Thursday, August 1, 2013

No, unreasonable wage increases would not have simple results

Forbes Staff Writer Clare O'Connor penned a fundamentally-flawed piece this week trumpeting the claim that a radical wage increase for McDonald's employees would have a minor effect on the price of food.

O'Connor breathlessly repeated the claims of Arnobio Morelix, a research assistant at the University of Kansas School of Business. Despite his listed credentials his thought process reveal him as a non-economist. He claimed that increasing the starting hourly wages of McDonald's employees from $7.25 to $15 would only raise the price of a Big Mac by 68 cents and the price of a dollar menu item by 17 cents.

Here's the man himself speaking:

“Some folks online are complaining they will not pay $2 for their Dollar Menu, but the truth is that even if McDonald’s doubled salaries the price hike would not be 100%,” Morelix said. “I will be happy to pay 17 cents more for my Dollar Menu so that fast food workers can have a living wage, and I believe people deserve to know that price hikes would not be as high as it is often portrayed.”

I'm not an economist either, but I do play one on this blog. Let me spell this out for you. We don't care one bit that you would happily pay 17 cents more for a dollar menu item. You are not McDonald's only customer and other customers would buy less. We call this concept marginalism, where when the cost of something goes up people respond by buying less of it.

This assumes of course that McDonald's doesn't change it's menu to respond to the wage changes. I remember a few years ago when double cheeseburgers were on the dollar menu. Material costs became an issue and McDonald's responded by creating the "McDouble," which is a double cheeseburger with only one piece of cheese.

Because of these losses in sales, McDonald's would become less profitable. This is because of something called deadweight losses, where cost increases change the point of equilibrium. That's a double-whammy for McDonald's, a loss in sales and in profits for each sale.

While Morelix feels good because the workers he's seeing are enjoying a political creation called a "living wage," the laid off workers he's not seeing are having a worse time. That's because when the cost of labor goes up employers respond by buying less of it. You know, like we learned three paragraphs ago. That means more automation of tasks, smaller work crews and more demanding workloads for all employees.

Morelix's analysis isn't just superficial, it's fundamentally flawed. The same time O'Connor's post went up the Huffington Post withdrew a similar piece after the Columbia Journalism Review said it fundamentally misunderstood the composition of McDonald's as a whole and that those cost estimates were only two-thirds of the way there. If current wages doubled it would wipe out nearly all of the company's profits.

That didn't stop lefties from spreading the misinformation to the four corners of the Earth, but isn't that what people do when an outrageous pieces confirms their world view?

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