So, Why Is There A McDonald's $5 Meal Deal?
Can anyone say minimum wage rises?
It’s terribly unfashionable to say that minimum wage rises have any effects - other than that the minimum wage workers earn more, of course. It’s supposed to be one of those areas where only good things can come from pokeing a stick in the market. The justification is that the only jobs these folks can get are slinging fries (If that is the case then I’d probably start with education system reform so that grievance studies graduates are skilled enough to do something else but maybe that’s just me), therefore MaccyD’s and the like have a monopoly on employing them (a “monopsony”) and so omniscient and caring politicians and bureaucrats can correct this market error without there being any side effects.
Hmm. Seems unlikely but that is the story.
Part of the background to this is the Card and Kreuger study. Which looked at chain restaurants at a time of a rising minimum wage and noted rising employment, not falling. So, take that free market liberals!
My own answer to that was - having spent some part of my working life in the restaurant world - that studying chain restaurants doesn’t in fact study the marketplace. There’s the Mom and Pop sector, there’s the chain. And the chain sector is very much heavier on capital usage, lower on labour, than the Mom and Pop. So, it’s possible to construct a model in which the Mom and Pop sector declines with a min wage rise, the chain expands. Job losses happen overall, the sector declines overall, but by studying only the chains you are looking only at the capital intensive part of the overall sector.
My guess is that that is the explanation there. Note that I’m not an economist so I’m not going to try to prove it. But somewhere between informed speculation and a prejudice.
OK, so now we’ve this MaccyD - and then Burger King and all - $5 meal deal coming up:
McDonald’s will roll out its $5 meal deal from June 25 for a limited time at some restaurants across the U.S…….Restaurant Brands International-owned rival, Burger King, is also considering a $5 “Your Way deal”
OK, so why?
….as companies turn to improved offers and promotions to counter inflation-hit customers who are increasingly opting to eat at home.
Ah.
The standard economics of a minimum wage rise is - well, was before the progressive smokeblowing about monopsony - that the money’s got to come from somewhere. It could be that profits fall and therefore there’s less investment - even a move away from having invested in - that activity and so employment falls. Or, wages are higher for those fewer people employed and some lose their jobs - also known as rising productivity and also known as fewer jobs. Or, customers get to pay higher prices, fewer now buy the item and so employment fall as the sector shrinks.
Hmm, well, we can get all serious about monopsony but that one doesn’t work to my mind either as even if profits were excessive a fall in them will still lead to less investment in the sector and we’re back at option 1) above. But, many have convinced themselves.
But here we’ve got a general agreement that Americans are eating fast food less. They’re eating at home more. The only thing that’s changed in the varied cost structures is the price of fast food labour. Sorry, the only thing that’s changed in the *relative* cost structures is that labour as the minimum wage is pushed up. Whatever food inflation has been it’s been no better or worse for MaccyD’s than it has been in Albertsons or King Super. It’s also true that US real incomes have been rising so it’s not a general retreat on the part of consumers. The price of fast food relative to home prepared has risen, people are buying less fast food. The only cost pressure causing this is the pushing up of the minimum wage in recent years (for chains, in California, it’s now $20 an hour).
Myself I take that as being proof of the original and base minimum wage argument in standard economics. Trying to recoup that fall in sales is what is leading to these special offers - and don’t forget they’re special, not for all time and so should be considered advertising, not a long term change in price levels.
As a larger lesson I take it to mean that we should be very wary indeed of those claiming that there’s some special little economic trick that makes what they want to do anyway such a good idea. Why, yes, that does include any special little tricks I might want to claim. But many really did convince themselves that fast food wages were different, that pushing them up would have only good, not ill, effects.
Seems it ain’t so.
The Card-Krueger study that claimed increasing minimum wages won't hurt employment has been cited thousands of times in other studies, but almost nobody has ever looked at it and seen what a complete disgrace it is. Had a study like this been submitted to a journal in any real science it would have been tossed in the trash, yet Card won an economics Nobel for it.
In my book with the same name as my Substack, I wrote an appendix exposing its flaws. I don't think I can attach the appendix to this comment but I'll be glad to send it to anyone who wants to write me at rick [at] rickteller dot com. To give you an idea of a few of its flaws:
1. The law raising the minimum wage in New Jersey was passed over two years before it went into effect, giving restaurant owners a long time to change their ways to reflect the coming jump in wages. Yet the "before" in the study was only a few weeks before it went into effect, ignoring everything owners had done for two years to reduce labor expense before then.
2. In the early 1990s fast food restaurants were still growing very fast at the expense of mom-and-pops, yet the study didn't survey the latter. The lack of employee layoffs likely largely reflected fast food restaurants grabbing share as the mom-and-pops went under.
3. In the US, the owners of one or a few fast food outlets must typically personally guarantee the lease payments. The study looked at employment less than a year after the increase went into effect. But even if an outlet was losing money, it doesn't make sense for it to shut down until the lease ends, because the owner is on the hook either way. The study never bothered to check if leases ended after the study's "after."
There were just some of the flaws I covered. As I summarized it, more politely than I would have said in person, "Economists can advance very far in their profession despite being unaware of how businesspeople think and operate."
No, minimum wage workers don't *EARN* more, they are *PAID* more. The *ENTIRE* *POINT* of a minimum wage is a floor below which regardless of the value of the work, the *PAY* cannot drop.