Thursday, September 19, 2013

McDonalds and the minimum wage

Recently, on a long car trip returning from a glider contest, I did something unusual among our liberal elite: I actually went to a McDonalds and ate there.

The lady who took my order must have been about 19, as were all the other employees I could see, and pretty clearly new on the job.  Getting the order right took some effort.  I made the mistake of paying cash. The bill was something like $7.62. I first offered a $10, and she rang it up. Then I found 12 cents in my pocket, and offered it. This was a big mistake, as the cash register had already computed my change, and adjusting to my offer of 12 cents was beyond her abilities.

Most people might have been annoyed, but as an economist and an educator, I'm happy to see human capital building. OK, I was a little annoyed.

Which brings me, of course, to the proposals for a sharply increased minimum wage.

In the end, there really isn't much argument about what a substantially higher minimum wage will do.

Let us not deny the benefit. For the few people who work at minimum wage, but have worked their way up the ladder enough that they will keep their hours; who are actually trying to support themselves and a few children on these meager wages, it will mean a modest rise in income. The rise may be more modest once you account for taxes and reductions in transfers.  There weren't any such people at my McDonalds, but NPR and the New York Times seem able to find them.

That transfer comes from somewhere. Some of it comes from a wealth levy on existing McDonalds shareholders. If a regulation lowers a company's profits, the stock price declines. Then the rate of return going forward is the same as always. So it's a one-time wealth tax on the existing shareholders. Economists are supposed to like wealth taxes, with an asterisk that it makes future investors a bit skittish.

Some of it comes from higher prices. I read estimates that a big mac might go up from about $3.00 to about $3.50, and dismissed those price increases as a small burden to bear.  Looking around my McDonalds, I found this argument less persuasive. Because, of course, the kind of people who work at McDonalds are also the same kind of people who eat at McDonalds. If you're working at minimum wage in the middle of Oklahoma, you don't go out to a nice Greenwich Village restaurant to sample organic free range locally grown non-GMO gluten-free artisanal nuts and berries. McDonalds is a treat. And a pretty nice one at that. It's clean, healthy -- yes, some offerings are  full of sugar and fat, but not of e coli, and you can get the grilled chicken if you want -- and reasonably tasty. Raising prices from $3.00 to $3.50 is not a small matter if you earn under $10 per hour and you're feeding a few kids too.

Still, that is the benefit.

The cost is just as easy to forecast. McDonalds cuts hours, and uses its most experienced and efficient workers more, and fewer people like my hapless server. And they don't get the oh-so-needed on-the-job training. The biggest impact of minimum wages is not so much on existing workers, but on new workers entering the labor force. (See a nice new NBER working paper by Jonathan Meer and Jeremy West.)

The effects fall heaviest on low-skill teenagers, especially minorities. Tom Sowell is eloquent on this point, for example in a recent New York Post OpEd. I was unaware until reading it that minimum wage laws were initially backed in part as conscious efforts to discriminate against minorities and preserve jobs for white people. Sometimes, I guess, policies do have their intended effects.

This much is pretty obvious. Looking around my McDonalds, though, I could see a deeper possibility -- an unexplored avenue for substitution away from low-skill labor.

source: chownow.com
Why, I wondered, after 10 minutes in line and the third effort to get my simple order right, did I not simply enter my order on my iphone, and then it's ready for me when I step up to the counter? Or why not enter it on a tablet provided right there? Why should ordering at McDonalds be any different than getting money from a bank, or getting a boarding pass at an airport? High end restaurants answer this question by saying they think their customers value the personal attention of a waiter. Maybe, but certainly not at McDonalds.

The answer, for now, is certainly that it's cheaper the way it is. But not for long.. At the left is the first image that popped up when I googled "restaurant ordering app."

And McDonalds is also reportedly testing an ordering and cellphone payment app. "Currently being tested at locations in Salt Lake City and in Austin, Texas, the app lets users order a meal remotely then collect it in person from a store or drive-thru window." My server's job days are already numbered.

Looking more inquisitively behind the counter, it struck me that the technology overall has changed little since the 1960s when my parents took me there as a child. The fry-o-lator beeps,  a teenager picks the basket up and dumps it out, sprinkles salt, and uses a cute little piece of aluminum to neatly line them up in bags, just as they did back then. The main change I could see is that they annoyingly don't let you put your own sugar in your coffee any more.

It's clearly only a matter of time before this whole thing is automated.  Industrial robots can assemble cars; designing a robot to operate the fry-o-lator, or even to cook and assemble the whole hamburger doesn't look that hard. Mechanization usually increases quality: your burger and fries could easily be cooked to order. Swipe your phone or card to pay and off you go. Or, a little drone helicopter delivers it automatically to your table.

(Update: The machine is here already. And planning a new chain to use it, rather than sell to McDonalds, as predicted. Thanks to Michael Ward for pointing it out.)

Reflecting on it, though, it's unlikely to be McDonalds. McDonalds has an amazing technology when you look hard at it: They have figured out how to run restaurants in a way that dramatically conserves on the world's scarcest resource, human capital. To run a McDonalds, you don't have to know how to cook, how to order food, how to buy kitchen equipment, or all the other hundreds of bits of tough knowledge and skill that it takes to run a restaurant. Hamburger U trains the rest.

The whole operation is about taking low-skill teenagers living typically unstructured lives, and training them to what it takes to work.  Peering around the side of the cash register at an earlier trip, I noticed there were pictures on the buttons! You can work at McDonalds and operate its cash registers even if you're functionally illiterate! To say nothing of not knowing what to do when offered $10.12 to pay a $7.62 bill. And McDonalds has a big investment in that technology.

In the face of technical change, it is seldom the successful incumbents who adapt, even when they innovate. Kodak did not bring us digital cameras, trying to protect their film advantage. Print media did not bring us the internet, and are floundering at it. Walmart tries to go online, but Amazon.com is displacing it. The major airlines flop in every attempt to imitate Southwest.

So, as I gaze around the familiar golden arches, it strikes me that the automated fast food restaurant -- and the rapid decline in low-skill employment that it implies --  will likely not come from McDonalds itself. Rather, new competitors will arise that perfect the automated, people-less technology. In the same way that McDonalds displaced the previous era of fast-food restaurants, by perfecting a technology that brilliantly used lots of low-skill people and conserves on scarce human capital. For McDonalds to go automatic would be for it to throw away the key innovation that defines it and has made it such a success.

So we may be past the point that McDonalds sticks with 1950s technology because it's still cheaper to use people. We may just be waiting for the tipping point.

But robot repair technician is a high skill job. McDonalds provided a positive social externality -- it gave young people their first experience of work, of showing up on time, in a uniform, of learning to be pleasant to customers, to work within a heirarchical organization, and so on. Young people who work at McDonalds don't get internships at NPR, the New York Times, or Goldman Sachs to to develop work experience. As McDonalds goes, so will that process. All that will be left is cleaning.

A sturdy hike in the minimum wage, in today's economy, is basically an industrial policy subsidizing the transition to low-skill service industry automation.

86 comments:

  1. One way to think about this is, since this automation is likely to happen anyway, this is an argument for more overall redistribution to the low skilled from the high skilled

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    1. If this, than through a negative income tax surely, not minimum wage.

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    2. I saw that dumb idea coming.

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    3. When there are only 500,000 jobs in the world and 15 billion people, "working to make a living" is going to be a thing of the past and some sort of a distribution of resources is going to have to happen a long time before we hit that stage. You might as well plan for it so that society doesn't all fall apart when jobs start disappearing.

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    4. Wow, so raising the minimum wage makes everyone better off! Now why would anyone be against it? Either they're evil or stupid, right?

      Your suggestion that a "recent immigrant" or "high school dropout" would not know how to press their thumb against a picture of a Big Mac is ludicrous and patronizing.

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    5. What I don't understand is if they are unhappy with the wages they are receiving, then why don't they do anything about it? I hated my minimum wage job, so I went to college & got a better paying job as a result. On a side note; if McDonalds increases the wages of their employees, will we the consumer get better service, or would we just be paying more for the same food & service?

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  2. I read somewhere that Kodak invented the first digital camera in the mid-70s.

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  3. Carl's Jr. already has the self-ordering kiosks in restaurants...since at least 2007 (I started seeing them in San Diego around 2011).

    http://www.kioskmarketplace.com/article/164936/Carl-s-Jr-offers-touchscreen-menus

    Searching "Carl's Jr. Kiosk" in google images also brings ups lots of examples.

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  4. I truly wish that politicians could think like actual businesspeople once in awhile (numbers are rough):

    McDonald's Crew Costs (i.e. min wage) = 20% of sales
    McDonald's Store Level Profit Margin = 5% of sales
    Proposed Increase in Federal Min Wage = 25%

    Therefore, a 25% Min Wage increase will effectively eliminate the store-level profit for a McDonald's franchise (i.e. 25% x 20% = 5%).

    What does any sentient being with even the remotest connection to business reality think a franchise manager will do, given the above? It's a trick question, because no one really knows - it may involve the automation speculation above, it may involve higher prices, it may involve a complete reorganization of store operations. But what one can say with absolute certainty is that the owner/manager won't, because he/she simply CAN'T, boost crew pay 25% without massive adjustments elsewhere, ultimately leading to lower labor utilization, i.e. fewer jobs.

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    1. Yes, but, let's be careful to be economists and not generalize from the individual producer to market outcomes. Everyone else has to pay minimum wage too. So the elasticity of demand to a coordinated price rise across all minimum-wage paying restaurants is less than to an individual restaurant. It's not perfectly inelastic -- people will substitute to cooking their own, to frozen tacos, and to higher quality (non minimum wage) restaurants. But some adjustment will come from higher prices.

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    2. "Therefore, a 25% Min Wage increase will effectively eliminate the store-level profit for a McDonald's franchise"

      You neglect to account for increased revenue as McDonald's customers, many of whom work at or near minimum wage, also receive wage increases.

      Also, McDonald's may currently be unable to raise prices because of the prices at their competition. If all fast food restaurants have a 25% increase in labor costs, all will attempt to raise prices.

      Sure, "all else being equal" McDonald's having to pay 25% more in labor costs will hurt McDonald's. However, an increase in minimum wage for ALL businesses, negates the "all else being equal" clause of the argument.

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    3. My point was not to assume "all else being equal", but quite the contrary. It is the pundits' assumption of "all else being equal" against which I am in fact arguing. As I said in the prior post, it could involve automation, higher prices, re-organizations, etc. and that neither pundits, businesspeople, or economists can really know how it will shake out in proportion. But what I want to stress is that one outcome is known for certain - any and every actual operator will react strongly to reduce their labor costs as fast and as far as possible, with terrible consequences for the actual employees targeted for "relief", as many lose their jobs. The franchise managers do this because there are financial rewards to do it, irrespective of any assumed elasticities. Even in the fanciful thought experiment where are all fast-food establishments raise prices simultaneously 5%, and where all fast-food customers are minimum wage-earners (with newfound extra disposable income), I wonder what brand of economics would suggest this is some new sustainable equilibrium? It defies logic - the returns to crew labor-saving methods have suddenly increased 25%! That is the case even in this implausible scenario (and in fact in all scenarios). How fast the automation (or other reactions) kick in is certainly debatable, but the potential for lots of $20 bills lying on the ground has unarguably gone up for the franchise operator. I submit that every one of them knows this, irrespective of their economic training, or perhaps in spite of it.

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  5. McDonalds is doing just that in Paris for some years now -- and as a customer I can attest it saved me a lot time since its inception. An article in Economist analyses this example and others in the context of our rigid labor laws in a similar perspective:

    http://www.economist.com/node/21540284

    Let's our situation can serve as an example for the US...

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    1. From the economist link:
      "Two years ago, McDonalds pioneered the use of touch-screen, credit-card-based ordering in its French fast-food restaurants. El├ęphant Bleu, a self-service high-pressure car-washing chain, has 472 outlets in France, and is expanding. All this in a country where the labour code runs to over 3,300 pages, an employer pays an average of 39% in payroll taxes, and unemployment is at 10%. Spot the connection."

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    2. This summer I was visiting Tokyo. We were in a residential neighborhood at lunchtime, and our guide took us to a noodle shop.

      The noodle shop was a tiny, narrow storefront. It had a long stand up counter that ran along one wall all the way to the back of the store, and 3 or 4 small tables. At the entrance was the computer touch screen pictured in this photo: http://twitpic.com/dednm4

      You made your selection, fed the machine cash or credit card, and received a little ticket. At the back of the store, a single employee was preparing individual noodle orders with a variety of toppings. When your number was called, he presented you with your steaming bowl of noodles and veggies.

      We were in the shop about 20 minutes, and while we were there, the noodle guy served a dozen or so customers. As a business owner, I admired the ruthless efficiency of the operation. One visible employee handling the lunch business with no cash register change errors, and no incorrect order (unless of course it was self inflicted by the customer).

      What a contrast to the US where the franchise fast food places are staffed with indifferent, listless workers. And by the way, I don't remember the exact price of my bowl of noodles, but I remember it was very reasonable - five bucks or so.

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    3. $5 for a bowl o'noodles doesn't sound cheap.

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  6. Kodak in fact predicted the digital camera and how it would be introduced. First for satellites (which could take a huge cost since they would no longer have to catch film canisters with aircraft); Kodak built the digital cameras for the US military satellites. Next in business and professionals. Finally in consumer. The big problem for them was that expertise in chemicals didn't automatically translate into leadership in electronics. They did build digital cameras, just that Japanese electronic companies in particular turned out to be better.

    McDonalds has been described as a real-estate operation with a sideline in food. Since in the near term even a fully automatic restaurant will require real estate (Amazon is not going to deliver you a hot hamburger via UPS) they may turn out to have just the assets required for the new world. It reminds me of the story of Seattle Coffee Company in London. They tried to franchise Starbucks but were turned down, so they built their own company (cheekily with Seattle in the name). When finally Starbucks decided to move to UK, it turned out that they had to buy Seattle Coffee. Why? Not because of the coffee, but Seattle Coffee already had all the best site on the best street corners.

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  8. See Momentum Machines at momentummachines.com for a recent entry into fast food production automation.

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  9. "personally unstable teenagers"

    Great article as usual, but I'm not sure what the "unstable" is getting at. It could be misinterpreted and cause a firestorm (detract from the great piece).

    Just reread your PhD Writing tips and am kicking myself for what I nearly turned in as a summer paper ... Thanks!

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  10. I often wonder, if we are a consumption driven economy (~70% of GDP), wouldn't increasing the wages of low income workers (via minimum wage) help to stimulate the economy (given low income workers have a high marginal propensity to consume)?

    I understand a higher minimum wage theoretically leads to higher unemployment, but besides casual observations, is there any research on the connection between minimum wage and unemployment?

    I have my own thoughts on McDonald's wages due to the recent strike (forgive the layman's, the blog is designed for a general audience).

    http://jake-e-lopata.com/CommonSense/minimum-wage-strikes-and-hikes/

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  11. I remember reading a book by Samuelson who said that there are no guarantees that idle resources will eventually funnel to productive areas. He said the structural barriers can keep this from happening for decades(not sure if he was just being hyperbolic). But it does raise an interesting question, namely, what will these 19 year olds do once mcdonalds and similar high volume low skill industries move to automation. Considering the steady flow of immigrants, it implies there are still many jobs to be had, but in what? Is there going to be a commensurate demand for additional gardeners, hair cutters, janitors, babysitters, etc?

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  12. You seem to make the same assumption that many others do, namely that a higher minimum wage will result in lower profits for companies that pay minimum wage. You do point out that most people eating at McDonald's are also those most likely to be working minimum wage jobs, but miss the next step. If McDonald's customers experience an increase in income because of an increase in minimum wage, then they will have more money to spend at McDonald's. This would tend to increase profits, at least on a nominal basis if not real.

    Raising the minimum wage is inflationary, which I think is the best argument for increasing the minimum wage. One of the reasons that the Fed backed off tightening is because inflation is still below target. Inflation is below target, in my opinion, because of slack in the labor market which the Fed is unable to directly target. Wages are not going up, so prices can't go up. Raising minimum wage is a non-supply/demand mechanism for increasing wages despite excess supply of labor.


    But, this goes back to my general feeling on monetary policy as a whole. Money supply is not the bottleneck to economic growth, so monetary policy can do little to stimulate growth. The Fed is largely pushing on a string.

    Our real issues are of a fiscal nature, namely our too flat, and in many ways regressive, tax policy combined with free international trade with countries that lack the same regulations as we have.

    If we want to restore the middle-class to the economic status it had in the 1950s and 1960s, we'll have to return to the tax and trade polices of the 1950s and 1960s.

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    1. "If we want to restore the middle-class to the economic status it had in the 1950s and 1960s, we'll have to return to the tax and trade polices of the 1950s and 1960s."

      Or we could bomb the rest of the industrialized world to rubble (again), so that they're too busy rebuilding to compete with us. Like the 1950's and 1960's.

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  13. You go badly wrong in assuming that McDonald's will magically be able to hire a better class of worker. To me, this makes the same error as those upset by the larger number of handicapped parking spots that go unused at the shopping mall.

    The arguement to reduce the number of handicapped parking spots goes something like this, "I have to walk a quarter mile from the far end of the lot, and there are 3 empty handicapped spots right in front. There should be fewer andicapped spots so that I can park in those close up spots." This assumes that the spot that is currently empty because it is a handicapped spot, would still be empty if it were not a handicapped spot. It would not be empty, for the same reason that the spot next to it is not currently empty, people will take the best available spot. Make that handicapped spot available to all, and every car in the lot will have moved up one spot. So, instead of walking a quarter mile, you have to walk 10 feet shorter than a quarter mile.

    The best spots will still go to the people with random luck to pull in as someone else pulls out, or to those willing to sit and wait for a close spot to open up.

    Raise the minimum wage to $15, and the jobs that are currently paying $1 more than minimum wage to get "better" employees will just raise their pay to stay $1 above minimum wage. They will be able to afford to pay these higher wages because, of course, their customers pay would also increase, allowing them to increase prices.

    The minimum wage paying companies will still attract the low end of the labor market as others will continue to pay more than minimum wage to atract better employees. All that will change is how much companies will have to pay to get "better than minimum wage" employees.




    Your point about replacing more workers with automation, in my opinion, would argue AGAINST rasing the minimum wage, if cost was indeed the limiting factor. There is already too much slack in the labor force, so eliminating more jobs would be a bad thing.

    But, is it really price that is preventing the automation at this time, or is it customer comfort? Remember that those most likely to be eating at McDonald's are also the most likely to be earning minimum wage. Perhaps a college educated professor of economics would have no issue inputing their own order, but what about the recent immigrant, the high school drop out fast food worker (like the one unable to put in your order for you) or the typical gardener.

    Disney installed touch screen computer kiosks in a restaurant called "Taste Pilots Grill" in California Adventure park to allow customers to enter their own orders. I loved entering my own orders, but I was surprised by the number of people that were uncomfortable. Disney had to have workers stand next to the self-serve consoles to enter the orders for the customers.

    5 years later, Disney has gotten rid of the self-serve kiosks and returned to employee entered orders.

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  14. Even Hollywood gets it, well back in 1979 they did:

    Yo, Rock!

    You wanted me, Frank?

    I gotta let you go.

    How come? I'm workin' hard.
    I'm doin' good.

    Yeah, but we gotta cut back on manpower
    and you ain't got enough time in.

    Seniority.

    How about if I take a cut in pay, all right?

    Can't do it. Union rules.

    Rules, rules.

    - Can I finish out the day?
    - Sure.

    Hey, Rocky... I'm sorry.

    Yeah, me too.

    from Rocky II 1979

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    1. And if every company in the country lowered wages, even if they didn't reduce the number of employees, what would happen to demand for the goods and services of those companies?

      Right, it would fall.

      You can't apply principles of micro-economics, where your spending does not effect your income, to macro-economics, where total spending effects total income.

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    2. This is really short sighted. There is an optimum wage for a given job. If you madate wages up or down, you will get ill effects. If you step out of the way and let the market dictate wages, you will get the optimum for all. That optimum may not be "fair" but it would be optimal overall.

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  15. “A sturdy hike in the minimum wage, in today's economy, is basically an industrial policy subsidizing the transition to low-skill service industry automation.”

    Perfect!

    Stated alternatively using The Virginia School of Political Economy: The current minimum wage argument, installment 1,345,975 of manufactured moral melodramas, where the economically uninformed, many times coming in the form of the do-gooder, hold forth notional propositions as empirical, argue through verbal virtuosity, and the ensuing legislation [a good dose of snake oil] creates negative cascading unintended consequences.

    Apparently there really is a difference between the benighted and the “beclowned”.

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  16. One of my favorite things to do to test out the counter help, is when they say "That'll be a dollar", I'll say "When?".

    Then I just stand there for a second to see if they're actually listening.

    It's pretty low odds, but on occasion I get a smile and a laugh. One time I even got one to say "Right Now!".

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  17. You may enjoy the other side of the story

    http://www.econjobrumors.com/topic/this-jerk-came-into-my-mcdonalds

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  18. My wife and I are in Florence right now. There is an upscale restaurant that has ipads at each table for ordering. Soon there won't be waiters and instead of spit in your food there will be motor oil.

    McDonald's has been skimping gradually for quite a while. The patties have steadily decreased in size. They keep the sugar packets behind the counter, etc.

    We often take our dogs with us on road trips. What was really disturbing on the last trip was our stop at a McDonald's where we got a couple of plain burgers for the dogs. THE DOGS WOULDN'T EAT A MCDONALD'S HAMBURGER PATTY. That's our last stop ever at McDonald's.

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  19. Dr Cochrane,

    here's a fact that I thought you might be interested in knowing: the average age of a fast food worker has gone dramatically up during the past decade in the US; it's currently around 30 years old, wherein in 2002 and it was around 22.

    (source: http://www.davemanuel.com/2011/04/21/the-average-age-of-a-fast-food-worker-in-the-united-states-is/)

    So the idea that these employees are teenagers at the start of their careers isn't, at this current period of time, correct. This may or may not change your analysis, in the sense that it seems that McDonalds is no longer providing performing the role of 'the first job experience' you attribute to it, or, at the very least, is doing much less so than before.

    Also, I have a question: if the minimum wage goes up, do you think we should see increases in wages of other low-tier workers, both at McDonalds and other places, who receive more than the minimum wage?

    Thanks.

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    1. History shows that indeed, an increase in minimum wage increases wages of those near minimum wage.

      Businesses that want, or need, employees that are more capable than the average minimum wage worker are forced to increase their wages to maintain their ability to attract better than minimum wage employees.

      In general, an increase in minimum wage is inflationary, so likely to result in nominal, if not real, raises all the way up the employment structure.

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    2. and reduces employement for those seeking minimum wage work... Why can't you get this through your thick skull?

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    3. "Minimum wage workers tend to be young. Although workers under age 25 represented only about one-fifth of hourly paid workers, they made up about half of those paid the Federal minimum wage or less. Among employed teenagers paid by the hour, about 21 percent earned the minimum wage or less, compared with about 3 percent of workers age 25 and over."

      http://www.bls.gov/cps/minwage2012.htm

      So the idea that if they are earning minimum wage working at a McDonalds then they are likely a teenager IS correct. You are making the assumption that all McDonalds employees are earning minimum wage therefore you can simply find the average employee age and apply that. The reality is that many of those workers are no longer earning minimum wage.

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    4. No, I'm making the assumption that if the median age of a McDonalds employee has shifted upwards significantly by nearly 8 years in a decade and, crucially, if the overall employee structure of the company has not changed significantly in that time period, i.e., no big changes in how many employees are managers vs line workers (and I see no reason that has happened), then it means that there must have been a large increase in the # of workers at McDonalds who aren't teenagers. From there, it seems safe to assume that the # of workers who are at the minimum wage or close to it (I'll get back to this point in a second) and are teenagers has dramatically changed in the last 10 year period.

      I'm very much open to criticisms on all the above points, my original post made a lot of implicit assumptions that should have been made clearer, but without the time and knowledge as to where to look for more finely tuned date, this is the best I can come up with. If you disagree with anything above, by all means contest it.

      Furthermore, I have two direct criticisms and one question about your post above: the data you cite is for the economy as a whole, and although the 'workers paid by the hour' category helps refine the numbers cited, I'd argue that it's still a strong assumption to then conclude that these numbers can be directly overlayed with the fast food industry, much stronger than any of the assumptions I made above.

      Secondly, the data refers to people who earn the minimum wage or below that; we (potentially) need to look at data that also includes people who are close to receiving a minimum wage. Why? Well, that leads straight to my question: would an increase in the minimum wage lead to changes in the wage structure of other workers who receive close to the minimum wage? It's far from clear cut, but these indirect effects could potentially be very large and should be taken into consideration in any analysis.

      Note, I'm not arguing in favor or against a change; I'm merely trying to clear up two things: firstly, there's (potentially) convincing evidence that the average line worker in the fast food industry is no longer a teenager in a first job situation (something that Dr Cochrane claims in his original post); secondly, I'm asking what would be the indirect effects of minimum wage increase on workers close to that line, something that I feel isn't addressed in the original post.

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  20. What is your comments on Saez and Michaillat:A Model of Aggregate Demand and Unemployment, which say that under some conditions raising the min wage will raise the employment, do to transfer from savers to spenders (and a lot of market friction).

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    1. If in a private transaction I forcibly transfer money from savers to spenders that results in the crime of theft. Outside of perpetually living in the Broken Window Fallacy (Fantasy?) it never ceases to amaze me at how casual the Left is about forcibly taking money earned in entirely voluntary exchanges and redistributing it involuntarily.

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  21. I think an increase in minimum wage would allow people, you know, to eat or turn on the heat: http://thinkprogress.org/economy/2013/07/15/2300321/mcdonalds-buget-low-wage/

    Some of the people who commented this post should try to live 3 months with the budget of a Macdonalds employee (today I'm a phd in economics, but I lived a looong time with the minimum wage, in Brazil nonetheless).

    Regards

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    1. Easy answer: try living 3 months on nothing.

      Your "best available alternative" was missing.

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    2. Less easy answer: you don't know the circumstances of people who take jobs. You don't know if they need to live on the income, or anything else about them. They are making a very personal, intimate decision about how to spend their time. As a society, we have learned that it's not appropriate to decide who people are allowed to be friends with, or fall in love with, but somehow we think it's okay to decide whether they're allowed to exchange their time for money. We don't know - nor is it any of our business - what that person wants the money for. A retiree who can act as a docent at a desk in a gallery for $5 an hour might be a very happy camper - but they sit at home, living on a barely-sufficient income and talking to the walls, because that job would offend your sense of morality and wouldn't be enough to live on.

      The minimum wage is not a law that requires businesses to pay people more than they're worth. It's a law that prohibits people from taking jobs that would pay less than the minimum.

      How you can prohibit the poor from taking opportunities, then feel good about yourself, is beyond me.

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    3. It's beyond me that someone says (writes) out loud that it is an opportunity earn less than the minimum wage. It truly baffles me. If you had taken the time to read the article you'd have seen that, in the second line of the budget, Macdonalds says that the employee should get a second job. I'm not sure how this guy is exchanging money for time.

      And really, do you really believe that the example that you used is more commom than the poor bastard that have 2 jobs to eat? C'mom

      Delete
    4. Yes, a job offer is an opportunity. You can either refuse it, because you have better options, or accept it, because it is your best option. Again, if you have better options, you don't have to take it.

      This works both ways. If the employer has a better option, they don't have to offer you the job (or let you keep doing it). If there is a minimum wage higher than your value, the employer may decide the task doesn't need doing, or doesn't need doing as often, or may hire someone whose skills would justify that wage (their productivity is higher than yours), or may automate the task.

      My example of the retiree was just an example - but I'd suggest that when you combine teenagers/young-20s and retirees, we are talking about a large number of people whose lives are threatened by these morality-based laws.

      Whether someone takes a job depends on many factors, which they know and the rest of us may not. Factors include the type of work, the environment in which it's done, the financial/tangible/intangible benefits (like human connections, personal satisfaction, involvement in the community, etc.), opportunities for skill development and professional contact building, the other alternative uses of the person's time, and, yes, the pay.

      I realize that you believe the minimum wage would help the poor, but it won't. By analogy, imagine declaring that if people don't have at least 3 close friends, they can't have any - do you think this would really help unpopular kids? No, it would be a cruel rule.

      Similarly, when you declare that the people with the poorest job skills can't have the jobs that might have been offered to them, do you really think this helps them? It does not: it is a cruel rule.

      I assume supporters of the minimum wage are not acting cruelly because they are cruel people, necessarily, but because they lack understanding, or empathy, or are motivated by a moral agenda that blinds them to the hurt their moral code does to others - much as are religious fundamentalists of the various stripes.

      Delete
    5. Dude, people who could not support themselves should be supported by the rest of the society. Their low productivity is not their fault (hello, 0.1% !!!!), and they are not points in a supply curve. Unfortunately, we do not live in the world of economic models. And I believe you misused the word empathy.

      I could t table the microdata just to disprove you, that the example you used is irrelevant, and people kill themselves with 2 jobs not because they choose, but because they need (shelter and food are not superflous, or are they?). And I won't continue to argue, it's not worthy... or maybe I do lack the understanding, even teaching mas colell a few years ago.

      Delete
    6. Outlawing entry-level jobs that don't support a family is like outlawing bicycles that can't transport a family.

      Or was it, transport a fish?

      Whatever. Total non-sequitur.

      Delete
    7. And I thought only Krugman readers were smug, boy was I wrong. Ok, lets skip the minimum wage question. A family that doesnt earn enough to live (live = each member being able to eat 3 times a day and have a roof). Should they starve and live under a bridge? You can even answer in Latin

      Delete
    8. "Dude, people who could not support themselves should be supported by the rest of the society. "

      No disagreement. None, at all. Never implied it. What I said was that, just because they cannot support themselves, is not a reason for prohibiting them from getting a job.

      Give them social support.

      But let them help themselves, to the extent they can/want to, doing whatever.

      Their low productivity is often not their fault, but it is elitist and arrogant to assume that, just because their productivity is low, the rest of us are entitled to make their decisions for them and deny them the right to do what they can, if they choose, when the opportunity arises.

      And, again, remember that the minimum wage law is not an income guarantee. It isn't a job guarantee. It's a PROHIBITION AGAINST OFFERING JOBS TO POOR PEOPLE. And that's cruel.

      Delete
    9. It's pretty clear that the difference between those who support the minimum wage, and those who oppose it, is this:

      Supporters of the minimum wage believe it will give more money to the poor, because employers base pay rates on federal minimum wage laws more than anything else, and will not substitute higher-productivity workers for workers whose productivity is below minimum wage.

      Opponents of the minimum wage believe it will take jobs from the poor, because anyone whose productivity is below the minimum wage will be rendered unemployable, by law.

      Both intend well.

      Good intentions being, of course, the paving stones of that famous road.

      Delete
    10. "A family that doesn't earn enough to live..."

      I don't understand - how will outlawing their jobs, taking away the little income they have, eliminating the two meals a day they have, improve matters?

      And you call me smug?

      If you want to help them, first do no harm. By all means give them money, but don't outlaw their jobs. Don't reduce them to collecting bottles and cans.

      But, since you wanted Latin: primum, non nocere. Infeliciter, nemo est tam caecus, qui non videre vult. (Translations by google - I know when I'm out of my depth.)

      Delete
    11. Ok, free market? Lets legalize the sale of human organs. There's a demand, and a supply, why not? I'm saying that a market for jobs that pay less than the minimum wage shouldn't exist, it's morally wrong, and the society should support people who could not get a job.

      Delete
    12. Yes, let's legalize the sale of human organs, specifically kidneys. It's rather pathetic that Iran, yes Iran, has essentially no backlog of waiting kidney recipients because they have a functioning market for selling your spare kidney. Instead you would deny someone the right to earn money selling their kidney, the ability for the recipient to get off of dialysis and lead a relatively normal life, AND the huge reduction in medical costs from not having to do said dialysis. And all because you think poor people are too stupid to sell their kidney without being taken advantage of.

      But it IS ok to forcibly take 45% of my income to subsidize lower income (or no income) workers irrespective of their choices such as failing to get an effective education or failing to develop basic job skills or even failing to keep their pants on during high school.

      Delete
    13. Anonymous 3:07, this is Anonymous 6:51 / 6:41 (but not 9:52).

      I think we have arrived at violent agreement. Our difference of opinion is not about what's good for the poor, or what the poor would prefer. It is a difference of morality: jobs below a certain wage level are offensive to your moral code, in much the same way that some people may be offended by pornography; prohibiting simple opportunities for the poor to better their lives is offensive to mine.

      That's progress! I don't know how to resolve the conflict, but at least now we understand the root of it.

      I've persisted with this conversation (and am pursuing similar ones elsewhere), because I think there may be ways to narrow the scope of the problem, but I don't know yet if that's true. For example, I believe many people who share your moral views would feel less upset about a minimum wage job for a not-for-profit organization. I would view it as progress, if we eliminated the minimum wage at not-for-profits: not ideal, but better. It's something to think about.

      Turning to the sale of human organs, I don't have a well-formed opinion on that. It's a more complicated situation. So far, the best objections I can see are that a) organs can be stolen, and b) selling an organ is an irreversible decision that people may be tricked into making. Neither problem applies to taking a low-wage job: no-one can force you to take the job; and even if you are somehow tricked into taking it, the moment you regret it (or have a better opportunity) you can quit. The cost of taking a low-wage job is simply the loss of free time, and time passes whether you are working or not.

      As I've mentioned, if you want to guarantee a minimum income (which, in fact, I do), that can't be done through the minimum wage, because there's no guarantee of the job itself: it must be done separately.

      I'll sign off now. Cheers!

      Delete
  22. Everyone looks at the low wages paid by fast food and Walmart and sees a problem, what they do not see is the true cause.

    There is a curve between unskilled jobs and skilled jobs when it comes to wages, but there used to also be a curve between unskilled jobs and unskilled jobs that are really hard.

    Working in Fast Food and Walmart is easy compared to Landscaping, Roofing, and housekeeping. However, with the inability or unwillingness of our country to enforce our immigration laws, jobs that used to pay a living wage, Roofers landscaping etc. are now done by illegal immigrants, mostly for the same minimum wage that fast food and retail pay. (and often off the books and untaxed so even cheaper)

    If government could enforce the immigration laws and dry up the massive % of illegal workers in harder jobs, the invisible hand of supply and demand would drive up wages.

    Right now Walmart competes with KMart for workers, BK vs McDs. But if Walmart had to compete with a roofer willing to pay $20.00 an hour, what would Walmart have to pay in wages?

    In ND and other oil patch areas, Fast Food workers make $15.00 an hour because there are tons of jobs on the oil rigs that while harder and more dangerous pay more, fast food must pay more than minimum wages just to have staff show up.

    Americans will do anything for enough pay, as an example, look at the popular TV show, "most dangerous catch". A bunch of rather un educated low skilled workers risk death and dismemberment to make tens of thousands of dollars in a fishing season. Why don't the fishing captains use illegal immigrants and pay them less? Because fishing boats cross international borders and are subject to customs inspections when returning. I will bet anyone here that the on shore processors employ a ton of illegal immigrants as cheap labor.

    If you want to raise wages of fast food, enforce the laws so other harder jobs pay more and the competition for workers intensifies.

    ReplyDelete
    Replies
    1. You have heard of "offshoring", yes?

      When you can't move the labor to the work, you move the work to the labor. That labor then pays taxes somewhere else. And when that labor is entrepreneurial, it creates jobs somewhere else.

      Delete
    2. Yep, that's exactly right about offshoring. The last time I needed my roof repaired, I sent it offshore, and it was much cheaper. Shipping costs weren't an issue because I sent it along with my lawn that needed trimming.

      Delete
  23. The capital investment of new machinery may make it difficult for a newcomer to swoop in and overtake McD's. McD's may actually be in a better position, as they have the scale to experiment with and perfect more machinery at test sites before rolling them out to franchises. I don't know if McD's does it, but I know that some Wendy's use a call center to handle drive-thru orders.

    ReplyDelete
  24. Professor, do we need to redistribute wealth? Do you have any doubts that the elites are shredding the social ladder, so they will stay atop forever (and please, don't bring on that awful Mankiw piece)?

    "Young people who work at McDonalds don't get internships at NPR, the New York Times, or Goldman Sachs" - is that because they are naturally inapt, or because their parents are poor enough so they don't beat the odds?

    ReplyDelete
    Replies
    1. Mostly natually inept. Not inapt.

      -Former Burger King Worker.

      Delete
    2. Yes, they are shredding the social ladder, as you put it. How? By limiting upward mobility. For the upper middle class who might threaten their position, they impose ever-higher marginal taxes on earned income. And for the poor, who vote for them, they create poverty traps (including the minimum wage) to ensure that they will always have that base of support.

      It always astonishes me that people well-educated enough to sneer at creationism, nevertheless believe the minimum wage is good for the poor.

      Delete
    3. I believe that is because of their parents poverty, and I bet you know thousands of Burger King Employees much smarter than you.

      In portuguese inept is "inapto", that was my mistake... so I truly ask for your forgiviness.

      Delete
  25. A most poignant plea against a minimum wage, or at least a high one. Free-marketeers got no heart? We got more heart than all the rest put together! Consequences matter.

    ReplyDelete
    Replies
    1. Please, pleeease, read this piece, you warm, big hearted free marketeer!: http://thinkprogress.org/economy/2013/07/15/2300321/mcdonalds-buget-low-wage/

      Delete
    2. The referred article is a joke

      Delete
    3. No, (unfortunately) it isn't: http://www.practicalmoneyskills.com/mcdonalds/budget/budget2.php

      Delete
    4. To the anonymice with the McDonalds worker budget -- did you read Frank's post? Or the article we're commenting on? Consequences matter. You can complain all you want that McDonalds workers don't make enough money, but if your solution is to raise the minimum wage and put them out of work entirely then *you're* the problem, compassionate as you think you might be.

      Delete
    5. Yes, and yes. Do you think that they make enough money? Do you think it's fair that millions have to choose between clothing and eating? Whats *your* solution?

      Delete
    6. And yet somehow America struggles with world-leading obesity. Oh, it must be that they have to choose between eating the RIGHT food and clothing. Do you think it's fair to confiscate the property of others to fix that problem? Is it fair to force those who did get an education, who did save, who did acquire skills to subsidize those who did not? And just for the record I grew up in a single parent home and my mom worked two jobs for most of her life so I know firsthand that everyone has choices and opportunities. Whether they choose to do something with their lives is up to them.

      My solution is massive deregulation and opening of free markets. Your precious government has made us all much poorer.

      Delete
    7. Between you and the guy who thinks it's ok to regulate the human organs market, this blog is a really interesting microcosm of whats wrong with people... Nice posse, John!!!

      Delete
    8. Yeah, because these guys over here http://richkidsofinstagram.tumblr.com/ reaaaally worked their tails off to, and I quote, "get an education, (...) save, (...) acquire skills".

      Delete
  26. This post makes me hungry...

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  27. Love your Blog, taking your course at Coursera. Regarding your last conclusion, "All that will be left is cleaning." Don't forget about robot vacuum cleaners (I bought a chinese one for $70) and everything else that will come from the revolution in robotics!!

    ReplyDelete
  28. Hi

    What do you make of the argument that minimum wages correct monopsonies? Difficult to detect and implement, for sure.

    Tony Yates

    ReplyDelete
  29. I think you miss the amount of automation that has taken place. It also includes shifting the labor to the customer (like the ordering app). When you went as child were self serve drink stations the norm? Not anywhere I went, there were always 1 or 2 people behind the counter just preparing drinks (go to a McDonald's in the morning and you will still see it, as they have not shifted coffee preparation to the customer). Also the setup for preparing food is very different - they have stations with everything in warming trays, rather than a grill and fryolators, this way they can offer multiple variations of chicken sandwich very easily. Frying french fries is automated, and on and on. I would bet if you look at the labor hours per sales in any McDonalds it has dropped substantially over the years. This is one of my key complaints about the Card/Krueger paper, they never allowed for time for automation to kill jobs. I don't if one could dig up the data, but it would be interesting to see if labor/sale changed substantially from to prehike to 1 and 2 years after.

    ReplyDelete
  30. John,

    as a fellow libertarian and opponent of any kind of minimum wage, I quite like reading your blog. However, the arguments presented in this post seem rather stupid to me. You getting angry because some McDo cashier couldn't calculate your change. That isn't even a concern. Like you said, they have their machines to do the calculations for them. Are you really saying these people are to stupid to subtract 7.62 from 10.12? Nobody, and I repeat nobody in this world is that stupid. It's just that in todays world, nobody needs to do this. I think it's pretty redicioulus that you mention this. The argument that in todays hyperconnected world, with complex markets, only humans can indeed respond to such complexity, seems rather valid to me. That's why humans won't be obsolete in the near future and probably never will be. In the end, computers (and machines) are stupid and can only do what a human tells them to do.

    ReplyDelete
  31. Though, McDonalds does make it weirdly difficult to order your food. I order the same thing everytime, and they basically make me repeat it three times every time I go. I'm contemplating printing my order on business cards and just handing it to them...

    ReplyDelete
  32. I think there also needs to be a good debate on the education system in Canada and the US. We spend billions and billions of dollars on the k-12 and post secondary education systems to turn out people that end up working in minimum wage jobs and can't even do those well! We have a k-12 system that can't produce graduates with a good grasp of the 3rs (I know I'm old fashioned, but when I have to correct basic math done by high school graduates I get angry) and we have universities and colleges scamming students to pay them huge amounts of money to get worthless degrees in media studies, gender studies, communication studies, First Nations studies, etc. etc. and yet we are lacking in engineers, geologists, IT people - anything that requires STEM courses!!! We have left the future labour market in the hands of 18 and 19 year olds who have been told by their k-12 teachers that they are special and that anything they touch is golden - no wonder they are angry when they graduate with $50,000 plus of student debt and find that the minimum wage job is their best option.

    ReplyDelete
  33. I think you're ignoring the supply effect that decent wages have on labour, as well as the existence of numerous implicit subsidies on low wages retarding capital formation. The EITC comes to mind.

    Oh, and there's the ever-present employer oligopsony, depressing wages below marginal productivity and down to margrinal revenue. You can see it in the US, where wage-productivity ratios have been eviscerated over the last four decades, especially at the nonsupervisory level. During the "Bush Expansion" from 2000 to 2007, 15-64 employment fell 3.2%. During the data we presently have on the Great Recession? From 2007-2012 15-64 employment fell 3.8%

    Low wages destroy jobs without promoting capital formation.

    ReplyDelete
  34. Professor Cochrane,

    As a Chicago grad and finance geek, I am an admirer of your work. This post is clear and informative -- thank you for sharing it. However, if you would like to maximize your chances of convincing readers who don't already share your views, I suggest dropping the subtly (and sometimes not-so-subtly) derisive constructions and references to others: "liberal elite," "NYT and NPR," "GMO... etc". It puts me off, and I am not a bleeding heart. With political discourse in this country in such a sorry state, my friendly suggestion is to let your thinking speak for itself. Avoid falling into the culture of dismissing the intent or "groundedness" of others where possible. I believe this will help your ideas and your analysis travel as far as possible. Thank you.

    ReplyDelete
  35. Minimum wage is not the only force stimulating automation. Automation is a natural force that can, if managed well, can improve everyone's life. The secret is in figuring out how to share the wealth. When I was earning my industrial engineering degree in 1960 we studied automation and our role in its development. When I asked the professor what will become of all those who lost their job because of automation the answer I received was – "we will all own the machines". Unfortunately ownership is going more and more to fewer and fewer people. That is the true problem that we must solve in order to survive.

    ReplyDelete
  36. Your comment as to one of the reasons they should not need a raise to the minimum wage is that they are not skilled enough to deserve it. That may not be exactly the case. It may be that they don't make enough at that job to bother caring.

    Current McDonalds employees make the minimum wage. At $7.25/hr, that comes out to $15k per year if they work 40 hours a week, 52 weeks a year and never take a vacation. (knock off $1000 if they were to also have 3 weeks of vacation since hourly people aren't entitled to that).

    Since these people are well below the poverty line if they have a family to to support, they are probably worried about their next job that night and still try to take care of their family. In fact, McDonalds actually encourages their employees to work 2 full time jobs to make ends meet from their own financial planning site.

    So, if someone were to throw change at me after I run up their order and tendered what they originally gave me, I wouldn't care either. Not because they can't, but probably because after working 60-80 hours a week every week without a break, they just don't give a fuck.

    And personally, I am all for slightly increased prices to give these people a living wage. What is 25-50 cents extra for me? As a consumer of these products, it is fair that I pay what they should really be worth to the suppliers and the employees that provide them if that is a service I desire. That sad part is since they are all sub-poverty, they now qualify for WIC, food stamps, welfare. This shifts the burden of their low wages onto all American taxpayers, while the executives at these corporations like McDonalds can protect their personal profits. If a single person (ie McDonalds CEO) can pull in almost $25,000 dollars per day as his salary (not to mention the amounts of his entire executive team) while making the American public help pay the salaries of his employees, that is what is not right.

    ReplyDelete
  37. People who write these articles need to find a new argument. This is the same argument that has been used everytime the minimum wage has increased or was established. If they were and are correct then why hasn't their dire predictions come true?

    ReplyDelete
  38. The problem is people skilled or unskilled are fighting over any jobs that pay a living wage... There should be a salary gap for skilled workers but our economy is leaning the other direction.

    ReplyDelete

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