 1970, why can’t they be more or less the same today, especially in a business environment where profits and productivity rise, but wages don’t?

In the United States, low wages — and poverty overall — is the result of politics, not economics.  The fast food industry is not going to pack up and move it’s restaurants to Bermuda.  The money is made here (just as it is for other off-shore corporations) so fast food is a great place to look at the broken relationship between prices, profits, and wages.  The country does not have the political will to manage the nation’s minimum wage.  Politics no longer focuses on people, it focuses on profits.  The GOP in particular is an advocate for business and profits, not the people who earn those profits for business.

Corporate profits have reached levels never before attained.  Worker productivity has also hit records never before achieved.   Even the very make up of the fast food industry favors a secure and profitable future with few competitors in a industry that already favors economies of scale.  So why are the workers left out?

Very simply it is about an ethic — and politics — that only focus on profits and more specifically maximum profits for investors.  Business isn’t going to correct this.  It isn’t in their best interest.  So politics needs to step in.  That’s what government does.  It represents the people.

Instead we were given this narrative that promised opportunity and prosperity for everyone if government got out of the way.  It didn’t work.  (Again, the business of business is to look after its best interests.)  The inverse is true.  There is more prosperity and opportunity for everyone — business included — when people have money to live and thrive.  A faster growing GDP shared among many is better than what growth there is being sucked up and hoarded by a few.  Politics, not economics, enables this backward path to prosperity.



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