Thursday, October 23, 2014

McDonald's and Minimum Wage Legislation ... The Bigger Story of How Things Work in the Public and Private Sectors

Do we really want government dictating to employers the minimum wage that they must pay to their employees? And hasn't government done enough to "help" keep low wage, low skilled employees from getting full time employment lately, including ObamaCare? And is the government knows best gang of elitists sufficiently knowledgeable about the inner workings of free markets to require of any company what its cost structure must include? And if there aren't enough people employed due to all this government "assistance," will the government soon attempt to outlaw automation as well?

Overview -- The people in charge at the "Golden Arches" are having trouble these days convincing enough consumers to buy their burgers, fries and cokes. McDonald's sales are falling each quarter and there's no sign of that dismal situation changing anytime soon. But while the company is wrestling with what to do to get things back on track, it is also being attacked for not paying employees a 'living wage.' So let's connect the dots in the context of the broader story concerning private sector competition and consumer choice, and the public sector's spendthrift ways, monopolistic practices and non-consumer driven behavior.

Public Sector -- To begin our comparison, let's recognize that as an employee of government, the public sector employee isn't faced with competition from either other public sector employees or competing firms. The fact is that since there aren't customers who must be satisfied for the public sector employer to continue to exist, the public employee is under no competitive pressure to keep his job. Accordingly, wages, pension benefits and even the type and number of public sector jobs are largely unaffected by economics. Compensation is simply a matter of negotiations between two sets of public sector employees --- public sector union representatives and taxpayer agents, aka our 'public servants.' There's no competition in the public sector. It acts like a monopoly.

Private Sector -- On the other hand, private sector employees are faced with competition every day as competing firms vie for the same consumer dollars by offering to their current and potential customers a better value. Free choice and MOM (my own money) based behavior reign in the competitive private sector marketplace.

So when government pays $10 or $15 per hour, it's on the taxpayer. But when fast food employees are paid $10 or $15 per hour, it's on the consumer.

Thus, private sector companies aren't able to pass along costs to customers unless the customers are willing to pay them.

So what happens when private sector employers are required by government to raise the pay of their low wage and low skilled employees --- when the minimum wage is increased? Nothing good for the employees, that's for sure. In other words, there will end up being fewer jobs for the intended beneficiaries, the low wage workers, despite what the unions and politicians may say. Now let's consider the case of McDonald's.

Minimum Wage Backfire is subtitled 'McDonald's moves to automate orders to reduce worker costs:'

"If there’s a silver lining for McDonald’s in Tuesday’s dreadful earnings report (see McDonald's Vows Fresh Thinking), it is that perhaps union activists will begin to understand that the fast-food chain cannot solve the problems of the Obama economy. The world’s largest restaurant company reported a 30% decline in quarterly profits on a 5% drop in revenues....

So even one of the world’s most ubiquitous consumer brands cannot print money at its pleasure. This may be news to liberal pressure groups that have lately been demanding that government order the chain known for cheap food to somehow pay higher wages.
Unions have made McDonald’s a particular target of their campaign for a $15 an hour minimum wage and have even protested at corporate headquarters in Oak Brook, Ill. The pressure was enough to cause CEO Don Thompson this summer to capitulate and endorse President Obama’s call to raise the federal minimum to $10.10 an hour from $7.25. Many states have already enacted wage floors above the federal minimum.

If higher wages force higher prices on the menu, will union-backed activist groups agree to compensate McDonald’s franchisees for futures sales declines? We’re guessing not. So . . . with sales slipping lately, higher prices probably aren’t the way to draw more customers. . . .

The McDonald’s earnings report on Tuesday gave a hint at how the fast-food chain really plans to respond to its wage and profit pressure—automate. . . . forcing businesses to pay people out of proportion to the profits they generate will provide those businesses with a greater incentive to replace employees with machines.

By the third quarter of next year, McDonald’s plans to introduce new technology in some markets ... (which will result in) a reduction in the chain’s global workforce. It’s also a way to send a message to franchisees about the best way to reduce their costs amid slow sales growth. In any event, consumers better get used to the idea of ordering their Big Macs on a touchscreen."

Summing Up

We need to face reality. Government mandates won't work to improve the plight of low skilled workers. And government mandates will cause there to be fewer jobs for young people entering the workforce and wanting part-time employment.

In fact, government mandated wage increases will damage the relationship between a company's employees, its owners, and its customers.

And the ones who will suffer most will be the low wage and low skilled employees who either lose their jobs or will never be hired in the first place.

Customers always have the final say about whether to buy, what to buy, when to buy, how much to buy and from whom to buy, if anyone. It's their money and it's their free choice.

And as for the owners of McDonald's outlets, current and prospective franchisees may simply opt to close or not to invest in opening or operating more outlets. To the extent that they do, lots of potential employees will remain unemployed.

The forgotten middle class taxpayer gets the bill for everything these days --- everything except the hamburgers, fries and cokes that he chooses not to buy at McDonald's and similar outlets, that is.

That's my take.

Thanks. Bob.

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