Minimum Wage Hurts More Than It Helps

$11-hr Minimum Wage Meme
In the US, minimum wage is $7.25 per hour and a Big Mac costs $4.56. In Australia, minimum wage is $15.96 per hour and a Big Mac costs $4.62. Tell me again how raising the minimum wage will raise prices? “In support of the $11 minimum wage”

As with nearly every aspect of applied Liberalism, human nature is never taken into account when considering legislation. The meme pictured at left isn’t legislative in nature, but the support expressed by the picture would assumedly support a legislative measure that would guarantee a higher minimum wage. Of course, the scenario painted in the “Condescending Wonka” meme fails to address the broad spectrum of variables associated with pricing at point of sale. This is especially so when considering global pricing parity where one price is near to the pricing in a comparable nation where the minimum wage is significantly higher than the nation of origin for the company described. In this case, McDonald’s.

The first aspect of economics this meme fails to address is economies of scale. McDonald’s is a global food service provider. More to the point, the franchise network actually provides for the service of food, and McDonald’s proper is a food supply chain logistics management company. Because of their purchasing power at the corporate level, their significant leverage in the markets that produce their raw materials, their robust logistics network and their massive global franchisee network allow for those economies of scale to enable the franchise general manager to set prices at a competitive rate for the local economy while also maintaining relative price parity throughout the world. This is no small feat, but the meme seems to ignore the magnitude of corporate presence that McDonald’s has had to build to be able to accomplish this outcome.

First I want to discuss what a minimum wage does at the nationally macro level. Proponents of an increased national minimum wage argue that increasing the wages of those workers who are paid the very minimum allowed by law will improve their purchasing power, and that this increased purchasing power will translate into an improvement in economic conditions. This premise remains true given that those employers the increased wages are imposed on are not prevented from reducing their labor force in order to maintain profit margins. You see, when these “humanitarian measures” are implemented they are never voluntary, but they also never remove the ability of the employer to shape their workforce in response to non-market business cost influences (read: Government regulatory costs).

When a business is imposed on by the Government their first response is to look at the regulatory costs in terms of bottom line impacts to profitability. If the company can remain profitable, business continues. If the business can decrease their regulatory costs through labor force shaping, thereby maintaining their previous profit margins, and still be able to maintain operations at the demand rate, they will do so. Simply put, a governmentally mandated increase in the minimum wage will often have a inversely proportional decrease in labor participation through corporate level labor force shaping so as to maintain profit margins. Obviously, this result is decidedly opposite from what the legislative proponents would have intended.

Staying at the national macro level for another minute, lets talk about economy participants who are not as well connected, as well set up and as influential as McDonald’s. Lets say, for instance, San Andreas, California’s single grocer, Treat’s, sees a significant increase in their labor costs as a result of a newly increased national minimum wage. Because minimum wage increases are not applied to individual participants in the national economy, Treat’s is not singularly impacted by this increase. Their supply chain for every product they sell will also be impacted by this labor cost increase. Those increased costs will be passed along to the next level consumer at every step of production, ultimately resulting in an increase in prices at the end consumer level, the public in San Andreas. They would have several options, of course, in terms of grocery purchasing opportunities, but since every other economy participant will have experienced the same increases in cost only the most competitive participants will be able to remain economically viable as an option. This means Treat’s, a family owned business in the heart of Calaveras county, may end up not being able to compete with Walmart, only 16 miles away in Jackson, CA, at the heart of Amador County. Walmart has the logistical advantage over Treat’s, and therefore the ability to keep their prices lower in order to draw consumers away from companies that are not as competitive in the entire economic spectrum. This is specifically how an increase in minimum wage hurts small businesses. Walmart can afford to maintain lower prices because their economies of scale in their logistics chain allows for higher profit margins, which then allows for product pricing stability when regulatory costs increase. Aggregating these burdens across their entire exposure to the economy allows for them to remain competitive while their competition ends up closing their doors.

Zooming out to the international macro level, one can take what you’ve just read and apply it to the the economic conditions in places like Europe and Australia. Liberal economic policies have created an expectation that unskilled labor will provide for what many consider a “middle class lifestyle” when an employee is fully employed. The unfortunate reality, though, is that full employment comes with other regulatory burdens I won’t discuss here, as well as increase operating costs that may or may not be reasonably passed on to the consumer. Taking McDonald’s as a for instance, because of the economies of scale they enjoy at the international macro economic level, the pricing for fast food in Australia is only marginally more expensive than in the United States. The meme uses this as justification for increasing the minimum wage in America becauseĀ hey, if it works for them, it can work for us!

The simple fact, though, is that when the United States increases its minimum wage it impacts McDonald’s, and other multinational corporations, in a way that isn’t directly translatable from the small scale (Australia) to the large scale (America). In fact, the margins that McDonald’s enjoys in America are significantly higher because the market in America is much more densely populated than the market in Australia. Conversely, McDonald’s can consider, and often does, operating locations in smaller markets at a much smaller profit margin so as to maintain a market presence, and thereby maintaining brand exposure in a given region. Their global market leverage allows for their continued global pricing parity while also allowing for lower margin markets to continue to produce a profit, or at least a value-add to the corporation as a whole.

So lets say the United States mandates an increase in the minimum wage from $7.25 to $11/hr, an increase of 51%. Since McDonald’s global infrastructure is based in the United States, and much of their raw materials for their US operations originates in the United States, this wage increase, as it applies to the entire US economy, will ripple through McDonald’s entire corporate structure. Production costs will increase, and thus prices will also increase. Since this labor and materials cost increase will be felt by the competition as well, adequate measures to curtail a decrease in profit margins will result in a combination of consumer level price increases and labor shaping (read: layoffs and decreased hours per worker) should be expected for the entire market. In the US this will translate into an increase in those who are considered poor because it will directly increase the unemployment rate for low skill workers.

Internationally it will have a magnified effect, but that effect will be varied and broad spectrum. Alongside increased consumer level prices as the international macro economy finds ways to manage the supply and logistics chain’s increased costs, McDonald’s and its competitors will have to find new, cheaper sources of raw materials in order to maintain profit margins. This translates into decreased quality, lower standards, and ultimately higher instances of safety violation events that, because of the volumes I’m discussing, are not possibly able to be reliably overseen and prosecuted by any Government.

The Fast Food industry example is just a small snippet of what can happen when arbitrary values are mandated for unskilled labor instead of allowing for the market system to dictate what the value of that labor is in real time. This, of course, is an unintended consequence of what the Left would call a noble goal. Absent market forces pressuring corporations to act in a predictable manner when subjected to governmental stimuli, their noble goal might be attainable. Of course, this is not possible. The Governments of the world can only command so much before the corporations of the world simply cease operations because not participating in the economy is preferable to participating on Socialism’s terms.

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