Friday, August 02, 2013

Fast food protests and the real world

Yesterday, we saw scattered protests at some fast food restaurants. (Well, you had to get pretty lucky to actually see one, but they were a few. It's in the paper.)

The point of the exercise was to argue that McDonald's (and other fast food joints) ought to raise the pay of all their restaurant employees to 15/hr because they can "afford it."

Is that true?

Recently, the Huffington Post breathlessly published a "study" by a University of Kansas researcher that purported to show that McDonald's could double the salaries of its employees and only raise its menu prices by 17%.

It took about no time at all for the "study" to unravel. It was done by a UK undergrad who made some rather large mistakes. He calculated that McDonald's expense for salary and benefits (which is largely, although not entirely, made up of pay and benefits for line workers in company stores) is only 17% of its total revenues. If you simply raised prices by 17%, you would bring in enough to double salaries. This, he said, would raise the price of a Big Mac by 68 cents.

There is so much wrong with this, it is hard to know where to begin.

First, the student failed to recognize that about one third of McDonald's operating revenue includes franchise fees. But the salaries and benefits of employees at franchise restaurants - which constitute the majority of McDonald restaurants - are an expense of the franchisee and not McDonalds and, therefore, not included in McDonald's financials.

When you do what he should of done and compare McDonald's salaries to the revenue from company stores, it turns out that McDonalds' salaries and benefits constitute 26% of revenue. So prices would have to go up by that amount to "double" salaries.

But the notion that you could raise prices by 26% - or even 17% - and sell the same amount of food is preposterous. It assumes that the demand for McDonald's food is completely "inelastic," i.e., unrelated to price. The fact is that, if a Big Mac goes up 26%, people are going to buy fewer Big Macs. Prices will have to go up even further to cover the additional labor costs and restaurants will do one of two things - they will either close or find ways to operate with fewer employees. If everyone makes $ 15/hr, labor replacing technologies become more attractive.

But, the rejoinder come, can't McDonald's simply keep the prices where they are (they'll have to if no other fast food chains raise their salaries) and make less money. There would still be enough.

First, it's not clear that there would be. Before the allocation of SGA expenses, McDonalds makes a bit over 3.5 billion in operating revenue (which, incidentally, is not the same as net profit) on its $ 18.6 billion in sales at company stores. Its cost for labor and benefits at those stores is about $ 4.7 billion. While I suspect that you would not have to double that number to reach an average wage of $15/hr, it is safe to that you would erode much - and maybe all -  of the company's operating profit. (Again, McDonalds would probably find ways to cut employment and save some of that revenue.)

So it turns out that better wages for fast food workers are not simply a matter of demanding them.

Cross posted at Purple Wisconsin.


Robert from Mishicot said...

When liberals try to do business math and economics, very bad things happen.

George Mitchell said...

Replace "liberals" with "people" and you've got it!

Anonymous said...

No, Liberals...

George Mitchell said...

Looks like Anony 9:44 a.m. has an affliction referred to as "confirmation bias".