Tuesday, September 03, 2013

The $17 Big Mac

I was intending on doing something like this, but this deputy economist did a fine job - breaking down the effects of a $15/hr wage on McDonald's profitability and pricing.

I'm going to explain this very succinctly and simply as possible in the vain hopes some of these McDonald's protestors are listening as it WILL help them in their financial futures:

Companies would not exist without profit.  The reason why is that in order to form a company you need investors.  And investors (that's you people with your 401k's and IRA's and pensions) will not part with their money unless they get something back OF HIGHER VALUE in return.  In otherwords, people aren't just going to throw money away at McDonald's so they can employ people temporarily until the company runes out of money (besides, that's what Barack Obama does with the likes of Solyndra and other green-red companies). 

So you can protest all you want.  If you get a law passed for the $15 per hour, McDonald's will shut down those stores.

If Wal-Mart has to pay it's employees $12 per hour, Wal-Mart will shut down.

What you are experiencing and the frustration that comes with it, is the real world telling you that you do not have the skills they want.  You offer nothing of value (beyond the minimum wage job) that they are willing to part with their money for.

Your real world choices are jobs that pay minimum wage or no jobs that pay $15/hr.

You also could go to school and develop a skill in which case you'll provide something of value in excess of $15/hr.

But sitting on your ass and merely existing, that's nothing special.  And your wage shows it.

And don't get pissed as me.  This is the real world.  You either live in it or suffer.  You should be thankful I'm telling you like it is.

Post script - for those McyD's employees still reading this, I want you to real through the comments.  Some wise words there about basic labor market economics.  You think long and hard.  Do you want real world advice or just want to be lied to?  Which is going to benefit you in the long run.

29 comments:

Monroe Ficus said...

Not only that, even if for some crazy reason McDonalds could survive paying people $15/hr, the current people making $7.50 would not be able to compete with the better educated, more pleasent competing labor that would be enticed by such a wage

PeppermintPanda said...

Companies won't (necessarily) close their doors due to a higher minimum wage; but they will try to pass those costs onto their consumers, cut back on the number of employees they hire, and reduce employee benefits.

Realistically, if Walmart or McDonalds is forced to spend $15 per hour per employee, they will probably spend hundreds of millions of dollars on R&D to eliminate as many positions as possible.

sth_txs said...

The idiot protesters should have been in front of their regional Federal Reserve bank. This unelected organization is the cause of many problems though I don't think corporations are my friend either all the time.

The Great and Powerful Oz said...

Nobody mentions the extra competition for low end jobs from the illegals. Part of the reason wages are so low is that we have a massive oversupply of unskilled workers and millions more are sneaking across the border every year.

Supply and demand applies to the labor force as well. If companies can't get people for the minimal wages they are paying, then they'll just have to offer more.

Eric Mueller said...

When I worked at McDonald's, minimum wage was $3.80. I worked my way up to $4.00 an hour, when the minimum wage was raised to $4.25. My .20 per hour above minimum wage became .15 above minimum wage as my pay adjusted to $4.40.

I left McDonald's when I was 17. Never intended to go back.

To this day, for the life of me, I can't understand people wanting to make a full time living at McDonalds. It was great for a first job, and gas and hanging out money in high school (also paid my insurance).

Also something the minimum wage people overlook is, the higher the wage goes, the more younger people trying to get started are shut out. Why would McD's hire a 16 year old with no record while there are minimum wage lifers in their 50's applying for the job? At least they know those people have to show up for work, usually.

Aerodawg said...

I highly doubt that McDs would shut down with a $15 minimum wage for the simple reason that the vast majority of fast food jobs are ripe for automation, being relatively simple and highly repetitive. The only thing stopping it up to this point being how cheap labor is.

I can envision an McDonalds staffed by exactly 2 people, one to put feedstock into the back end of the burger machines and one to take out the front and set it on the counter for the customers. Bagging, traying and even ordering could be automated easily...

Southern Man said...

Want to see a big jump in employment? Drop the minimum wage entirely for workers under, say, 21. The libs would scream bloody murder but I bet there are a bunch of young folk who would rather work for $5 an hour than earn nothing at all. I've got a lot of brush to clear and I'd love to pay some strong young men to do it. But that's illegal. So my brush remains uncleared, and the young men remain unemployed.

ProdigalSon said...

I'm not going to speculate about McDonald's automating things, or other such changes (although that obviously would put people out of work, hence ruining the purpose of a higher wage), but I did do a follow-up on some potential greater consequences of such an action.
http://amanoutsideoftime.blogspot.com/2013/09/the-greater-consequences-of-15-minimum.html

earl said...

If there is one upside to a 17 dollar Big Mac.

Perhaps people would quit eating the garbage and prepare their own food...and obesity rates would go down.

Either that or the fatties will be continue to pay outrageous prices for those products. I barely eat fast food the way it is...at those prices I would never step foot in one of those places again.

Kristophr said...

earl:

You listen too much to libtard propaganda.

If you eliminate major carb dumps like french fries, McDonalds sells fairly healthy food.

Cheap too. Two McDoubles cost about $3, are enough to meet the minimum RDA, and provide 800 calories. Enough to survive on.

Anonymous said...

This isn't original, but something to think about IMO.. In 1963, the minimum wage was $1.25/hr. In silver quarters, that'd be worth about $20/hr now.

dance...dancetotheradio said...

I second PeppermintPanda.
When labour becomes too expensive it makes sense for companies to invest in equipment to automate those positions.
The first to go could be the cashiers.
I don't need someone to take my order and my money.
I can enter my own order, pay a machine and wait for my food.
If labour costs rose to auto worker levels, you could very nearly automate the whole operation on the same scale as automakers have.

earl said...

I worked at a McDonald's growing up...I saw what that "food" looked like before we cooked it.

I'd rather eat a juicy steak with a vegetable side...like I normally do for dinner.

Unknown said...

Here's a back of the envelope calculation on the cost of a MCD's combo meal in NY when increasing the minimum wage to $15 per hour:

- Assuming a minimum wage jump from $8 - $9 per hour (the $7.25 figure is the Federal rate, most States are higher) to $15 per hour (a 67% to 88% increase),
- Fast food restaurants usually run between 25%-30% labour cost.
- The cost of MCD's combo meal is $8 in NY.
- Labour % of that $8 is around $2.20 (assuming 27.5% labour cost)
- If minimum wage increases 67% to 88%...
- And all other costs of any other inputs stay the same (not likely but let's keep it simple)...

- The labour portion of the combo meal increases to $3.67 - $4.14,

- In order to keep labour at 27.5% fore the new min wage rate, the cost of the combo meal increases to $13.35 - $15.05

Fred Z said...

Cappy, you're a nice guy, but I don't think you have ever employed "minimum wage workers", or you wouldn't have written "You also could go to school and develop a skill...".

Ha, ha, ha, ha.

Problem is, minimum wage workers might have the intellectual capacity to go to school, but most of them, the young excluded, don't have the moral capacity to do so. They are lazy, intemperate, addicted, unfocussed, procrastinating, crazies.

I do construction. I hire a lot of them as laborers. I know them well. They can't, they cannot, there is no possibility that they can go to school or learn a skill.

Anonymous said...

Captain,

I really like your blog entries, and you have a lot of great insights into today's economic situation. But you are way off base here -- the return in the fast food/prepared food industry is astronomical. My family owned a couple of delicatessens and they spent MUCH more per item than McDonalds, charged less, and paid workers $8.50 (more workers per store, also) when minimum wage was $5.15. The reason McDonalds does not ever raise wages is not because they are operating on such a razor-thin margin that they would go out of business, that's ludicrous. They don't do it because the shareholders to which they are accountable (and we were not) would throw a massive tantrum and drive the stock price through the floor.

I agree, $15 is way too high. I don't even necessarily think that McDonalds workers should get any kind of raise. Lets examine this with some complexity, though.

Make no mistake -- if some state upped the minimum wage to $15, there's no way that McDonalds would pull out. They'd take a hit and make less money -- but they would still be making a lot. And yes, even if they kept every single employee in said state on the payroll!

Paul E. Zimmerman said...

I look forward to my touch screen ordering experience:

http://investorplace.com/2011/05/mcdonalds-nyse-mcd-touch-screen-menu-ordering/

Keep protesting against your own jobs, morons.

Bike Bubba said...

Regarding the quality of McDonald's food, I typically find that eating at McDonald's will give me about 50% more calories than preparing my own--or more. Good thing if you're working with manual labor for a living, not so good if you're a desk jockey like myself.

Regarding paying $15/hour, you've got to consider that the guys who provide the "raw materials" for the product also are earning low wages. So if you increase the minimum wage to $15/hour, you've also doubled the wages for the bakery, the meatgrinders, etc..

I don't know that you'd get to a $17 Big Mac, though; 30% labor burden and 40% food burden will get you an increase of about 30% for in-store labor and then about another 20% for the cost of food. So you take a Big Mac from about $4 to about $6, and then Oak Brook automates a lot more because that's some serious money.

If someone wants to see how well McDonald's handles their finances, by the way, Google "McDouble vs. Double Cheeseburger". The second piece of "cheese" was the thing that had to go to get it on the Dollar McMenu without losing money. They can't just take it in the margins.

kleyau said...

So, what you're saying, is if we increase the minimum wage to $15/hr, then both McDonalds and Walmart will shut down?

That's genius! We should start this immediately.

Bike Bubba said...

Regarding the claim that McDonald's wouldn't be forced to close stores or fire people; their net margins are about 29%. With a doubling of labor costs, you'd end up with net margins of about -10%. You'd be losing money hand over fist.

So even if the board of directors escaped the fury of the major stockholders after such a debacle (doubtful), the company would be forced to make some significant changes to survive.

For those of you in Rio Linda, that means that a lot of their workers would be replaced by machines.

(cripes, anonymous, can't you read a stock listing?)

Jose Romero said...

In short this is just another "ME" problem like like to use and not realizing that if we raise your wage then we will need to raise everyone along the line from the Hamburger Bun maker, The Patty Maker all the way down to the $15.00 an hour employee manning the register.

Remember everything we do affects everything else around us people need to realize that. If they raise the hourly wage to 15 then that means all of the above i explained as well as the product price will go up to cover the costs in making those products. Believe me if this happens Mickey D's will not be in business for long and you will be out of work.

I understand that restaurant work is hard. Hell i did it myself for a while until i decided to learn a trade and left it all behind. SO stop being lazy and trying to get a free ride!

Don't like working for Mickey d's then you need to find something else to do!

great post Cappy!

Blaximus said...

I don't have an opine concerning McDonalds specifically, but ever escalating profits and lower wages seems highly unamerican to me.

Not to sound all communist or anything, but we had a tradition, after much legislative wrangling, of working folk sharing in the creation of a compamy's profitability.

For some odd reason that I can't fathom in my 50+ years of life, greed has become the gold standard. CEO's making 300 times the salary of employees goes without any major protest, but if you talk about raising the minimum wage, popular opinion ( at least here in the comments ) rails about how crazy that idea is.

God Bless Amerikkka.

Bike Bubba said...

Blaximus, if you would "read the papers" or "google it", you would quickly learn that in many areas, "Chez Mac" and other fast food chains pays somewhat above the minimum wage so they can get employees who show up for work on time and having bathed.

And yes, they make a profit, and a good one. That's the point of being in business; to get a return on your money and effort. If you don't think profits are a good thing, hand your paycheck back to your employer.

Dreamer said...

Captain,

At the risk of getting banned. I ask you to show me numbers than just the logic assuming that $15 dollar wage is un-viable for McDonalds.

I ask this because I heard some numbers in the past that seems to say that it is possible without killing the business.

1. When you adjust inflation for minimum wage for the 1950's. They were in the 11 dollar range. Yet I don't believe business were kelling over then.
2. Australia's minimum wage is at $15 and McDonalds did not pull out.
3. Costco have food courts and pays its workers at $20 dollars an hour. Somehow the food court is viable (and it doesn't make sense if Costco was making it a loss leader and the other roles in the store is equal to a Wal-Mart).

I wish I can actually tell the margins for McDonalds itself. That part I do not know. I can look a the financial numbers as noted for looking for stocks like Yahoo Finance, but I do the actual numbers.

That said, the 3 numbers I do know above seems to indicate that resistance to higher minimum wage is not necessarily a fight for a business's survival, but keep the same level of profits. If the raise food prices or increase automation, it is not because it's needed to survive, but they can (and unlike if we had raise the wage back in 1969 to the 1969's equivalent to $15 dollar wages had an option to automate, back then if it is still profitable and can't prudent raise the price, they just have to swallow living with smaller profits).

Does this mean I am supporting the idea of a $15 minimum wage? No. Despite the contrarian nature of this comment, this is a search to know the facts. Because there's a lot of arguments out there on both sides. One includes this post's thrust that such wages is a business killer. If Costco can somehow have $20 wages, why can't Wal-mart handle $15 dollars? There has to be reasons. Or I don't know who is truly right on the assessment. That include your assessment. And know you believe in numbers.

Anonymous said...

Southern Man said...

"Want to see a big jump in employment? Drop the minimum wage entirely for workers under, say, 21. The libs would scream bloody murder but I bet there are a bunch of young folk who would rather work for $5 an hour than earn nothing at all. I've got a lot of brush to clear and I'd love to pay some strong young men to do it. But that's illegal. So my brush remains uncleared, and the young men remain unemployed."

- How is it illegal to ask someone to do something around your home for you in exchange for some cash, off the books?

Answer: its not.

The fact that you have no one to "clear your brush" for you is not because you can't ask for it. You could place an ad on Craig's List today, right now in fact, or just ask your neighbors.

Whether or not you'll get any takers for a mere 5 bucks? That's another story. But you are well within your rights to try.

"I bet there are a bunch of young folk who would rather work for $5 an hour than earn nothing at all."

- You'd be surprised then. There may be a small percentage of young people with no other options but "5 bucks or nothing at all", but there's a whole helluva lot of options out there than that.

Even amongst those with no options, that doesn't guarantee that they'll want to stand on their feet at Mickey D's for 8 hours/day for a mere 5 dollars (which amounts to diddly squat once state taxes, SS and other things are take out of the pay check).

I mean heck, kids could make more (and tax free) just answering Craig's List ads for "clearing brush".

;)

Anonymous said...

Jose, " I understand that restaurant work is hard. Hell i did it myself for a while until i decided to learn a trade and left it all behind. SO stop being lazy and trying to get a free ride! "

So all these lazy people are doing work that you left behind because it was "hard" and yet they are "lazy" if they don't do the same?

And why do you consider people who do "hard work" for pay as "tryig to get a free ride? What are they getting for "free" exactly?

Captain Capitalism said...

Dreamer,

You ask a legitimate question which is why I respond.

It is NOT an issue of what the price of a Big Mac will be if the theoretical $15/hr wage is established.

What EVERYBODY is missing is whether investors will part with their money to allow for McDonalds to exist as a company in the first place unless they provide a certain rate of return.

Ergo, any discussion about "could McD's in DT NYC make it by charging $15 for a happy meal" or "could we pay their employees a certain amount and only increase labor costs by X%" are moot.

People, HARD WORKING PEOPLE, who have forfeited pieces of their FINITE LIVES have agreed to part with their time in the form of money to get an previously agreed-upon rate of return.

If a bunch of losers (and that IS meant to sting) who have no skills want to jack their rates up to $15/hr by force of law, then they are betraying the original investors who GAVE THESE VERITABLY TALENTLESS PEOPLE AN OPPORTUNITY TO WORK IN THE FIRST PLACE, and those people have every right to withdraw their money, sell their shares, lower the equity value of McDonald's, and ultimately send it into bankruptcy.

AGAIN, the primary complaint of these people is that they're complaining about their own lack of worthy. They have no skills, they have no abilities, all they have is the ability to complain and demand more money for a job that can be (as many people pointed out) automated if it gets beyond $10 per hour.

The whole ORIGIN of this gets back to the fact that there wouldn't be any freaking jobs if the profit margins were't there.

Yes, it sucks. Yes, I know, working at McD's must suck.

But that's the real world

Now either deal with it and succeed or whine and complain and piss away your life.

Anonymous said...


Fred Z said...

Cappy, you're a nice guy, but I don't think you have ever employed "minimum wage workers", or you wouldn't have written "You also could go to school and develop a skill...".

Ha, ha, ha, ha.

Problem is, minimum wage workers might have the intellectual capacity to go to school, but most of them, the young excluded, don't have the moral capacity to do so. They are lazy, intemperate, addicted, unfocussed, procrastinating, crazies.

I do construction. I hire a lot of them as laborers. I know them well. They can't, they cannot, there is no possibility that they can go to school or learn a skill.
_________________

You "do construction". That's a different demographic pool.

But most of the people working at Mickey D's are actually in school - high school or college. And for some people Mickey D's is one of 2 or even 3 jobs.

These people are anything but "lazy".

Anonymous said...

Hey Spike Spiegel,

The "original investors" don't have the right to do anything -- Ray Kroc and the rest of them are dead.

Now, as far as the current stockholders go: if you think a setup in which computerized algorithms determining market sentiment about individual companies (OH CRAP panic sell guys, a guy in Cleveland is getting $9.15/hr at the McDonalds on Prospect!!) for hedge funds which manage accounts for corporations (or unions) who (because of 401k legislation) match money set aside for retirement by contributing employees is the most efficient way to determine the value of someone's labor -- I must disagree.

I understand what WILL happen in today's society, you are absolutely correct in your analysis of the situation.

That still doesn't mean there aren't serious structural problems with the way business is done in the United States -- and none of it is natural or immutable as you seem to be suggesting. A system like that is not going to last long. It already imploded once.

They should just give them $9/hr an hour already. If their business model is so damn bad that they can't afford it then let some creative destruction take place, plenty of businesses can and do pay food service workers better!