Former Joe Biden chief economist Jared Bernstein has a piece up at PostEverything extolling the virtues of the $20/hour wage rate paid to McDonald’s employees — and other fast food workers — in Denmark.
The base pay for a fast-food worker in Denmark is $20, and the pay package includes considerable non-wage benefits, including five weeks’ paid vacation, paid maternity and paternity leave and a pension plan. What’s the U.S. fast-food pay package? Um…not so much. The average hourly wage is $8.90, with few benefits, and the base wage is closer to $8.
Now, this huge difference poses a huge problem for those who want to argue that such compensation levels are set solely by the market fundamentals of supply, demand and productivity.
I don’t know too many people who argue that that compensation levels are set solely by the market, but lots of free market advocates argue that compensation levels should be set solely by the market.
Surely those factors play a role, but the difference in pay is too large to be explained by market factors alone. Denmark and the United States are different countries serving different markets, but a burger is a burger — and we’re not in different universes.
Clearly, Bernstein doesn’t know very much about burgers if he thinks they’re all like Big Macs, but I’ll grant that McDonald’s burgers are probably mostly the same everywhere. But that doesn’t mean that McDonald’s restaurants are operated the same everywhere. I’m guessing that a McDonald’s with those labor costs operates a bit differently than the ones I’m used to.
An economy is a complex system, and trying to push it around often produces unintended consequences. Bernstein implies that the higher pay for McDonald’s workers comes at the cost of making restaurants less profitable. If that’s the case, then we would expect that the higher wages would force McDonald’s to cherry-pick its best locations for restaurants, and drop all the less profitable locations, or never build anything there in the first place.
And indeed that seems to be the case. In proportion to its population, Denmark has about 1/3 as many McDonald’s as the U.S. Now I’m not saying that Denmark could triple the number of jobs in its fast food sector by allowing lower wages — there are undoubtedly other factors explaining the relative lack of McDonald’s — but the high wages probably aren’t helping, and if they’re widespread in other sectors of the economy, they may be contributing to the high cost of living in Denmark.
Denmark does have a much more balanced distribution of income according to World Bank estimates, but their overall income is lower, with the average person in Denmark earning a GDP per capita that is about 80% of what U.S. residents make. Denmark also currently has an extra point of unemployment.
Naturally, the higher labor rates raise the prices on a McDonald’s menu:
Of course, burgers cost more in Denmark. A Big Mac is $5.60 there, compared to $4.80 here. But that price difference is dwarfed by the wage difference. Not that she’d necessarily want to, but a Danish worker can buy almost twice as many Big Mac’s on her wage than her American counterpart.
A worker at McDonald’s could buy almost twice as many Big Macs on her wage, but every other person in Denmark who is not a McDonald’s worker can only buy about 85% as many burgers as their American counterparts because of the higher price. The burger price increase may not be as steep as the wage increase, but it affects many times more people.
Here in the United States, we’re all about lower prices. What we often fail to do is connect lower prices to lower wages. In part, that’s the result of a national economic model that puts the consumer at the center of the action.
That’s a little mixed up. Prices and wages are connected, but not just in the way Bernstein suggests. Let me see if I can explain what I mean.
To keep it simple, let’s suppose you work for one hour a day for $10 per hour, and you spend all $10 every day on food at McDonald’s. Day in, day out, that’s your routine: Work for an hour, buy food to stay alive.
Then one day, you negotiate with your boss for a 10% raise. Now you make your daily trip to McDonald’s with $11 in your pocket. You still spend $10 on a burger, fries, and a drink, but you have $1 left over to spend on something else — maybe a mini-desert at McDonald’s, or something to read, or maybe you save up and buy an article of clothing. Whatever you buy with that extra dollar is the tangible manifestation of your increased income.
But suppose that when you get to McDonald’s, you’re shocked to discover that prices have gone up 10%, so your regular meal now costs $11. You can still afford to eat, but don’t have money left over for anything else. Once again, you’re working an hour a day and spending all your income on the same food. Your quality of life has not changed. Your income has gone up in nominal terms, but in reality nothing has changed because you are not able to consume any more than before.
Finally, let’s back up and suppose your negotiation with your boss failed, and you still earn $10 an hour. Feeling a little dejected, you stroll into McDonald’s only to receive a pleasant surprise: McDonald’s has cut its prices by 10%. Your meal now only costs $9, meaning you have $1 left over to spend on something else, just as you would have if you had received a 10% raise. By lowering its prices, McDonald’s has effectively given you a small raise.
The true measurement of your income is not the money that you’re paid, but the goods and services you can consume. You are better off if your employer pays you more money per hour of work, but you are also better off if the production of things you buy becomes more efficient, so you can buy more stuff for the same amount of money. The money itself is only the medium of exchange that you use to convert your hard work producing goods and services into an improved quality of life by consuming goods and services. In fact, we can take the money out of the equation entirely and conclude that your quality of life is directly related to the amount of goods you are able to consume for every hour of work you do.
If we expand our view to encompass the whole economy, it’s pretty clear that we can only consume as much as we produce — because those consumer goods and services don’t materialize out of nowhere. (I’m ignoring fluctuations due to imports, exports, and warehousing for the sake of simplicity.) So the more we can produce in an hour, the more we have available to consume. Or to put it another way, the less labor it takes to make something, the more of that thing we can produce with our existing labor force, and the more we have to consume.
Labor productivity has increased dramatically in the developed world, and it has made us rich. Historically, keeping humanity fed used to require the labor of anywhere from 50 to 80 percent of the population, including women and children. But over the past few hundred years we’ve figured out much more efficient forms of agriculture, and the percentage of agriculture workers in developed countries like the United States has fallen to less than 2 percent.
All those people who used to labor at farming are now working to produce everything else we have — sturdy housing, reliable transportation, electric power, advanced medicine, colorful clothing, instant communications, stimulating entertainment — all the advantages of our modern civilization. We have so much more than our ancestors because it’s all so much cheaper to produce.
In denouncing the pursuit of low prices, Berstein is attacking the source of our prosperity.