Minimum Wage Math

What is a cynic? A man who knows the price of everything and the value of nothing.

Oscar Wilde (1854 – 1900), Lady Windermere’s Fan, 1892, Act III

 

This topic may seem political but I don’t as a rule do political writing. However, there is a lot of political writing out there about the minimum wage and everyone seems to be trying to use math to lend weight to their wildly varying opinions.

And that’s where I step in.

One of the problems facing the number-phobic is that there are people who will use your fear against you by throwing numbers, percentages and equations at you in order to intimidate you into supporting their position. My primary goal in my writing here is to help you get over that fear so you can tell when someone is trying to cheat you or lie to you using math. This is not a new thing. As Mark Twain famously said, “There are lies, damn lies and statistics.”

Both opponents and fans of raising the minimum wage throw around a lot of numbers so I decided to dive in and see if I could separate the wheat from the chaff, as it were. I pulled up a spreadsheet and started to put together some actual, researched numbers along with some reasoned assumptions of my own. Since everyone seems to be picking on McDonalds, that’s where I began my quest.

Remember, this isn’t about politics. I’m just trying to see where the actual numbers take me.

One problem with the current assumptions in the debate is that you can’t treat McDonalds as a monolithic operation. The corporation makes their money through franchising. In fact, about 80% of the restaurants are independently owned and operated. So to figure out costs, it doesn’t make sense to look at the company as a whole. You have to focus in on an average individual restaurant.

That’s where things get tricky. You see, I was trying to figure out how much raising the wages of employees would increase costs, thereby (in theory) how much prices would have to go up in order to at least break even. So I was able to find out, among other things, how much it costs to own and operate a franchise, average labor costs for restaurants, about how many hours a part-time employee works at McDonalds and average annual sales for a McDonalds franchise.

But after a while I found that my assumptions had to get more and more complicated. In addition, there were some numbers that were impossible to get. (For example, there’s an annual audit fee for franchise holders that is simply specified as ‘cost of the audit’). I concluded that unless we pin down a specific franchise holder and get them to open up their books (and I mean all of their books and I mean open), we’ll never actually know the effect of raising the minimum wage until we actually do it.

Another part of this has to do with economics. Economics is basically math plus people. The math is pretty straightforward. It’s the people part that gets complicated. For example, if you decide to employ fewer people in response to a higher minimum wage, doesn’t this mean that you won’t be able to service as many customers and will end up losing money anyway? What if we replace the laid-off workers with automation? I’m not sure what exactly will happen but we may want to ask supermarkets how their self-checkout lanes are doing.

As I dove deeper and deeper into the numbers, it suddenly occurred to me that I was looking at the wrong thing. As long as you only focus on what it costs the employer, you are not only going to never get accurate numbers but you’re only seeing half of the picture. Not to mention that you give people the excuse “Well, I never eat at McDonalds/shop at Walmart/etc. anyway so it doesn’t affect me”.

This is not a political post so I’m not going to impugn motives to either side of the argument but it’s a classic piece of misdirection, like when the magician focuses your attention on his right hand while his left is putting the playing card in your pocket.

It turns out that, while private sector financial numbers can be difficult to come by, public sector ones are very easy, thanks to the Open Government Initiative and similar regulations. Overall, it doesn’t matter whether McDonalds will have to lay off workers or raise their prices or let robots take over the fry grill if the minimum wage goes up. Corporations have been laying people off, raising prices and automating jobs for many, many years.

Consider this, however. In Colorado, where I live, a McDonalds employee making minimum wage (even with full-time hours) qualifies for both Medicaid and food stamps. Over the next ten years, Colorado is set to spend over 3 billion dollars per year on Medicaid and almost a million dollars per year on food stamp assistance. So, as taxpayers, we are all effectively subsidizing the low wages at businesses like McDonalds and Walmart. Raising the price of a Big Mac by fifty cents doesn’t change that one bit. Raising the minimum wage would.

It’s not politics, it’s just math. When you do a math problem, you need to look at all of the numbers.

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