"I'd be willing to pay an extra fifty cents so McDonald's Workers Can Make More..."
Proposed hikes to minimum wages and improvements in working conditions are not free lunches, and at least part of the cost gets passed on to consumers in the form of higher prices. The reply from advocates of the higher minimum wages or better working conditions is usually something like “I’d be willing to pay an extra fifty cents (or two dollars or whatever) so workers can have a decent wage.” But what are the unseen costs of the benefits we seek to confer upon others?
We travel a lot and we have three small children, so I think we’re fairly frequent fast food customers. Knowing that we can rely on consistent quality in the food (decent but not great) at McDonald’s or Chick-fil-A combined with iPhone apps that help us locate restaurants with playgrounds frees up time and energy we can devote to other things.
Let’s assume we eat fast food four times a month and that doubling the wages paid to fast food workers would raise the prices of what we’re buying by 5%. Note that I am making these numbers up for the sake of the example; my guess is that 5% is too low, but it will work for the sake of the example.
Our last fast food receipt shows we spent $26.84 at Chick-fil-A in Dothan, Alabama. Five percent of that is about $1.35. Multiplied by 48 fast food trips over the course of a year, it’s about $65. That’s $65 that isn’t providing an income or funding investment elsewhere. The easy-to-see benefits to one group (fast food workers) are the privation of others.
We’re blessed to have an income such that $65 won’t break us, and we’re also not so price sensitive that we’re going to make a big change the frequency with which we visit Chick-fil-A and McDonald’s to save $65. However, there are a lot of fast food consumers for whom $65 is a pretty big deal and who probably are sufficiently price sensitive that they will make noticeable changes in their behavior in response to the higher prices.
We might also see substitution within the fast food category, as well. Healthy foods like salads and fruits, for example, are normal goods (consumption increases as income increases), and a 5% increase in prices at fast food restaurants lowers customers’ real incomes. On our aforementioned stop at Chick-fil-A, my wife and I got salads, and we got fruit cups instead of fries with the kids’ meals. I think the fruit cups cost a little extra, though I can’t tell from the receipt. Let’s assume they do. Again, we’re blessed with an income sufficient that we’re probably going to stick with salads and fruit cups even if the price is a little higher. At the margin, there are some people who will be induced by the reduction in real income caused by the price increase to opt for the cheaper sandwich/fries/soft drink combo meals rather than salads and fruit cups. A quick Google turned up this representative Chick-fil-A menu; if you teach intermediate micro, this might be a fun way to explore income and substitution effects.
$1.35 added to an almost $27 bill won’t create a great hardship for a lot of us. We make a big mistake, though, when we dismiss the added cost as something we can all handle or that we should all be willing to pay. As Henry Hazlitt put it so memorably,
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
I’m willing to believe that higher wages at McDonald’s might make some people better off (though I’m not fully convinced, as I explained in my last Forbes article). It’s important to recognize that we’re not giving them free lunches. Their windfall gains will be someone else’s windfall losses.
Aug 5 2013 at 12:25pm
Also, that $65 might not make a difference in your consumption of McDonalds and Chick-Fil-A, but it WILL, inevitably, make a difference in your consumption of something else.
That’s $65 less that you have to tip waitresses at table-service restauraunts. Or $65 less in the fund to buy clothes for your kids, depending on what your income is.
This is always going to be a marginal impact somewhere in the economy.
Aug 5 2013 at 12:37pm
My experience is budgeting by online account balance. If costs are higher at the beginning of the month then things get tighter at the end and you stop buying. Meaning the low income customers will pay for the raises with slightly reduced consumption.
Water only at dinner. Hunts instead of Heinz. Skip a few items in a grocery trip the last week of the month.
Aug 5 2013 at 12:37pm
It would be interesting to know the median household income of McD’s customers. Are we transferring income from one 30k/yr household to another 30k/yr?
Aug 5 2013 at 1:07pm
An increase in wages over the value of its marginal product could distort the price signals of the human capital market. Thus sending more people toward the fast food industry and repressing the development of skills needed in other occupations.
Aug 5 2013 at 1:57pm
I would guess that a trip to McDonald’s is an extremely rare occurrence for the writer’s of such “I’d pay more claims.” In fact it is embarrassing in certain circles to even admit that one dined at McDonald’s. At least that’s how it is for me and the rest of my upper-middle-class coastal friends.
Aug 5 2013 at 2:25pm
@GU: I think you are on to the main reason that people support higher minimum wage: such jobs are distasteful.
To people with good jobs, a McDonalds job is beyond sub-optimal. It’s just unpleasant to think about. Similarly for shopping at Walmart. In both cases, lots of people vote with their feet that, distasteful or not, the option looks appealing to them. To the aristocrats in D.C. clinking their cocktail glasses with each other, McDonalds and Walmart are simply gross.
I think we should control our distaste and learn to embrace starter jobs as a valuable part of our society. Fundamental to the concept of a starter job that it won’t pay that much. No viable business can pay its employees more than they add to the bottom line.
Aug 5 2013 at 2:40pm
The classic fight to create an understanding of Bastiat’s seen and unseen. The complexity of our actions and subsequent effects are astounding. Thank you for delving into this.
Aug 5 2013 at 3:28pm
Interesting points, but why is it that Libertarians are so interested (fixated?) on the inefficiencies/moral ambiguities of different sub-optimal ways of getting more money into the hands of low wage earners compared to farm subsidies, or exempting investment income as an flawed attempt to make the income tax into a progressive consumption tax, or the absence of Pigou taxes on most forms of pollution?
Aug 5 2013 at 7:48pm
I offer an additional reason for why raising the prices at fast food restaurants will not increase the wages of restaurant workers.
Mark V Anderson
Aug 5 2013 at 9:20pm
This whole idea of paying more so fast-food workers can make more simply makes no sense. If you want to give charity to the poor or to the hard-working poor there are organizations out there which will do that. If you are careful about your charity, it will go more directly to the poor person than paying a bit more at McDonald’s.
And paying a bit more at McDonald’s is charity. If the free market results in a certain wage, then that is the value of their services. Any more pay is charity. Actually giving money to a charity is much more effective than the indirect method of paying more for your big mac. And hopefully the charity will spread this largesse amongst all the poor, not just those who are fast food workers.
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