Saturday, August 10, 2013

You Want Fries With That?


A series of small strikes occurred in several major cities last week.  Strikes is probably too strong a word, since they were more like protests.  The targets of the demonstrations were fast food outlets.  The demonstrators were employees of fast food restaurants.  The object appears to be both trying to organize unions, and to protest for higher wages.  The target wage desired was an eye-popping $15 an hour.

If by some bizarre chain of circumstances these strikers would actually gain their chief demand, they might not like the consequences of their “victory.”  I have seen estimates for the fast food industry that claim labor costs run from 25% to 50 % of the total cost of operation.  Doubling labor costs would require a substantial increase in prices.  Good-bye dollar menu items.

Axiomatically, when you increase the price of a good, volume sales for that good drop off.  If something costs more, fewer people will decide that it is worth buying.  Economists call this shifting upward on the demand curve.  Now, a drop off in demand for fast food maybe a good thing for society as a whole.  With the obesity epidemic, we could all stand to eat more salads, and fewer French fries.

A good thing for society, in this case, would be a disaster for the fast food restaurants, and by extension, their employees.  If you are selling fewer hamburgers, you don’t need as many hamburger flippers.  Hours would be cut and positions eliminated.  Maybe the demonstrators don’t care.  Maybe they figure that they’ll still be ahead, even if they work less, because of the increase in wage rate.

The next shoe to drop would be management’s response to higher wage rates.  When the cost of a production input rises, a prudent response would be to start working on ways to use less of it.  In Australia, where the minimum wage is significantly higher than over here, McDonald’s is already using touch screens for ordering, eliminating the need for cashiers.  They may bring those over to America anyway, but higher wages improves the case for a faster rollout.  When they arrive, not everybody protesting would survive the ensuing cutbacks.

Certainly demand for fast food workers would drop if wages were to shoot up.  But another factor that I don’t think the protestors have considered in making their demands is that the supply of ready workers would also increase.  Anytime you increase the price paid for something, like an hour of labor, the number of providers willing to supply increases.  Shifting upwards on the supply curve is the exact opposite of shifting upward on the demand curve.  Increasing the price offered leads to a drop in demand.  Increasing the price taken leads to an increase in supply.

Fast food restaurants are both the entry level job and the employer of last resort.  No education beyond the most basic level, and no special skills are required.  The work is not particularly physically demanding.  Increased experience does not benefit you in performing the job.  Flexible scheduling on the part of the employee is allowed and even expected.  All of these factors have allowed fast food employers to keep wages low.  The current fast food employees are the beneficiaries of the low job requirements.  What I am saying here is that these people are working at fast food jobs because they cannot get better positions with other firms.

If you increase wages sharply, however, lots of applicants who would not consider fast food jobs now would give it a second look.  People with better education, better work ethic, higher capabilities.  Now ask yourself: if you were an employer, would you want to retain employees with low capabilities when you could replace them with better employees?  Or would you begin looking for pretexts to trade up?

I don’t know that new employees would squeeze existing fast food workers out if they did get the big raises they’re asking for.  But I’ll bet the demonstrators never considered the possibility.

You really need to be careful what you ask for.  Sometimes you won’t like it so much after you get it.

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