Concerning the minimum wage we still have our equivalent of economic flat earthers. Those who insist that if we raise the cost of labour then people won’t use less labour. The contortions they go through to try and insist that this is so, that prices do not alter demand, are most impressive. But reality does have a manner of finding out those whose beliefs are not in accordance with it. So it is with recent minimum wage rises in the US. McDonald’s, one of the country’s major employers of such low wage labour, is arming itself to use less labour:
Hangry customers in Canada, Australia, and the U.K. have gotten used to mobile ordering a Big Mac, or navigating a self-serve kiosk when you’re drunkenly trying to order fries, but the technology is not widespread in the U.S. yet. That will most likely be changing, though. In an earnings call in January, McDonals’s announced that half of all American storefronts will have self-serve kiosks by the end of 2018, The Street reports.
This is not just that technology moves on and so the change. For note something important about where changed first:
International markets like Canada, Australia and the U.K. are already fully integrated with kiosk service and mobile ordering. Locations in France and Germany, too, are almost completely transformed with this new technology.
“The U.S. is a little bit behind,” Easterbrook said.
At the low end of the labour market wages are higher in those other places. Therefore labour is going to be conserved first in those places, isn’t it?
Steve Easterbrook, the CEO of McDonald’s, says that the company is planning to add self-ordering kiosks to 1,000 locations a quarter. The CEO says that the plan is to keep this up for the next eight to nine quarters.
Easterbrook says that this effort will help bring McDonald’s locations in the U.S. up to date with those in other parts of the world. Self-ordering kiosks are already present at most locations in Canada, the U.K., and Australia.
As US low end wages rise to meet those in those other places then so does the amount of labour employed to serve the products fall to the levels seen elsewhere. This is not, to economists, a surprise, although it appears to entirely blindside minimum wage activists.
To explain a little more. The reason we go and look at the restaurant industry to measure the US minimum wage and its effects is because that’s the industry it bites in. Some – roughly you understand – 50% of the people in the industry get the minimum wage, some 50% of all who get the minimum wage are in the industry. It’s thus the bellweather, the place where we can see the effects and extrapolate from them to the rest of the economy.
It’s also true that those of us who point out that forced wage rises are a bad idea do not predict imminent disaster a a result of them. Not in the sort of ranges people tend to talk about that is. Sure, there’re people like Nick Hanauer who seem to think that $26 an hour would be a good idea but then there are loons in every part of life, public and private. What we do say though is that rises above the market clearing rate for labour will result in less labour being used. We’ve plenty of research supporting the point too.
There’s also a point sometimes made. Which is that all businesses will always be optimising their use of labour therefore raising the price of it can’t change the amount being used. Beause it’s already optimised, right? Which is to ignore the influence of relative prices.
Imagine, just as an illustration of the point, that self service kiosks cost $8 an hour to run and they can take the place of one worker. Do note, I do not claim this is true, these are just numbers to illustrate the logic. If wages are $7 an hour in total (that is the total cost of employment, including employer paid taxes, meals, uniforms, benefits and so on) then people will be employed. If labour costs $9 an hour then the machines will. By changing the price of labour we’ve changed the relative prices of machines and labour and thus encouraged – or forced – the substitution of one for the other.
That is, the spread of self service kiosks across McDonald’s is, at least in part, driven by rising minimum wages. And that really does mean that rising minimum wages are leading to fewer people being employed in those places which must pay the higher wages. Yes, I know, a lot of people wish this weren’t so but it is. Reality has a manner of asserting itself.