July 19 2013

McDonald's, Profit, Wages, and Growth

Hadley Heath

Earlier this week, in an effort to provide financial advice to low-wage workers, McDonald’s teamed up with Visa to put together an online resource called “Practical Money Skills.”

This pamphlet, available in English and Spanish, has sparked a lot of controversia. On one hand, critics claim that the suggested budget serves as proof that no one can live on minimum wage. On the other hand, supporters point out that the general advice (don’t spend more than you earn, set spending and saving goals) is valuable.

I don’t think anyone would contend that living on a minimum wage salary is particularly easy or fun.  It certainly requires a great deal of spending restraint, and forgoing certain desired purchases.

The gut reaction many people have to this story is to try to improve the situation of low-wage workers. This is a good, sympathetic impulse.  But many of the policy “quick fixes” to low-wages aren’t fixes at all.

One “quick fix” is to tell McDonald’s to stop profiting so much.  Big corporations are often demonized for maximizing their profit margins “on the backs” of their low-wage workers. 

This ignores the important role that profits play in the world of business.  They are used to reward shareholders, without whom there would be no investment in the company.  They are used to innovate, research and develop new products and services.

Profits are used to pay taxes, or in some cases they are invested into corporate charitable giving. Some businesses set up a “profit-sharing” model so that employees have a stake in the success of the company.

The common mental picture of large profits is the cutting of large bonus checks to fat-cat owners of the company.  No doubt, owning a successful restaurant chain like McDonald’s will make you rich. 

We can debate about whether it is right or wrong for these business owners to take home luxurious bonuses, but remember, rich people only do a few things with their money: spend it (spurring consumption), save and invest it (making more business possible), or give it to charity.

Consider another “quick fix” to ease the plight of low-wage workers – raising the federal minimum wage by law.  This won’t work either: If McDonald’s has to spend more money on their employees (and Burger King does too), they could react by raising the prices of BigMac’s (or Whoppers).  This price inflation actually hits low-income folks hardest.

Alternatively, McDonald’s could simply employ fewer workers and not stay open as late. So we haven’t succeeded in fixing the problem. In fact, we might have made it worse.

Another law – the Affordable Care Act – is backfiring on low-wage workers in a similar way.  Requiring employers to provide health insurance (or more expensive health insurance) has the same effect as raising minimum wage. It increases the cost of employment, resulting in fewer jobs and slower economic (i.e. wage) growth. 

It’s this last point – economic growth – that is the key to real wage growth.  While some economists say that increasing the minimum wage will drive consumer spending and ultimately grow the economy, they have it backwards.  A growing economy (driven by investment, production, and even – gasp – profits) leads to a bigger pie, and therefore bigger slices for everyone.

Everyone wants to ease the burdens of others in our communities.  I imagine that was the impulse behind McDonald’s sincere attempt to give financial advice.

But the best way to spur job creation and wage growth is to reduce the burdens that businesses face, remove hurdles to hiring, and encourage economic efficiency. 

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