Re-Blog - "The Ugly Truth About A $15 Minimum Wage"

The Service Employees International Union spent 2015 expanding its campaign for a $15 minimum wage to other industries. In recent nationwide protests, the union focused again on its original target: Fast food companies, and McDonald's in particular.

I worked for the company for three decades, and served as its USA President for 13 years. I can assure you that a $15 minimum wage won’t spell the end of the brand. However it will mean wiping out thousands of entry-level opportunities for people without many other options.

The $15 minimum wage demand, which translates to $30,000 a year for a full-time employee, is built upon a fundamental misunderstanding of a restaurant business such as McDonald’s. “They’re making millions while millions can’t pay their bills,” argue the union groups, suggesting there’s plenty of profit left over in corporate coffers to fund a massive pay increase at the bottom.

In truth, nearly 90% of McDonald’s locations are independently-owned by franchisees who aren’t making “millions” in profit. Rather, they keep roughly six cents of each sales dollar after paying for food, staff costs, rent and other expenses.

Do the math

Let’s do the math: A typical franchisee sells about $2.6 million worth of burgers, fries, shakes and Happy Meals each year, leaving them with $156,000 in profit. If that franchisee has 15 part-time employees on staff earning minimum wage, a $15 hourly pay requirement eats up three-quarters of their profitability. (In reality, the costs will be much higher, as the company will have to fund raises further up the pay scale.) For some locations, a $15 minimum wage wipes out their entire profit.

Recouping those costs isn’t as simple as raising prices. If it were easy to add big price increases to a meal, it would have already been done without a wage hike to trigger it. In the real world, our industry customers are notoriously sensitive to price increases. (If you’re a McDonald’s regular, there’s a reason you gravitate towards an extra-value meal or the dollar menu.) Instead, franchisees can absorb the cost with a change that customers don’t mind: The substitution of a self-service computer kiosk for a a full-service employee.

In higher-cost European countries, these kiosks are already the norm. In 2011, the company ordered more than 7,000 of them to replace entry-level employees. They’ve been tested successfully in a number of markets in the U.S., and now the company is even testing self-serve McCafe kiosks where a customer can prepare and customize their own coffee beverage.

Hurting young workers

If you’re tempted to shrug your shoulders at this brave new world, don’t. Over four million people in the U.S. are employed at “limited service” restaurants, a descriptor which includes companies like McDonald’s. If even one out of every four jobs was automated, that’s one million fewer job opportunities in a country where the youth unemployment rate is more than three times the overall unemployment rate. (In urban markets such as New York City and Washington, DC, the youth unemployment rate averages 30%.)

These young adults who face long spells of unemployment now are at a long-term disadvantage relative to their employed counterparts. One study released by the Employment Policies Institute found that high-school seniors with part-time work experience earned 20% more per year on average, 6-9 years after graduating, relative to their fellow students who didn’t work. Ironically, today’s minimum wage mandate for higher pay will be condemning young adults to lower-paid and less-successful futures.

I suspect that the labor organizers behind this campaign for a $15 minimum wage are less interested in helping employees, and more interested in helping themselves to dues money from their paycheck. They’re unlikely to succeed in their goal of organizing the employees of McDonald’s franchisees, but they may well succeed in passing $15 into law in other sympathetic locales. You’ll see their legacy every time you visit the Golden Arches, where “would you like fries with that” is a button on a computer screen rather than a phrase spoken by an employee in their first job.

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source:
The Ugly Truth About A $15 Minimum Wage by former president and CEO of McDonald's USA, Ed Rensi - 4/25/2016 Forbes

Classically liberal

RE-BLOG: Classically Liberal

There is a lot of poor thinking going on when it comes to poverty. I hear more absurd or irrational statements made about poverty than almost anything else except, perhaps, the environment.

Here are a couple of common errors about poverty and why they are wrong.

The cause of poverty myth: This one is found in statements that usually begin with “Poverty is caused by....” Now it really does not matter how you fill in the blank. Poverty is not caused. It is the default nature of man. It is like asking: “What causes nudity?” Nothing! We are born naked.

As the saying goes we come into this world with nothing and we leave with nothing. Poverty is the natural state of existence while wealth is artificial. Wealth is created. Wealth, like clothes, has a cause where poverty does not. The proper question to ask is what causes wealth not what causes poverty?

If you understand the wealth creation process then you can see ways to end poverty. And when you realize that wealth creation is a process you can investigate what blocks it. Almost without exception the process is blocked by force. That force can be from marauding gangs who pillage
production or governments who tax it.

The block can be naturally caused or man-made. But roadblocks exist that have to be torn down. People want to make exchanges because through exchange they maximize wealth even when no new wealth is created. If I trade an orange for an apple I am ‘wealthier” by my own standards and so is the person who got the orange. That is because I only make the exchange because I value the apple more than the orange and my trading partner only does so when he values the orange more than the apple. We each walk away from the exchange with an increase in our own well being according to our own values.

But if someone comes along and prevents or inhibits the exchange then both traders are worse off. If they ban the trade, because my partner lives within one set of imaginary lines drawn on a map, and I live within another set, it matters not. We are still worse off. If they forbid the exchange because they don’t like my race or nationality there is still a reduction in well being.

Or if they come in and tax the exchange we are still worse off than we would be. All uses of force to interfere with voluntary exchange, by definition, substitutes the values of the one who uses the force for those of the traders. That inhibits wealth creation. And when this is inhibited the natural state of poverty either continues or the state of things revert. Wealth is man-made, poverty is natural. And that means wealth, once made, must be preserved as later interference with the process can cause poverty to reassert itself. When the process is stopped things revert to their default state.

The "equality matters" myth: If Bill Gates get richer I am supposedly worse off. But I have never heard anyone explain how this is the case. This is called relative poverty. I may be well off but if you are better off then I am relatively impoverished compared to you.

That’s like calling someone who is 6’ tall “relatively short” because someone else may be 6’4”. A person who weighs 150 lbs is “relatively” fat compared to a person who is anorexic.

This concept of “relative poverty” is absolutely irrational. It tells us nothing. You can make almost any case you wish by using a “relative” comparison. I could argue that the average American is “relatively poor” if I use the wealth of the top 10% of the population as my point of comparison. Or I can argue they are “relatively rich” if I compare them to the average income of people in the developing world.

And the Left, who are notorious at stripping words of any rational content, does this all the time. If they want to attack capitalism and make Americans feel “exploited” and envious they will compare the average working income to that of the average CEO. From this they conclude that Americans are made worse off by capitalism because “relative poverty” or wealth inequality is growing.

But when they want to make the average worker feel as if he is an exploiter, and appeal to his guilt, they compare the same income to that of poor people. One day you can be “too poor” and the next day you can be “too rich” simply by shifting the goal posts.

Such concepts add nothing to a discussion. But they are not meant to. They are used precisely because they allow one to make any argument anytime.

The poor as a static group myth: This has two variations. One is that there are X number of poor people in nation in one year, and then X number later down the road, indicating that no progress has been made. The assumption is that the people, who were poor, say in 1990, are the same people who are poor in 2005.

In fact people who are “poor” in any one year are mostly a changing group. A university student can be poor in his 20s because he is a part-time employee while studying. But with a valuable degree he may become one of the rich 20 years down the road. The category “poor” is not necessarily static but may be a changing one.

Another variation of the static concept is to define “poor” as some arbitrary percentage of the population. A popular definition of poverty is one where the “poor” are defined as anyone in the bottom 10 or 20 percent when it comes to income. The problem is that this definition means it is impossible to eradicate poverty. Even in a community of millionaires someone will be in the bottom percentage.

While this is a static definition it really is a fallacy that is similar to the first one discussed - that of “relative poverty”. This is so because the bottom percentage is always determined in relation to the income of others. This is a popular theory with some special interest groups because you cannot eradicate poverty since you cannot abolish the bottom percentage no matter what you do. It is always there. And that justifies the existence of the antipoverty group or its programs for eternity. That appeals to them.

Just clearing up the poor thinking around poverty can do a lot to clarify what needs to be done, or needn’t be done, when it comes to wealth creation. And poverty will only be ended when wealth creation is allowed to flourish.

For some information on the actual state of American poverty go here.