What McDonald's Shows About The Minimum Wage

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On Nov. 29, 2012, dozens of fast-food workers assembled at a McDonald's in Midtown Manhattan to demand better pay. Their demonstration kicked off a massive wave of protests for a $15 minimum wage. Since then, cities and states around the U.S. have taken action. And now, the federal government, led by President Biden and a Democratic-controlled Congress, has begun to consider making the $15 minimum wage national.

McDonald's is one of the nation's biggest employers of low-wage workers. As such, it was kind of the perfect place to launch what was, in retrospect, the beginning of a historic labor movement. A new study by economists Orley Ashenfelter and Štěpán Jurajda suggests McDonald's is also kind of the perfect place to test the effects of the minimum wage increases that workers have been fighting for.

Ashenfelter is an economist at Princeton University, and he has spent a couple of decades studying McDonald's. Back in 2012, when he was president of the American Economic Association, he even dedicated part of his big presidential address to the company. And it wasn't just because, as he told us, his "favorite meal is fries, a chocolate shake and a Big Mac." He views McDonald's as a kind of natural "laboratory" to compare and contrast different labor markets. I mean, think about it: Each McDonald's restaurant is pretty much the same. The workers have almost identical jobs, regardless of which part of the world they're in; the food they make is generally the same; and McDonald's restaurants are basically everywhere.

Meanwhile, over the last decade, a McFlurry of cities and states has been raising their minimum wages. In their new study, Ashenfelter and Jurajda use McDonald's restaurants as kind of like treatment and control groups to assess the impact of these new minimum wage laws. They obtained data on hourly wage rates of McDonald's "Basic Crew" employees, the prices of Big Macs and other information from about 10,000 McDonald's restaurants between 2016 and 2020. And they crunched the numbers to see what happens when a city or state increases its minimum wage.

One big fear of a higher minimum wage is that it could cause businesses to replace their workers with machines. Ashenfelter and Jurajda found that some McDonald's restaurants have already installed touch screens so customers can input their meal orders without interacting with a human being. But they also found that those touch screens weren't installed in response to higher minimum wages. "We couldn't find any relationship between minimum wage increases and the adoption of touch-screen technology," Ashenfelter says.

Not surprisingly, Ashenfelter and Jurajda found that McDonald's restaurants raise their wages after a city or state raises its minimum wage. More surprisingly, they found that a substantial fraction of restaurants preserve their pay premiums for workers who were previously earning more than the minimum wage. That is, if a worker was making a dollar more than the old minimum wage, many McDonald's will make sure those workers continue to make a dollar more than the new minimum wage. Ashenfelter says they don't have hard evidence for why this is, but he believes it's because certain restaurants want to offer wages slightly higher than the legal minimum as a way to reduce turnover. Paying above the minimum wage creates a kind of magnet for workers. Overall, the economists found that if the minimum wage goes up by 10%, the average McDonald's restaurant will increase worker wages by about 7%.

Finally and perhaps most thought provokingly, the economists looked at the effects of minimum wage hikes on the prices of Big Macs. They found that when the minimum wage goes up, the price of a Big Mac goes up too. Ashenfelter says the evidence from increased food prices suggests that basically all of the "increase of labor costs gets passed right on to the customers." But because low-wage workers are also usually customers at low-wage establishments, this suggests that any pay raise resulting from a minimum wage increase might not be as great in reality as it looks on paper. In econospeak, the increase in their "real wage" — that is, their wage after accounting for the price of the stuff they buy — is not as high, because the cost of some of the stuff they buy, such as fast food, goes up too.

However, Ashenfelter says, the fast-food workers they studied were still, on the net, much better off. "They still get a raise. They just don't get as big a raise as it may seem," he says. In effect, a minimum wage increase appears to be a redistribution of wealth from customers to low-wage workers. Ashenfelter says he thinks of it like a kind of sales tax. And for whatever reason, unlike with many other types of taxes, the minimum wage tax seems to be more popular with voters — even in many red states, like Florida, where they're voting to increase the minimum wage.

The one big disappointment from Ashenfelter and Jurajda's study is they're unable to tell us much about the effects of minimum wages on employment, which is at the center of the debate about the policy. They couldn't obtain data on hiring and firing from McDonald's restaurants around the nation.

It's worth remembering that McDonald's was also at the center of the famous study by David Card and Alan Krueger that revolutionized economic thinking about the minimum wage. Card and Krueger found no evidence that New Jersey's hike of the minimum wage from $4.25 to $5.05 an hour reduced employment at fast-food restaurants there. Would the same happen in the entire nation if the federal government raised it from $7.25 to $15? Last week, the Congressional Budget Office, while saying a $15 minimum wage would reduce poverty, cast doubt on the idea that there would be no substantial job losses.

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