Minimum Wage

My cousin recently asked me what I thought of this article talking about how the USA's minimum wage leaves many below the poverty line and needing assistance. I didn't think much of the article, actually. I'm not an economist and there are undoubtedly many subtle points to raising a minimum wage, but none of those were explored. The article never goes beyond gut-level reactions, slapping around a few ominous, but not so meaningful, stats and then a silly judgemental statement about McDonald's (and btw, how is this problem fundamentally related to McD's??). Let's explore the framing of the article:

1. New research shows more than half of low-ware workers at fast-food restaurants rely on public assistance to survive - a rate double that of the overall workforce.
Why yes, people who make less money will get more assistance. Also, this isn't unique to the fast food industry. Other minimum- or low-wage jobs are equally affected. Why is this article only talking about fast food? Why not be more powerful and generalize to all such workers in the country? Is it because it's easier to make McDonald's look like the evil lord of just the fast food industry instead of all low hourly wage jobs? And while we're at it, if we make the highly plausible assumption that need for assistance is heavily correlated with lack of income, it's simply a matter of choosing what "low" wages are defined as to get the above result. It's basically meaningless, other than to say "there is a segment of the population that needs twice the assistance as the rest". Duh.
1a. According to the research, low wages in the fast food industry cost the tax payers $7B a year, more than the entire budget of the CDC!!
Math time: $7B divided into 300+M people, factoring out those are poor, let's say ... no more than $40 per person per year? So $40 of the $15,000+ I paid in taxes last year go to help the needy. I'm pretty ok with that. I'm happy to make that $80. $7B sounds like a tremendous number, but it's not really very much on a national budget scale. I'm frankly far more concerned about the several hundred billion a year that heart disease and diabetes (which is at least partially tied to the fast food industry) costs us in medical care, and that doesn't even include lost productivity, disability, etc. Again, what does the CDC have to do with anything here? This is just a sensationalistic comparison. Most people have heard of the CDC, so they assume it's something huge. I just ate an orange, which has more vitamin C than all 3 of the cars I've owned, combined!!
2. A study has found that McD's alone costs Americans 1.2B a year by paying insufficient wages.
Finally something concrete! I do wish they'd gone ahead and just presented a table of wage-vs-average-assistance-needed, but that'd be too nice of them. Let's keep this number in mind as data is brought up about the fast-food labor strikes and McD's profits.

Now we move into a transcript of hosts Juan Gonzalez and Amy Goodman, along with guest Jack Temple, a policy analyst from the National Employment Law Project. We'll notice that Amy and Juan are already pretty well in agreement with Jack, so the entire conversation is really just an echo chamber. There are no hard questions (or really questions at all). I usually associate this kind of setup with a person attempting to leverage another organization to legitimize their position, or in some cases to have both sides co-legitimize each other.

Juan: [same as framing] and the top 10 fast food companies made $7.4B in profits last year.
Amy: While CEOs are raking in record profits, fast-food workers protested to be able to form a union and make $15 an hour. National minimum wage is $7.25.
This is a conflation. CEO wages are certainly higher than ever before, but the largest companies are also larger than ever and more global than ever. This is simply market response. If a company has revenue of $10B, a 1% better CEO is worth $100M and is easily worth $10M more per year. While lots of people complain about the ratio of CEO-to-average employee going through the roof, company sizes are also increasing. Each employee relies on the CEO and senior management for their job to persist, so some fraction of their earnings should be allocated there. More employees = more company = more the CEO's value is. Amy's statement also implies that McD's employees are making $7.25, but this may or may not be the case. Again, all definitions of "low wage" and "poverty level" and similar are missing.
Amy then quotes Shantel Walker, a fast-food employee: I've had numerous jobs, and each starts back at $7.25. It doesn't matter where you work. That's the irony: that it's not just fast food, but other industries as well.
Shantel calls out that this issue is not limited to fast food, yet our panel continues to focus on fast food only, and mostly McD's at that. Shantel's quote also implies an important truth: these are not skilled jobs. These jobs can always be filled by an employee with no experience. This is the crux of an issue I'll elaborate on later, but basically there's no reason to give them more money. They are easily replaceable.
Jack: my report is really important and it shows that no matter what, this industry is costing you money, and therefore significantly affecting the economic growth of the country.
Well Jack, that's a bold statement. The GDP of the USA is $16.6T, and assuming this assistance money could be magically eliminated, we'd save ourselves a burden of $7B. Again, I'm no economist, but this isn't even a tenth of a percent of the economy. I'm now going to be cross-checking all your claims more carefully.
Juan: Jack, counterarguments include that McD's and BK's restaurants are franchises and are therefore effectively small businesses and that the wages are low because these are entry-level jobs from which employees are expected to move on.
I believe what Juan is referencing is that small businesses are less likely to have cash to invest in a higher-skill workforce. Since McD's locations are actually operated semi-independently by a franchise owner, they are effectively a conglomerate of very small businesses. Also, it's less about people moving on to other jobs and more about ease of replacement. There's little incentive to invest more in an employee and keep them longer when their skill-set is easy to replace for cheap.
Jack: Facts refute both of those. for all the talk about small businesses in the industry, McD's made $5.5B profit last year ...
Well, that's entirely ignoring the fact that each McD's location is a franchise, but continue ...
Jack, cont: McD's corporate exercises a lot of control over locations. They determine just about everything, but suddenly they don't determine wages? They infer wages by the control the exercise.
Sort of ... there's definitely some truth to this. McD's corporate controls all aspects that would affect their brand. This includes the food, the machines ('process'), logos, etc. However, some franchises operate in great locations and others in less-great locations, which certainly affects the volume of business each location does. It's not like McD's corporate has an equal-outcome consequence on every restaurant location.
Jack, cont: Regarding entry-level workers, this industry actually employs much older people than we'd expect. 70 percent of workers are over the age of 20, 30 percent of those** are supporting children, which adds to the public support cost.
I don't like this statement for a few reasons:
1. "Entry-level" does not mean "high-school job". It means "job with no prior experience or training needed. He's confusing age with skill set. It's a reality of the world that plenty of people old enough to have gone to college haven't, and haven't gained any other skills either.
2. Even if "entry-level" was tied to age, his stat has a cutoff at age 20. This is still in the very early phases of career development and includes kids in college trying to make money on the side, etc. Why not a percent of people over 25? over 30? This makes me feel like he cherry-picked this stat because it sounds bad.
2a. "30 percent of those" is vague. Is that 30 percent of workers? or 30 percent of the 70 percent? It's just a sloppy phrasing, but it's not really clear what we're to do with these numbers anyways. It's just statistical pseudo-support.
3. "adds to the public cost": we already agreed that the public cost is $7B. That's a final number and discussing the composition of it with no other reference to the composition makes me feel like he's trying to artificially inflate the value in people's heads. I ran into something similar while house hunting. The seller's agent was adamant about the added value of the brand new elementary school nearby, but was already in the comps because the houses that sold a few blocks away already had that factored into the price as well, so it's really just a bullet-pointing of something that's already been covered. Why emphasize this if the bottom line is already set?
Amy: how much do these franchises make and how much do the CEOs make? How much do the workers make? Justify the disparity.
Despite my claim before, this is actually a solid question. Good job Amy.
Jack: the CEOs at the 7 largest publicly traded fast-food companies made $53M combined.
McD's CEO Don Thompson made $13.7M alone last year. The median hourly wage of a fast-food worker is $8.69. It's one of the lowest wages in the economy today for the occupation. So you see the stunning disparity between workers and CEOs.
So the top 7 companies make $7.4B in profits and pay their CEOs $53M to get there. This is less than 1% to get the result they want. Also, consider the risk to replace a CEO. This is a company's right: they need to determine how much someone running the company well and with vision should be valued. Really, who cares. McD's employs 440,000 people world-wide. Don Thompson's income is about $30 per employee. Is it worth $30 to make sure they continue to have a job? Is that more or less than union dues they'd be paying? I'd also bet that most of that compensation is in company stock which comes from the fact that (shock!) the company is doing well. The CEO makes about 1000x a low-wage worker. This seems like a big number, but really, why does this ratio matter so much to us? These ratios get flung around the media like they're a definitive statement of guilt, wrong-doing, corruption, greed or something. But, it's just global capitalism at work. If McD's tried to keep CEO pay at, say, $1M per year, maybe Don would still be the boss. Maybe not. Since every other company would be willing to pay more, McD's would be left with either an unknown or a known mediocre person to run the company. Is that preferable through the lens of the 440,000 jobs they are supporting?
Amy: the demographic of the workers?
Huh? Not sure what she's referencing with this question. I guess it's a prompt to talk about that aspect.
Jack: the median age of workers is nearly 29. Many are supporting children. We've seen a real shift away from industrial jobs that supported the middle class to service jobs today, which are defining the American economy. This is a problem because the wages are so low.
This is a reasonable sounding statement. I suppose the implication is that industrial jobs have shifted to service jobs? I imagine that we had lots of service jobs decades ago as well, so I don't really know what concrete conclusion to take away from this. I guess this funnels into the 99% chatter, that it's a symptom of the hollowing out of the middle class? At any rate it seems the issue is not inherently that service jobs make little money, but that there's a lack of blue-collar jobs that require some skill and specialization.

After some more of the same, there's finally a concrete statement that it's the growth of the service industry relative to the rest of the economy that's going to perpetuate our issues because they get paid so little. Let's get to the final conclusion.
Amy: Companies argue that costs associated with increasing wages will have to be passed onto the consumers.
Jack: This is a multi-billion dollar industry. There's no reason to suspect companies can't afford higher wages.
Let's do a little more math using McD's as the example. Suppose we trust that McD's causes $1.2B of public assistance. Suppose McD's decides to foot that bill. This would drop McD's earnings to $4.3B. Assuming the same P/E ratio, McD's market cap would drop from $109B to about $85B. It would remove $24B of value from the economy, which is a 20-fold impact. That's no good. Fast-food is highly competitive and highly commoditized, meaning returns on investment and operating margins are not great. Thus, any hit to the bottom line would be magnified in stock value. Just because a company has large revenue doesn't mean it's got money to burn. This is a gross mistake from a guy who's involved with employment and financial matters here.

Now that I've ranted about the format and exact content of the discussion, there was also some talk about the fast-food workers wanting $15 an hour. I'm not really sure what to think of that one. I know other countries believe in much higher minimum wages and it works for them. My gut reaction is that it would really just escalate all wages a bunch, and there'd be a "cost of work" wash across the economy. It would likely lead to a compression in wages across the board, but you can't just raise a burger-flipper's pay to $30k a year and expect a teacher to stay happy at that same income. It'd necessarily push other wages up because otherwise other industries would lose people to easier jobs. This is all hand-wavy and vague, but I don't think it's quite so simple. What I do know is this discussion has left me with nothing new to think about.