If they've got to pay more wages per person then they'll use fewer people. Credit Oast House Archive

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.

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8 COMMENTS

  1. Trump, whose push for corporate tax reform has money squirting everywhere and US growth already back up to 2.9%, also brags that he has “gotten rid of Obama-care.” But this is only the individual penalty for not having insurance, and will only take effect if we re-elect Republicans, and if they don’t cancel their reform to rake in loot to pay for “Homeland Security” or troops in Syria or the “War on Drugs” or some new outrage.

    To return to the point, Obama-care also mandates that every hamburger-flipper gets free, through-the-job health insurance covering infant dental care through gender change counseling. Small companies can, and are still, evading this by staying under 50 employees and keeping each employee under 30 hours a week. McDonald’s can’t, and an independent McDonald’s franchise can’t either, because Obama’s bureaucrats ruled that they are to be counted in the aggregate.

    In most of the US, the $7.25 minimum is moot, but the remaining Obama-care mandates jack the cost of human labor up considerably. Tim correctly notes the need to look at the total cost of labor, and benefits still mandated by Obama-care are a huge additional cost.

    So, by the way, is management. Your entry-level hamburger-flipper isn’t always punctual, courteous, or happy to work with colleagues of certain skin colors. You have to program kiosks, but you don’t have to cajole them, soothe their hurt feelings, or pull them apart when they start fighting.

  2. Having been to a few McD’s with the touchscreen system it doesn’t seem to reduce the staff numbers by very many. The kitchen still requires the same number of people to sling the product together and there are probably three or four out front putting the orders on the trays. But then even if you only lose a couple of workers you’re saving money.

    • Of course, McDonald’s is working to cost-reduce not only Sales but Fulfillment. We heard about the “burger-flipping robot” earlier this year. Technology marches on, but the political establishment will not consider just making it easy again to hire kids to get work done.

  3. Advocates of minimum wage increases don’t care about job losses. It’s an absolute non issue for them. Among their principle beliefs are: The increased wages of those who don’t lose their jobs will somehow lead to more spending elsewhere that might result in more employment. Secondly, they believe that those who do lose their jobs will be taken care of in some other (undefined) manner. The only group that truly cares about job losses are those who might actually lose their jobs, and they’ve often been swayed by promises of other care. It becomes a tough lesson when those promises aren’t delivered upon.

  4. But, butter, buttest, as TW loves to tell us, those displaced order-takers and burger-flippers have now been liberated from their drone jobs and are now free to satisfy the myriad other human wants and desires, at vastly higher compensation than that afforded to order-takers and burger-flippers, so it’s not quite clear why they didn’t migrate to these devilishly tempting better jobs long ago. The inescapable conclusion is that a big jump in the minimum wage, by forcing automation, is the best thing that could possibly happen to those who have wants and desires as well as to those whose purpose it is to satisfy them.

    Automation is great. It results in greater efficiency and lower prices, which benefits the rest of us who haven’t been automated. It has a cost. When you’ve been automated the odds are you will sit without work for longer than you like, and in the end be forced to take a job with lower compensation than your inefficient old-school manual job. Nevertheless if an old fart like me can look back fifty years and see the huge improvement in standard of living, automation does benefit everyone, even the temporary losers. The debate should not be over whether or not to automate. That’s a given. The debate should be over how to reduce the negative human cost.