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  1. #1
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    $15 per hour at McDonalds

    Liberal activists and some striking McDonald's employees have called for a minimum wage of $15 at McDonalds restaurants. Below is the Profit & Loss statement for an average McDonalds.


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    Before any change, the store has a profit of $153,900. A wage increase from $8 to $15 would be an increase of 87.5%, increasing operational costs by $472,500 per year, not including payroll taxes, resulting in a store operating loss of $318,600. The restaurant would go out of business and everyone would lose their jobs.

    So, realistically, how is the average McDonald's restaurant to pay its crew members $15 per hour? Where is that money supposed to come from?
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    Re: $15 per hour at McDonalds

    You should spell out what your argument is. Simply posting some data, useful as it is, doesn't give folks much to argue on in a debate thread.
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    Re: $15 per hour at McDonalds

    Quote Originally Posted by Sigfried View Post
    You should spell out what your argument is. Simply posting some data, useful as it is, doesn't give folks much to argue on in a debate thread.
    The argument is implied in the questions he asked at the end of his post.

    The profit and loss statement is that of an average McDonalds. It is likely that there are some that make enough profit so they could continue to operate even at the higher wages. Most would have to either raise the prices of their products or go out of business. Of course raising prices would mean fewer customers so in most cases they would still end up closing.
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    Re: $15 per hour at McDonalds

    Quote Originally Posted by theophilus View Post
    The argument is implied in the questions he asked at the end of his post.
    It wasn't there when I posted. Glad it is now.

    The answer is you raise your prices by about 20% on average. It would get you 540K which would cover the increase in wages.
    Of course it is more complicated than that and you have to consider there would be a decrease in consumption at your restaurant, though likely that would mean less employees (not to mention its possible you have more efficient employees at that rate so that may reduce staffing numbers.)

    Relative price to competitors is not so much an issue if everyone is hit by minimum wage so that is not so much the issue as would be alternatives to restaurants such as home cooking or the like as well as folks simply ordering a bit less due to price sensitivity.

    Minimum wage tends to put unemployment pressure on low wage unskilled workers more than it shuts down businesses.
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  5. #5
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    Re: $15 per hour at McDonalds

    Quote Originally Posted by evensaul View Post
    Before any change, the store has a profit of $153,900.
    To be fair, that isn't even profit. The profit number should be lower. The $153,900 is the amount of money the store owner has at his discretion. He could take all of that as profit, but more likely he is putting some away as operating capital, using some to invest in machine upgrades or renovations, etc. The amount of money he actually takes home is probably more around the $100,000 mark, hard to say, but definitely less than the operating income.

    ---------- Post added at 05:47 AM ---------- Previous post was at 05:40 AM ----------

    I'll also do the math because it isn't presented here.


    Currently the wages are $540,000. Assuming a $7.25 MW (probably averages higher), that means 74,482.75 hours worked that month. At $15/hour, wages come to $1,117,241.

    Taxes also increase to $111,724

    That would lower the Net Operating Income to (481,065). Nearly a half a million dollar loss. And that is before we include any kind of equipment upgrades or other capital expenditures.


    So say we call it an even $500,000 loss for a month. I think a good OP would be, where in the P&L do you make up that difference?
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  6. #6
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    Re: $15 per hour at McDonalds

    Quote Originally Posted by SIG
    The answer is you raise your prices by about 20% on average. It would get you 540K which would cover the increase in wages.
    That is a fair point to make, especially the raising min wage on all to $15.
    That said, I don't think it is reasonable to assume a business can survive a 20% price increase. I mean, if it was as easy as saying "hey you should earn 20% more money" every business would be doing it.
    In the end, income is the thing businesses have the least control over.
    I apologize to anyone waiting on a response from me. I am experiencing a time warp, suddenly their are not enough hours in a day. As soon as I find a replacement part to my flux capacitor regulator, time should resume it's normal flow.

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  8. #7
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    Re: $15 per hour at McDonalds

    Quote Originally Posted by MindTrap028 View Post
    That is a fair point to make, especially the raising min wage on all to $15.
    That said, I don't think it is reasonable to assume a business can survive a 20% price increase. I mean, if it was as easy as saying "hey you should earn 20% more money" every business would be doing it.
    In the end, income is the thing businesses have the least control over.
    Again, if the labor cost goes up for everyone, then the game is different than if one producer had a cost bump and the others didn't. If everyone is paying more, they all have to raise prices. some might soak it for competitive advantage but not too likely, everyone likes profits. Again, there are impacts but its not a business killer in that sense, more something that takes a toll on the entire market segment.

    All business have to deal with supply cost changes and you will note its a bigger line item than labor is here. Same goes for the retail space. A downtown McDonald's has way higher rents than a neighborhood suburban one or a rural McyDees. Somehow they manage to stay in business, usually due to prices or volume.

    Mind you I'm not a huge min wage fan. Nor a huge detractor. It does some good and it does some harm in different areas. I'm just trying to add some complexity to this case.
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  9. #8
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    Re: $15 per hour at McDonalds

    Quote Originally Posted by SIG
    gain, if the labor cost goes up for everyone, then the game is different than if one producer had a cost bump and the others didn't. If everyone is paying more, they all have to raise prices. some might soak it for competitive advantage but not too likely, everyone likes profits. Again, there are impacts but its not a business killer in that sense, more something that takes a toll on the entire market segment.

    All business have to deal with supply cost changes and you will note its a bigger line item than labor is here. Same goes for the retail space. A downtown McDonald's has way higher rents than a neighborhood suburban one or a rural McyDees. Somehow they manage to stay in business, usually due to prices or volume.

    Mind you I'm not a huge min wage fan. Nor a huge detractor. It does some good and it does some harm in different areas. I'm just trying to add some complexity to this case.
    You are certainly correct with your assumptions, but that is not the problem of the OP as I understand it. What McD's is faced with is unilaterally raising it's rates. I assume something similar to what Wal-mart was forced to do in one of those uber liberal cities. They simply write a rule that exempts all others (such as only companies worth 10billion have to pay a min wage of X).

    Now that noted.
    My point was that given your assumptions of raising all min wage, it isn't certain that the company could survive that rate hike, because doing that is more complex as you point out. It could be the case that a large enough portion of it's base of customers can no longer afford burgers from Mc'Ds because they have less hours or no job, or higher bills as a % of their income. That is what min wage does to the lower end, and the lower end probably makes up a large portion of their customer base.

    So yes, as you said all business have to deal with it, but that isn't the problem, the problem is how the customer base deals with the accumulative effects, and it simply isn't a safe assumption that the business could survive the unintended consequences.
    In short, in the simplest form of the problem, it isn't clear or certain that the business could survive the change, and given the more complex version of the problem that you point out it becomes even less certain.
    The greater complexity certainly doesn't add to the case for increasing the wage willy nilly. otherwise we may as well say "raise it to $50 an hour.. after all companies deal with that sh@t all the time"
    I apologize to anyone waiting on a response from me. I am experiencing a time warp, suddenly their are not enough hours in a day. As soon as I find a replacement part to my flux capacitor regulator, time should resume it's normal flow.

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    Re: $15 per hour at McDonalds

    Quote Originally Posted by MindTrap028 View Post
    You are certainly correct with your assumptions, but that is not the problem of the OP as I understand it. What McD's is faced with is unilaterally raising it's rates. I assume something similar to what Wal-mart was forced to do in one of those uber liberal cities. They simply write a rule that exempts all others (such as only companies worth 10billion have to pay a min wage of X).
    Walmart raised their pay voluntarily and there is no reason McDonalds would need to do so unilaterally. Each geographic region has its own min wage. There is a federal one but it is nowhere near $15. Id agree however that giving exceptions to some business really defeats the purpose and level playing field of a min wage hike.

    My point was that given your assumptions of raising all min wage, it isn't certain that the company could survive that rate hike, because doing that is more complex as you point out. It could be the case that a large enough portion of it's base of customers can no longer afford burgers from Mc'Ds because they have less hours or no job, or higher bills as a % of their income. That is what min wage does to the lower end, and the lower end probably makes up a large portion of their customer base.
    There are a rather large number of restaurants that cost at least 20% more than McDonalds that remain in business. It is a proven and viable business this resturaunt thing and they range from $5 meals to $500 meals. I can attest to eating that full price range personally. Not to mention the fact that while their food costs 20% more, the population making the lowest wage possible is making 40% more so likely they can afford the extra cost at McDonalds if they wanted to.

    In short, in the simplest form of the problem, it isn't clear or certain that the business could survive the change, and given the more complex version of the problem that you point out it becomes even less certain.
    Minimum wages have been raised many times over the years, McDonald's demonstrably survived it as have a great many other enterprises. People don't just stop eating because base wages go up. No matter what happens in the economy, people will need food.

    The greater complexity certainly doesn't add to the case for increasing the wage willy nilly. otherwise we may as well say "raise it to $50 an hour.. after all companies deal with that sh@t all the time"
    I didn't make such a case, keep that in mind. I was simply answering the question about how they make up the cost in the most likely way. Prices are almost always based on demand and cost of production. It's the very basics of economics. Unless the price of production is found nowhere on the demand curve you can find an equilibrium point. Generally production and consumption will decline, not drop off the face of the earth.
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    Re: $15 per hour at McDonalds

    Quote Originally Posted by sig
    Walmart raised their pay voluntarily and there is no reason McDonalds would need to do so unilaterally. Each geographic region has its own min wage. There is a federal one but it is nowhere near $15. Id agree however that giving exceptions to some business really defeats the purpose and level playing field of a min wage hike.
    I stand corrected, must have been just some political talk I remember that didn't come to pass.

    Quote Originally Posted by SIG
    There are a rather large number of restaurants that cost at least 20% more than McDonalds that remain in business. It is a proven and viable business this resturaunt thing and they range from $5 meals to $500 meals. I can attest to eating that full price range personally. Not to mention the fact that while their food costs 20% more, the population making the lowest wage possible is making 40% more so likely they can afford the extra cost at McDonalds if they wanted to.
    Could, and would are two different things.
    We had a local business owner with 3 Wendy's restaurants. He changed the name and before he ran out of wendys food his business had decreased to near zero. He went out a business and it was over 5 years before a wendys returned to our town. So even if what you said is true their survival is not guaranteed, and 20% is a very large change. I don't feel that you have addressed my underlying point here.

    Quote Originally Posted by SIG
    Minimum wages have been raised many times over the years, McDonald's demonstrably survived it as have a great many other enterprises. People don't just stop eating because base wages go up. No matter what happens in the economy, people will need food.
    Sure, but they don't "need" food from fast food joints. as part of a response to your previous point. When you raise min wage, all costs go up and they generally go up more than the increase to min wage earners.
    I saw this first hand when min wages were raised at the day care my wife worked at. First the increases took effect before the law went into effect. So min wage people had to pay more before they got their raises. Second, some min wage people lose their jobs. So it's not as though the total customer base would be unaffected. And as I pointed out with the wendys, there is a psycological effect at play too. Maybe people just eat at McD's because Drinks are $1, and will stop as soon as it is raised to $1.50 to offset higher wages.


    Quote Originally Posted by SIG
    I didn't make such a case, keep that in mind. I was simply answering the question about how they make up the cost in the most likely way. Prices are almost always based on demand and cost of production. It's the very basics of economics. Unless the price of production is found nowhere on the demand curve you can find an equilibrium point. Generally production and consumption will decline, not drop off the face of the earth.
    I believe you are confusing the idea that people need to eat, with people eating at McD's. Price changes matter, and the negative effect min wage typically has on min wage earners would directly effect the customer base of McD's. Especially if they get innovative (and many others) to maintain prices, and in so doing eliminate jobs.
    you can't simply make such a large change, and assume all will go as normal only at inflated prices.

    The assumption itself defeats the whole notion of raising the wages to begin with. If it all levels out, then don't raise them at all, as it is useless. If it doesn't and actually increases their income while all things remain the same, then why not raise it to $50 an hour? If it does the opposite then why not decrease it?
    Basically, there is no reasoning or outcome that justifies the increase, and it represents a huge variable that we have no justified reason to think McD's would necessarily survive the change. (and closing a mess load of stores doesn't really count as surviving).
    I apologize to anyone waiting on a response from me. I am experiencing a time warp, suddenly their are not enough hours in a day. As soon as I find a replacement part to my flux capacitor regulator, time should resume it's normal flow.

  12. #11
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    Re: $15 per hour at McDonalds

    Quote Originally Posted by Sigfried View Post
    Again, if the labor cost goes up for everyone, then the game is different than if one producer had a cost bump and the others didn't. If everyone is paying more, they all have to raise prices.
    And if they all raise prices, that just increases the cost of living and we are still back in the same spot we were with the $7.25 minimum wage it would seem.

    The objection I would form to the price increase is that McDonalds still has an elasticity of demand, regardless of whether you increase everyone's costs or not. We should also remember that this change only affects a small portion of businesses and as such the increased wage to offset the increased price is extremely limited.

    So regardless, if McDs were to increase prices by 20% they would absolutely see a drop in volume. Maybe not to the same level as would happen pre-MW increase, but closer to it than not.


    If you are the owner, why risk that drop in volume? Why not simply fire 20% of your employees and automate them? Having been a manager at a McDs myself I would say it is likely to be the cooks who will go. They tend to earn more than the register jockies (they tend to be minority employees who have worked there for a long time and have gotten the 25 cent/hour raise several times) and automating the cooking process can eliminate quite a few health concerns.
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    Re: $15 per hour at McDonalds

    Quote Originally Posted by Squatch347 View Post
    And if they all raise prices, that just increases the cost of living and we are still back in the same spot we were with the $7.25 minimum wage it would seem.
    Partly, but not mostly. The min wage impacts a segment of labor costs which itself is only a segment of overall production costs. A rise in minimum wage of 40% is likely to have a much smaller than 40% impact on overall prices. For our Mcdonald's its 20%, for some businesses its 0%. So the price of goods would go up, but not as much as the income of those getting minimum wage. (who keep their jobs)

    The objection I would form to the price increase is that McDonalds still has an elasticity of demand, regardless of whether you increase everyone's costs or not. We should also remember that this change only affects a small portion of businesses and as such the increased wage to offset the increased price is extremely limited.
    Yes, but it does not drive them entirely out of the market which was the contention here. No doubt they would be happiest with a natural floor to labor costs.

    So regardless, if McDs were to increase prices by 20% they would absolutely see a drop in volume. Maybe not to the same level as would happen pre-MW increase, but closer to it than not.
    Of course, and I pointed that out in my first post.

    If you are the owner, why risk that drop in volume? Why not simply fire 20% of your employees and automate them? Having been a manager at a McDs myself I would say it is likely to be the cooks who will go. They tend to earn more than the register jockies (they tend to be minority employees who have worked there for a long time and have gotten the 25 cent/hour raise several times) and automating the cooking process can eliminate quite a few health concerns.
    If you can do that for the same cost as before you certainly would. Most people don't keep extra employees hanging around unless the labor market for them is very tight and with a minimum wage it rarely is. Again, I pointed out in my first post that some people may well loose their jobs in this scenario. That is a pretty well understood impact of an increase in labor costs without a commensurate increase in demand for goods.
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    Re: $15 per hour at McDonalds

    In a free society the battle is on, the deep question of fairness or breakdown is irrelavent. Big buisneses break the backs of small ones and and sometimes workers crush the hand that feeds. All is fair in love and war. Consequences are imaterial in true capitalism, they only get changed when they grind hard enough. Keep the workers fit so they can work harder earn more and spend more. Religion, which often ignores its own advice, teaches a hard lesson we should care about the world and one another. The best preacher was quickly hung.

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    Re: $15 per hour at McDonalds

    Quote Originally Posted by Sig
    Partly, but not mostly. The min wage impacts a segment of labor costs which itself is only a segment of overall production costs. A rise in minimum wage of 40% is likely to have a much smaller than 40% impact on overall prices. For our Mcdonald's its 20%, for some businesses its 0%. So the price of goods would go up, but not as much as the income of those getting minimum wage. (who keep their jobs)
    I think we need to step back to see how pervasive the price increase would be. Many service oriented businesses would see an effect, though it would probably be a lower price increase than McDonalds. Say a 5-7% judging by a few examples in Seattle.

    My point was that if you see a 5-7% price increase in a large sector of the economy, especially when it is so heavily focused on service industries and retailers (Walmart, Grocery distributors, Grocery stores, etc), that the benefit of a 40% pay increase disappears pretty quickly.

    To simplify it we need to remember that an arbitrary legislation on pay rates by the legislature doesnít actually produce any direct economic value. It is simply moving a fixed pie around. So if we arenít pinpointing where the corresponding harm will be done, we arenít having a complete analysis.

    Given this, an increase in prices would need to represent capital taken from somewhere else. In our discussion it was taken from consumers, who would then pass that along either by buying less or by buying less somewhere else, or raising their own prices over time. Grocery prices rise a bit, Amazonís prices rise a bit, rent rises a bit, etc, etc. Passing along the cost increase in prices isnít a one step process. Other businesses and consumers will move those costs along their chain as well leading to an aggregate price level increase, which severely dampens any benefit caused by the MW increase.

    Of course, all of this ignores the caveat you offered, for those who keep their jobs.


    Quote Originally Posted by Sig
    Yes, but it does not drive them entirely out of the market which was the contention here. No doubt they would be happiest with a natural floor to labor costs.
    Quick question up front, how do you define a natural floor to labor costs? Iím curious because that phrase is often associated with monopsony power, which is commonly referenced in pro-MW arguments.

    It would drive many of them out of the market however, right? McDonalds is a relatively elastic product and price increases have not traditionally gone well for them. So lets say it only drives 15% of stores to shut their doors.

    Would the employees at those stores be happiest with a natural floor to wages or no wages?


    Quote Originally Posted by Sig
    If you can do that for the same cost as before you certainly would. Most people don't keep extra employees hanging around unless the labor market for them is very tight and with a minimum wage it rarely is.
    That isnít quite the right comparison. You would chose to automate and fire employees if you can do so for less than the [/i]new cost of labor at the increase MW level[/i] not the old cost. You would also need to do an NPV of the tax benefits, the saved labor cost over time, etc.



    Quote Originally Posted by Sig
    Again, I pointed out in my first post that some people may well loose their jobs in this scenario. That is a pretty well understood impact of an increase in labor costs without a commensurate increase in demand for goods.
    Iím not sure itís quite so conditional. In every scenario weíve explored people lose their jobs. Either as a way to initially cut costs or as a result of decreased demand due to increased prices.
    "Suffering lies not with inequality, but with dependence." -Voltaire
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    Re: $15 per hour at McDonalds

    Quote Originally Posted by Squatch347 View Post
    I think we need to step back to see how pervasive the price increase would be. Many service oriented businesses would see an effect, though it would probably be a lower price increase than McDonalds. Say a 5-7% judging by a few examples in Seattle.

    My point was that if you see a 5-7% price increase in a large sector of the economy, especially when it is so heavily focused on service industries and retailers (Walmart, Grocery distributors, Grocery stores, etc), that the benefit of a 40% pay increase disappears pretty quickly.
    I don't see how. Even if every single service a person making min wage uses goes up by 5-7% a 40% wage increase still means they have 35%-33% more income relative to cost of living. Unless every cost of input in our economy is minimum wage labor (parish the thought) they will make a gain in income.

    To simplify it we need to remember that an arbitrary legislation on pay rates by the legislature doesn't actually produce any direct economic value. It is simply moving a fixed pie around. So if we aren’t pinpointing where the corresponding harm will be done, we aren't having a complete analysis.
    Agreed, ultimately someone other than the people getting the min wage increase are paying for this. The thing is, saying I don't want to pay more for a burger because I don't want the guy making it to make a decent living doesn't have a lot of rhetorical power. So they try to make it seem like this is a loose for the people getting the raise. Not sure why folks haven't figured out that doesn't sell too well either.

    I think the real argument and the best against it is it costs people jobs. If you can't produce at least $15 per hour of value, you won't have a job. (Same goes if you could but the boss is too stupid to figure out how.)

    Given this, an increase in prices would need to represent capital taken from somewhere else.
    No, the value can simply be lost by higher end consumers who are not getting a wage bump so their dollar does not go as far as it used to. Basically you and I pay for the difference. (Presuming your not in the min wage workforce here.) I think I made around minimum wage about 2 years of my life at most.

    Of course, all of this ignores the caveat you offered, for those who keep their jobs.
    Which is why I didn't ignore it. That part is real. Mind you in some cases you might not see as much as you expect, but I think in time and provided the market isn't hot, no doubt more unemployment is expected.

    Quick question up front, how do you define a natural floor to labor costs? I’m curious because that phrase is often associated with monopsony power, which is commonly referenced in pro-MW arguments.
    I just mean the price equilibrium for unskilled labor if there were no minimum wage imposed. It of course varies from market to market. I'm was not familiar with monopsony power (though I just read up on it), never came up in my econ studies in college (I only have the bachelors). I'm sure there is some truth to it. My feelings on the labor market are that often labor under bargains due to social and family pressure. If people acted less desperately in the labor market it would push wages up a bit on the low end. I support labor unions in principle because it puts equal bargaining power in the hands of labor. Mind you they can rather go off the rails and get too much leverage as well. But what you want is equal bargaining power.

    These days programmers are in the kind of demand I don't have to bargain, the threat of poaching makes my employers eager to be high bidder. Its not like that on the low end where the people setting wages are pretty far removed from the people earning them. I actually think that is really inefficient for businesses. When I managed a movie theater our wage scales were frozen for most positions. I tended to be stick with whomever would accept the low pay meaning I often could only keep my worst employees. For a couple bucks more I could have people twice as good and need less of them.

    It would drive many of them out of the market however, right? McDonalds is a relatively elastic product and price increases have not traditionally gone well for them. So lets say it only drives 15% of stores to shut their doors.
    I really doubt it due to the wayt he price goes up for all producers. Unless you think a price hike would drive people out of the fast food consumer market entirely, I don't think it shuts a lot of business down unless they are really weak, and McDonals is not a weak competitor. Its harder on independent operators not fighting to stay in the game.

    Would the employees at those stores be happiest with a natural floor to wages or no wages?
    It depends. I've been in the position a couple times where I could take a crap job. but honestly the externalizes and lost opportunity of taking that job makes it a bad deal for me. A lot of people just don't think about the fact that taking some jobs is bad for you and that you need to be working your way up the economic ladder, not just taking what anyone is offering. Honestly I always find my biggest pay bumps are from changing employers.

    But... ya some of those folks are not going to be happy, no doubt. But will there be more unemployed or more enjoying a hefty pay bump? My guess is more enjoying the pay bump at the kind of wages proposed.

    That isn’t quite the right comparison. You would chose to automate and fire employees if you can do so for less than the [/i]new cost of labor at the increase MW level[/i] not the old cost. You would also need to do an NPV of the tax benefits, the saved labor cost over time, etc.
    Right, but things like tech cost decreases do the same thing. Automation is a serious issue int he modern economy. It's one reason why so many jobs have become minimum wage. Its not just grunt labor we have automated. Actually much of our automation is in the skilled labor arena. I wrote a dystopian game setting once about a world where nearly every useful task was automated. Its one of the reasons I am not so opposed to things like welfare, its kind of an inevitability that we just don't need some peoples labor to have a healthy economy.

    I’m not sure it’s quite so conditional. In every scenario we’ve explored people lose their jobs. Either as a way to initially cut costs or as a result of decreased demand due to increased prices.
    It tends not to happen if there is a labor shortage, though in that case the equilibrium price may well be high anyway.
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    Re: $15 per hour at McDonalds

    Quote Originally Posted by evensaul View Post
    Liberal activists and some striking McDonald's employees have called for a minimum wage of $15 at McDonalds restaurants. Below is the Profit & Loss statement for an average McDonalds.


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    Before any change, the store has a profit of $153,900. A wage increase from $8 to $15 would be an increase of 87.5%, increasing operational costs by $472,500 per year, not including payroll taxes, resulting in a store operating loss of $318,600. The restaurant would go out of business and everyone would lose their jobs.

    So, realistically, how is the average McDonald's restaurant to pay its crew members $15 per hour? Where is that money supposed to come from?
    Well, you could start with getting accurate numbers ... there are a couple of numbers there that scream 'wrong' - like $81,000 for utilities? $391,000 rent and 'fees' the franchise fee is $45K a year, and the 'rent' of $350K a year would have to be among the highest out there. That is nearly the cost of building an entire new building every year according to the data:

    http://localcenters.com/2008/01/featured-7/

    Any businessman who would pay as much in rent as it would cost him to buy his own land, build his own building, and then own it outright in three years is probably not the sharpest of businessmen.

    Is there extra money in the kitty? Probably. Would costs go up? Probably. There is debate about how much, but it does not appear to be spectacular or business ending.

    There are a couple of things that increasing costs also do - they drive change and efficiency. Having a bunch of unskilled laborers who are paid a wage that essentially acknowledges that they are disposable and of little value gets you exactly that - an employee who realizes he or she is of little value and you get - what you pay for. Result: McDonald's is not exactly a mecca for great customer service.

    Costco and Starbucks pay their employees quite a bit better, plus benefits, and they are doing quite well (despite all those other business costs that are supposedly insurmountable? Does not compute.)

    And increase in wages - mandated or otherwise - will force McDonalds, and other fast food companies, to actually invest in the people they hire. Those that are fastest and most efficient will be given more hours, and dead weight will be cut. A valued employee who is compensated fairly is far less likely to leave, meaning advertising costs and hiring/training costs are reduced in the long run.

    There is also efficiencies to be gained elsewhere.

    http://johnhcochrane.blogspot.it/201...imum-wage.html

    The use of technology, like automated ordered, or app driven ordering, reduces the need for labor to take orders allowing you to hire fewer people and actually increase the volume of business you do (and I am sure there are other areas of efficiency and technology that can be gained - with the right impetus ... like needing to actually raise revenue).

    Another solution to this is the return of labor unions. It already happening, and as people work for wages they cannot live on there is a natural tendency to for labor unions to grow. The ebb and flow of business and labor in American politics is storied with no side long dominating the other. If you think labor unions hurt, please take a look a Germany, which is among the most competitive economies on earth.

    What certainly won't last is the result of paying what are essentially non-livable wages. What you see there is a star increase in requirements for welfare and other anti-poverty initiatives, to the tune of, for example, one Wal-Mart (same labor pool as McDonalds) costing a community nearly a $million a year.

    http://www.huffingtonpost.com/2013/0...n_3365814.html

    If your business is profitable by shifting the burden of labor wages onto the community? That will not last long, and indeed should not last long. The income gap between top and bottom is and wide as it has ever been, and inequality has real effects on the long term - like education - hard for mom to help out when she is working her ass off at McD's just make ends meet. There are all sorts of intangibles here, but the idea that people are just a cost to be reduced? Well, like any cost, if you cut too much there is a price to be paid ... even now, companies that pay little are seeing traffic go elsewhere just from the bad publicity.

    As we return to full employment, and as unskilled labor is needed by these fringe businesses ... they are going to get exactly what they pay for. That great customer service ... that perfectly cooker burger served smartly ... that warm smile ... and for some reason, people will go to Chipotle instead ...
    Most people say that it is the intellect which makes a great scientist. They are wrong: it is character.

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    Re: $15 per hour at McDonalds

    The "Rent & Fees" line is a combination of rent (typically paid to McDonalds corporate which owns the building), royalties equaling 4% of sales, and advertising fund fees.

    The cost of utilities looks right. There is a lot of refrigeration equipment, lighting, etc for a large fast-food operation. Besides electricity, there's gas for fryers and grills, phone, internet, Muzak, water, and probably other items I'm not thinking of.

    The 45k franchise fee is not annual, but rather a one-time fee paid at the beginning of the franchise agreement.
    Last edited by evensaul; April 30th, 2015 at 12:50 PM.
    "If we lose freedom here, there is no place to escape to. This is the last stand on Earth." - Ronald Reagan

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  20. #18
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    Re: $15 per hour at McDonalds

    Quote Originally Posted by Sig
    I don't see how. Even if every single service a person making min wage uses goes up by 5-7% a 40% wage increase still means they have 35%-33% more income relative to cost of living.
    I think perhaps I was unclear. I am saying that the cost increase has a ripple effect that negate the increase disposable income of those at minimum wage levels.


    As I pointed out, the service industry will be those primarily affected by the price increase. While there will generally be a ripple in the economy of price increases (all costs will go up, because the money to pay the larger wages has to come from somewhere), it is the service industry that will see the highest rates.

    But most of the service industryís customers arenít going to be getting a 40% increase in their pay, so if they are going to pay an additional 7% on a service they are going to take it from somewhere else. Say they pick going to the local cafť rather than having McDonalds. Hence McDonaldís price increase wonít really be 7% if it is going to pay for the labor (we were assuming no unemployment effects, which I think we can all agree is unlikely), it would need to be much higher.


    Quote Originally Posted by Sig
    Agreed, ultimately someone other than the people getting the min wage increase are paying for this. The thing is, saying I don't want to pay more for a burger because I don't want the guy making it to make a decent living doesn't have a lot of rhetorical power.
    To your point, the question isnít do I want to pay more for the burger, the question is, [/i]will[/i] I pay more for the burger? The answer to that question has generally been no, given the elasticity of demand for many of these goods and services and experiences with lower end price increases before.


    Quote Originally Posted by Sig
    No, the value can simply be lost by higher end consumers who are not getting a wage bump so their dollar does not go as far as it used to.
    Right, they forgo some purchases to pay for the price increase right? That is capital being shifted from one use to another. That forgone purchase represents capital no longer available for that good or service, and decrease demand for its associated labor.


    Quote Originally Posted by Sig
    I just mean the price equilibrium for unskilled labor if there were no minimum wage imposed. It of course varies from market to market. I'm was not familiar with monopsony power (though I just read up on it), never came up in my econ studies in college (I only have the bachelors). I'm sure there is some truth to it. My feelings on the labor market are that often labor under bargains due to social and family pressure. If people acted less desperately in the labor market it would push wages up a bit on the low end.
    Gotcha, Iíll interpret that phrase as market price and so wonít try to rail against what seems to be a strawman interpretation of what you meant. Thanks.

    It is probably a bit off topic, but monopsony power is an interesting concept. And while it is referenced (usually implied) in lots of MW arguments, there is quite a bit of empirical evidence that it doesnít exist. Don Bodreaux makes a good first pass argument here about it: http://cafehayek.com/2015/04/a-respo...nter-nick.html

    And interestingly points out that even if we were to assume monopsony power, that makes MW an even poorer solution than without it, since the consequences of those unemployed by the law are so dire.

    No need to debate this here since it isnít really part of either of our arguments, just thought I would pass it along.


    Quote Originally Posted by Sig
    I really doubt it due to the wayt he price goes up for all producers. Unless you think a price hike would drive people out of the fast food consumer market entirely, I don't think it shuts a lot of business down unless they are really weak, and McDonals is not a weak competitor. Its harder on independent operators not fighting to stay in the game.
    Lets remember what we talked about above. The choice isnít between McDonalds and Burger King, it is about where our disposable income goes. We recognize that there will be lower disposable income for the vast bulk of the market that didnít get a pay increase and that prices will go up based on the increased labor costs in multiple industries. So if it costs me more to get my Amazon package and I have a lower elasticity than for McDonalds, McDonalds is going to get less revenue.

    So we arenít talking about the company going out of business, Iím talking about the 15% lowest margin franchisers closing their doors. That seems like a pretty likely scenario given the relative elasticity of demand for fast food and the sheer volume of the labor cost increase. The lowest margin franchisers are also unlikely to have saved up capital (or get a loan) to move towards automation either.





    Quote Originally Posted by Sig
    It depends. I've been in the position a couple times where I could take a crap job. but honestly the externalizes and lost opportunity of taking that job makes it a bad deal for me.
    Ah, but you arenít part of the population being discussed here. Your decision was voluntary. You are part of the group that said, ďthis isnít worth it to meĒ and as such didnít take the job. No wonder you would be indifferent to the two wage options, it isnít your job after all.

    But I was asking about those who did take the job. Those who thought that the wages were worth the labor sold. They have already made a voluntary choice that the current wages are acceptable. So it would seem, by their very presence as laborers, that they do prefer the current wage over no wage, right?

    That isnít quite the right comparison. You would chose to automate and fire employees if you can do so for less than the [/i]new cost of labor at the increase MW level[/i] not the old cost. You would also need to do an NPV of the tax benefits, the saved labor cost over time, etc.
    Quote Originally Posted by Sig
    Right, but things like tech cost decreases do the same thing. Automation is a serious issue int he modern economy. It's one reason why so many jobs have become minimum wage.
    I donít think this last statement has any empirical support. There are generally fewer minimum wage jobs as a percentage of employed labor now than there was in the early 1980s.
    http://research.stlouisfed.org/fred2...LEU0203127200A

    Regardless, the choice to automate is generally not as cost friendly as one would think. Tech cost decrease usually involves decreased implementation costs, not maintenance, and over anything beyond five years, that maintenance is far more important since maintenance employees cost far, far more than register jockeys.

    I only say that to point out that generally automation investment has only occurred in two types of instances. 1) (the bulk) when labor cost due to expanding labor demand has driven up labor costs such that automation is necessary to increase the productivity of laborers (see the mid 80s, early 90s for this and the move towards computers). 2) When artificial barriers (such as MW) are imposed making labor artificially expensive and less attractive vis a vis automation.

    1 usually results in productivity increases and transitional unemployment (less than 6 months), 2 usually results in systematic unemployment (more or less permanent) and decrease in industry output.

    Quote Originally Posted by Sig
    It tends not to happen if there is a labor shortage, though in that case the equilibrium price may well be high anyway.
    But certainly we arenít in a labor shortage now right?

    And if there really was a labor shortage, wouldnít we see wages rise as firms compete for labor? Why would a MW law be necessary at all in that case?



    Quote Originally Posted by Gree
    Well, you could start with getting accurate numbers
    Hi Gree,

    You offer some criticism of the numbers Even offered here, but I donít see you offering any counter evidence. Do you have a better estimate for a P&L at a franchise?


    Quote Originally Posted by Gree
    Is there extra money in the kitty? Probably. Would costs go up? Probably. There is debate about how much, but it does not appear to be spectacular or business ending.
    Business ending for whom? Certainly for the laborers priced out of the market right? Definitely for the 15% or so franchisers who would need to close because their margin is too low to afford any new labor.


    Quote Originally Posted by Gree
    There are a couple of things that increasing costs also do - they drive change and efficiency. Having a bunch of unskilled laborers who are paid a wage that essentially acknowledges that they are disposable and of little value gets you exactly that - an employee who realizes he or she is of little value and you get - what you pay for.
    So if McDonaldís could get such an amazingly better service by simply paying their workers more, why arenít they doing that now? Are they just too dumb to realize they are forgoing all that extra profit?

    Quote Originally Posted by Gree
    Costco and Starbucks pay their employees quite a bit better, plus benefits, and they are doing quite well (despite all those other business costs that are supposedly insurmountable? Does not compute.)
    Costco and Starbucks also tend to higher older, more experienced employees while McDonalds tends to offer new entrants to the labor market their first job. You are essentially arguing that McDonaldís could do a lot better if they would just higher college grads at 40K a year. Starbucks has a higher margin on its COGS (cost of goods sold) and brands itself by having a certain type of employee. They are in a different segment of the market from McDonalds and as such higher different types of workers.

    Quote Originally Posted by gree
    And increase in wages - mandated or otherwise - will force McDonalds, and other fast food companies, to actually invest in the people they hire.
    Or just not hire them right? After all, this investment certainly wonít be cost efficient for McDonalds (otherwise they would already be doing it). So why would they chose to hire people to lose money on them rather than just not hire them?

    Quote Originally Posted by Gree
    The use of technology, like automated ordered, or app driven ordering, reduces the need for labor to take orders allowing you to hire fewer people and actually increase the volume of business you do (and I am sure there are other areas of efficiency and technology that can be gained - with the right impetus ... like needing to actually raise revenue).
    Lets first acknowledge a basic economic point here. These ďefficienciesĒ cost more per unit of good than current labor right? (Otherwise McDonalds would already have bought them).

    Now, with that starting point we can ask another fundamental question. With said automation, where do the displaced workers go?



    Quote Originally Posted by Gree
    What certainly won't last is the result of paying what are essentially non-livable wages.
    Non-livable for whom? Given that MW workers are overwhelmingly teenagers living with their families and who get support from their families, what is a ďlivableĒ wage for a 16 year old living with his parents?

    Quote Originally Posted by Gree
    What you see there is a star increase in requirements for welfare and other anti-poverty initiatives, to the tune of, for example, one Wal-Mart (same labor pool as McDonalds) costing a community nearly a $million a year.
    Confusing cause and effect fallacy. The welfare payments did not go up because Walmart moved into an area, they went up because the minimum requirement to file was raised.

    This type of argument is patently silly. If I would need to file for welfare because of taking a Walmart job, but wouldnít if I didnít take it, why would I take the job? It would appear I am better off without it, yet people are taking it. That should be the first hint that you have the dynamics wrong.
    "Suffering lies not with inequality, but with dependence." -Voltaire
    "Fallacies do not cease to be fallacies because they become fashions.Ē -G.K. Chesterton
    Also, if you think I've overlooked your post please shoot me a PM, I'm not intentionally ignoring you.


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    Re: $15 per hour at McDonalds

    Quote Originally Posted by Gree
    There are a couple of things that increasing costs also do - they drive change and efficiency. Having a bunch of unskilled laborers who are paid a wage that essentially acknowledges that they are disposable and of little value gets you exactly that - an employee who realizes he or she is of little value and you get - what you pay for.
    This is an interesting argument. Kind of a chicken v. the egg debate. Does raising wages lead to more skilled and efficient labor or does increasing the requirements of a position lead to higher wages? Based on your argument, if people are paid more, then they will become more skilled and efficient. Perhaps, what you mean is that increasing labor costs will lead to more demand for technology in order to replace overpaid laborers. You make this argument here:
    Quote Originally Posted by Gree
    The use of technology, like automated ordered, or app driven ordering, reduces the need for labor to take orders allowing you to hire fewer people and actually increase the volume of business you do (and I am sure there are other areas of efficiency and technology that can be gained - with the right impetus ... like needing to actually raise revenue).
    Of course, you are now admitting that you are supporting overpaying employees with the hope that their positions will quickly become obsolete. So, unless they magically gain new skills, then you've just put a bunch of people out of work. In a natural market, this same thing would occur, but gradually. People would retire, gain new skills, change jobs, etc on their own pace and companies would then fill these openings with technology as such technologies became available. I am afraid that what these artificially high minimum wages will do, in the short run, is leave a lot of people out of work and on the dole queue.

    With that said, in the long run, these minimum wage laws will have no or little effect as companies will naturally look to replace labor with cheaper alternatives. As people with families and lives, though, the short run matters. In the short run, a lot of people will be hurt.
    The U.S. is currently enduring a zombie apocalypse. However, in a strange twist, the zombie's are starving.

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    Re: $15 per hour at McDonalds

    Someone who is looking to support a family or kids should not be working at Mcdonald's or any minimum wage job. Increasing the pay for a McDonald's worker would put their salary above some US troops who are actually working.

 

 
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