A recent article at the Huffington Post makes the claim that if McDonald’s MCD +0.2% doubled its employees salaries it would only cause the price of a Big Mac to go up by 68 cents. The implication here is that 68 cents isn’t much money, so they should do it. There’s a few things missing from this. One is that the article itself alleges that doubling wages would lead to a 17% increase in costs. And I guess this is obviously supposed to seem like a small amount? It doesn’t look that way to me. What do people expect will happen when prices go up 17%? If McDonald’s could raise its prices by that much without lowering demand they would. No, what would happen is people would shop at those stores less, there would be less profit and less McDonald’s stores to hire workers.
You may have the impression from reports on the minimum wage literature that wages and employment aren’t related, and that there is no such thing as labor demand. Unfortunately I think this isn’t an unreasonable impression to take from much of the discussion, but it is in fact incorrect. You’d be hard pressed to find labor economists who think that if McDonald’s had to pay double wages there wouldn’t be a disemployment effect at McDonald’s stores. For one thing there is a difference between wages being artificially pushed up across an entire state’s labor market by the minimum wage and wages being pushed up artificially at an individual firm. So long as McDonald’s acted alone, people would shift some purchases to other fast food chains. In addition, while some economists doubt that the labor demand curve matters for small changes in wages I can promise you they all thing it matters at some point. And doubling of salaries is a big change.
Most importantly perhaps is what this does to McDonald’s incentives. We’re hearing more and more about machines replacing workers and there are some obvious contenders for replacement within a McDonald’s. Have you ever been to a Sheetz or Wawa ? As you can see in the picture below, they have ordering screens that allow you to place orders without speaking to anyone. It’s not hard to imagine McDonald’s switching to a system like this for credit card orders.