[Note: The Skeptical Entrepreneur should know better than to try to do math in his head. The initial version of this column incorrectly expressed the figures for increased consumer spending capacity in billions; it should have been millions. The corrected version is below. Sorry for the mix-up. - The Skeptical Entrepreneur]
The Motley Fool's Daily Finance column recently had an article on 3 Reasons why McDonald's would be Smart to Pay $15 an Hour as a starting wage. The arguments are good, especially the one that posits that McDonald's would be able to take its pick of the cream of foodservice workers if it became the first to offer a super-premium starting minimum wage.
What the article misses is the fact that bumping McDonald's 60,000-plus U.S.-based employees* to $15 an hour would provide a significant stimulus to the consumer economy. Assuming 60,000 employees, working an average 20 hours per week at an average $8 per hour, increasing the rate by $7 per hour leads to increased wages of $8.4 million per week, or $436.8 million per year. Given that American workers have the lowest marginal savings rate in the industrialized world, that translates to, at a conservative guess, something north of $400 million a year in increased consumer spending.
The benefit to other enterprises is two-fold. The Skeptical Entrepreneur has recently meditated on marginal consumer product demand, and the limitation thereof, as a hurdle to economic regrowth, despite the recovery of financial markets. The key to clearing that hurdle is to facilitate the expansion of consumer demand, thus increasing aggregate consumer product demand. Consumers cannot consume, if they lack the financial resources to purchase consumer products. Barter is not a viable option, since a fundamental principle of accounting demands that transactions be recorded in terms of a stable, unified, quantifiable system of valuation - no money, no documentable and recordable transaction.
Putting an extra $400 million-plus in purchasing power into the hands of consumers, who are bound by the same principle of limited marginal consumer product demand as regards food, will necessarily funnel a significant portion of that purchasing power into non-food consumer goods. All sectors of the consumer-retail economy will benefit, including the foodservice industry up and down the quality/service/efficiency scale.
How much of that extra wage money will find its way back into the hands of McDonald's Corp. and its franchisees is difficult to determine. Certainly, the increased demand for other consumer retailers's products will lead to increased hiring; the example of McDonald's and its premium wage will put pressure on other employers to increase their wages, thus initiating a further, two-pronged increase in consumer purchasing power. Goods and services flow circularly, so an increase in McDonald's wages should lead to an increase in other retailers's business volume, as well as payroll-based contributions to aggregate consumer purchasing power, which should feed back to increased demand for McDonald's products, both directly from its own employees buying more burgers and fries, but also from employees of other retailers (and wholesalers, and manufacturers, distributors, transporters, infrastructural-support firms, etc.).
The Skeptical Entrepreneur is at a loss to understand how anyone can consider that an increase of over $400 million per year in consumer purchasing power is a bad idea. Of course, there will be short-sighted managers who can only think of ways to increase their share of those consumer dollars without increasing their costs. There will be die-hard Hooverites who lament the weakening of the dollar. So what? Show me a businessperson who has a moral stake in maintaining the purchasing power of the dollar, and I'll show you a damned fool. It's not the entrepreneur's job to fret over whether the dollar buys as much today as it did yesterday. The entrepreneur's job is to grow sales and profits. Period.
McDonald's and its franchisees should raise their starting minimum wage to $15 per hour, and use the increase in customer-service value to justify increasing menu prices to cover the wage hike.
*A conservative guesstimate; The Skeptical Entrepreneur has been unable to locate hard data on employment numbers
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