The paltry McDonald's pay hike

On Wednesday, McDonald's joined corporations like Walmart, Target, and TJX and upped its employees' minimum pay.

Now, the hike only applies to the 90,000 workers McDonald's directly employs in the United States. The other 660,000 who work at the company's franchises aren't included. But it still amounts to a raise of about $1 an hour, possibly rising a bit higher in 2016. Moreover, McDonald's employees will also be able to accrue as much as five days of paid vacation — a deal that can still be hard to come by for many U.S. workers.

FiveThirtyEight called it "the latest piece of evidence that the improving economy is at last trickling down to low-wage workers." But so far we haven't seen the basic mechanical forces in the economy that would drive that. The rates of increase for inflation and average hourly wages remain flat and basement-low. And there's still a huge number of people who were pushed out of the labor force entirely by the 2008 collapse, and who could be coaxed back in without the wage hike.

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Something else is going on. And it gets at a key way we misunderstand — or have just forgotten — how worker pay is actually determined in the economy.

There's a lazy tic lots of economic reporters and commentators often exhibit, of treating workers as just another factor in production — a "cost" or an "input." But bolts and grills and conveyor belts don't share a society with you. They don't keep pictures of their kids on their desks. They don't bargain with you over pay, and they certainly don't get mad and get organized if they feel they're being exploited.

But workers sometimes do that. Walmart, McDonald's, and other chains have faced labor protests over low pay and poor working conditions, and it appears they're reacting to the pressure.

Because workers are people, their pay is a fundamentally political decision in a way the cost of a box of bolts simply is not. It's about the balance of power in society.

Setting aside the franchises, McDonald’s proper brought in a total global revenue of $27.56 billion in 2012. After accounting for taxes and all costs — including worker pay — its profits were $5.46 billion. That’s a pretty big profit margin, and it's remained relatively stable over time: McDonald’s made just under $5 billion in profit in 2014. And the profits are what get retained by the company and reinvested, or spit back out to shareholders.

But bracketing off what shareholders get like this is a weird way to divvy up the finances. A better way would be to put all the actual costs and taxes in one bucket, and all the "human" costs — what goes to workers, management, shareholders, everyone — in the other bucket. This separates out the purely economic choices (first bucket) from the social and political choices (second bucket).

What you realize when you do this is McDonald's has an enormous amount of space to increase worker pay even more. It directly employs 440,000 workers worldwide — including the 90,000 here in the U.S. — so if you took just half of those 2012 profits away from shareholders, you could raise pay for each worker by just over $6,000 a year. That’s way beyond a $1-an-hour raise and five days of paid vacation, especially given the hours people usually get in the fast food industry.

As for the franchises, the situation is more delicate, as the profits are going to franchise owners who may or may not be as well-heeled as stock market players. They also have to factor in hefty remunerations to the corporate mothership. That said, it's estimated that franchises in the U.S. took in $1.6 billion in profits in 2012.

If you took half of that and spread it among the 660,000 workers the franchises employ here in the States, you could raise their pay just over $1,200 a year. Then think of what would happen if some method were in place for McDonald’s proper to spread its revenue down the franchise chain for the sake of raising franchise worker pay.

Nor is this situation unique to McDonald's. The fast food giant enjoys considerably bigger profits than the rest of the industry, but their margins still leave room for a better return to everyday workers. The same goes for corporate profits throughout the economy as a whole.

The whole situation is especially weird when you consider that payouts to shareholders really should be minimal. The whole point of healthy market competition is it lowers prices, which squeezes revenue down towards operating costs and labor expenses, thus cutting profits. And in fact, payouts to shareholders and management were modest 50 or 60 years ago.

Then everything changed, and now public companies return huge amounts of money to shareholders, to no obvious benefit for the economy as a whole.

Point being, every firm is a little society unto itself. And the power balances within that society are what determine how much pay workers get. If the profit margins for a company are of any significant size, and worker pay is low, that means someone with a lot of power in that little society is sucking up a disproportionate share of the pay. If workers can get power back — either through unions and labor organizing, or through an economy that's close to full employment, or a generous safety net that gives them more freedom to walk away from bad jobs — then they can reclaim a bigger cut for themselves.

And as long as the above circumstances are met, this logic holds regardless of how the economy is doing. Historically, wages have risen faster than inflation regardless of the state of the business cycle. It's only within the last few decades that real wages have seemed to stagnate except for those short time periods when unemployment drops below 5.5 percent or so.

What's changed isn't any economic fundamental. It's the clout workers have to get their cut.

It also means there's room for politicians to hike the minimum wage without damaging job growth. It just requires the social pressure and policy pressure to make sure the pay increase comes out of profits, and not out of businesses' operations and investment. And it will require politicians to actually be interested in helping workers, or it will require worker mobilization to force them to take an interest.