Could the worker of the future be robots? And what will that mean for society?
I. Rise of the Machines (Year 2062 Edition)
That question has been asked since humans first started getting replaced by machines in the manufacturing industry. In the 1960s the classic Hanna-Barbera cartoon The Jetsons suggested in the year 2062 (100 years in the future) mankind would fly to work in hovercars and robots would do much of mankind’s dirty work, including virtually all manufacturing and service jobs.
The cartoon handled this serious possibility with humor and grace. And it delivered a rather optimistic vision in which mankind seemed to be enjoying a more leisurely life with a lighter workload thanks to robotic service industry workers, like The Jetson‘s live-in maid, Rosie the Robot.
Now The Jetsons is looking prescient. While the flying cars bit seems a bit unlikely, the possibility of robotic service workers finally appears to be gaining traction after looking highly improbable for decades. For years the possibility had been dismissed as many felt that the service industry would always require a human touch.
II. Battle Between Corporatism and Collectivism Heats Up
Behind the push to replace mankind with machines is a clash between corporatism and collectivism in America — and the rest of the world as well.
Last week, a series of protests targeted McDonald’s Corp. (MCD) — America’s largest and most profitable fast food company. The protests aimed to highlight inequity of one of America’s most profitable and public facing corporate sectors. Activists and academics alike warn this issue not only affects the workers, but all Americans.
Police in riot gear face off against fast food workers and their allies. [Image Source: AP]
The movement’s backers include:
Last Thursday, ahead of the annual McDonald’s shareholder meeting at the company’s headquarters in Oak Brook, Ill., 32 buses arrived carrying an estimated 2,000 protesters (according to most media sources; 1,000-1,500 according to a handful of more conservative sources).
The protesters were met by a batallion of uniformed police officers in riot gear. The cops ordered the protesters to leave, but many refused by praying, speaking, and chanting in solidarity. In total 139 were arrested, including SEIU President Mary Kay Henry, Rabbi Rosen, Rev. Simon, and Pastor Jakes. Of those arrested, 36 were “community, clergy, and labor leaders” according to SEIU President Mary Kay Henry. Some 103 other protesters were arrested, which various sources described as either employees of McDonald’s or other fast food chains.
Police in riot gear protect McDonald’s corporate headquarters. [Image Source: Getty Images]
Of the protesters an estimated 325 were McDonald’s employees in uniform. All of the arrested peaceful protesters were detained and charged with trespassing.
III. Robotization Could Eliminate Over 1 in 100 American Jobs
The protest has drawn international attention. One of the most interesting — and controversial — storylines to emerge following those clashes has been the suggestion that if employees push fast food chains too hard for higher wages, they will push back — by replacing employees with robots.
As the costs of human labor has risen, experts now mostly agree that it’s highly likely that in the next several decades human workers in the low-paying end of the service industry — jobs such as fast food register workers, retail chain workers, low-level kitchen staff, taxicab drivers, and waitstaff — will be replaced by robots.
Soon McDonald’s could replace most of its low-wage staff with robots. [Image Source: Getty Images]
That shift could displace millions of workers, including 3.7 million workers that are expected to be employed in America’s fast food industry this year, according to Statista. That’s nearly 1.2 percent of Americans, who would be left scrambling to find a new job.
The move could be highly disruptive given that fast food is far from a “teen job”, as some have suggested. The median age of a fast food worker in America today is 29. In fact, 36.4 percent of fast-food employees in the U.S. are ages 26-54.
America’s fast food workforce is dominated by adult workers. [Image Source: AOL]
Another common misconception is that the average fast food worker is a minority. In reality, 59 percent of fast food workers are white, 16.3 percent are black, and 18.4 percent are Hispanic. These numbers fall nearly in line with the U.S. Census Bureau’s estimates of population by race, indicating that the color of the workers’ skin has little to do with whether they are working in the U.S. fast food business.
IV. Push for Bots Mirrors Foxconn’s Struggles in China
The fast-food industry’s push for robotization mirrors that of the Chinese manufacturing industry, which is dealing with similar clashes with its workforce.
China’s high-tech manufacturing sector was beloved by supporters of global corporatism, particularly in the U.S. But it was also the site of a crucial human rights battle over the past several years after employees — who at times were literally worked to death — began to demand better pay.
High-tech manufacturing wasn’t the lowest paying sector in China. But it was arguably one of the most inequitable in terms of the cut of revenue received by low-level employees. Hence it fast became the top target in the growing conflict between globalism and collectivism in the Asian nation, disrupting U.S. corporate interests such as Apple, Inc. (AAPL).
The highest profile target of the conflict was China’s top gadget manufacturer — Foxconn. Foxconn’s parent company, Taiwan’s Hon Hai Precision Industry Comp., Ltd. (TPE:2317), had little tolerance with its disgruntled workers. However, it was forced to address their concerns after it suffered a series of labor disputes punctuated by ugly incidents in which workers distraught at their low wages committed suicide in order to try to earn death benefits for the families.
Beleagured Foxconn employees work to manufacture gadgets.
[Image Source: Southern China Weekly]
Foxcon tried a number of tactics to placate its employees without suffering a financial impact including installing anti-suicide nets and encouraging employees to sign binding contracts in which they agreed not to kill themselves for benefits. One of its most controversial ideas was that it might look to replace employees with robots. The plan was somewhat ironic, given that one key complaint of employees — aside from low wages — was that the job they did was overly robotic and monotonous.
Foxconn has continued to experiment with the concept, most recently looking to collaborate with Google Inc.’s (GOOG) burgeoning robotics efforts. But in most cases they concluded that for most functions it would be prohibitively expensive at present, so they begrudgingly agree to pay their workers slightly highly wages, or in some cases moved workers to lower wage locations, such as Vietnam.
Now the U.S. is looking at a similar discussion.
V. Record Profits Don’t Come With a Supersized Paycheck for Most
The protests come at a time when McDonald’s and its peers are riding on record highs.
McDonald’s 2013 10-K filing with the U.S. Securities Exchange Commission showed its profits rising 2 percent to $5.586B USD, its highest level in at least five years. McDonald’s biggest competitor — Burger King Worldwide Inc. (BKW) — earned $233.7M USD, according to its 10-K. The Wendy’s Comp. (WED) made a modest $45.5M USD. Yum! Brands, Inc. (YUM) — which owns KFC, Pizza Hut and Taco Bell — pocketed a cool $1.09B USD.
There’s some common ground between all of these fast-food franchise chains. They all stand accused of shorting employees even as they have made record profits.
Currently the minimum wage in the U.S. is $7.25 USD/hour. Recent reports indicate that the average wage of a fast food worker is just above that at $8.69 USD/hour. Other reports have suggested, more specifically, that McDonald has a mean wage of $8.83 USD/hour and a median wage of around $9.15 USD/hour.
Gains are growing for institutional investors, but not for hourly employees.
Also, 70 percent of McDonald’s employees are only allowed to work part-time (typically around 20 hours a week) [source]. A study published by Demos.org suggests:
An employee in a fast food restaurant earning the average wage for the average hours brings home less than $12,000 per year.
An analysis piece by Market Realist digs into this a little bit deeper, writing:
Based on its most recent 2012 financial filings, McDonald’s had 440,000 employees directly underneath its corporation. While its website says it has 1.8 million employees, these include employees that are hired by the brand, which include franchisees and the McDonald’s company itself. With an annual payroll and employee benefit expense of about 4.7 billion for employees in McDonald’s company-owned restaurants, each employee will receive just $10,681 per year in salary, which is equivalent to $5.14 per hour for each employee if each worker works for 40 hours per week (full-time) for 50 weeks in a year.
That analysis indicates the average so-called “front-line” worker (who interacts with customers at restaurants) at McDonalds is below poverty level, even for a one person household. That makes sense, given that 52 percent of McDonald’s employees are on some form of federal assistance.
VI. Who’s Profiting? Institutional Investors
Despite all the controversy, one thing is for sure — McDonald’s is a popular business with a massive footprint worldwide. Last year McDonald’s served 68 million customers worldwide daily at its 35,000+ restaurants in 119 countires, according to its 2013 10-K filing.
In order to understand who is profiting and who is suffering, one must examine McDonald’s franchising model, which essentially divides the public entity into three groups — shareholders/corporate, franchise owners, and the employees working at franchises.
McDonald’s monetizes in one of two ways. First, it directly owns roughly 19 percent of the McDonald’s branded restaurants. Second, of the 81 percent of remaining franchisee-owned locations, it charges a monthly fee (currently around 4 percent of revenue) and monthly rent on the land (typically the corporation owns the land, the owner is paying a mortgage on a restaurant).
Today only about a third of McDonald’s revenue (31 percent, to be precise) comes from its home country. While McDonald’s has strong presences in the UK, France, Germany, Australia, and Japan, it’s seen some of its strongest growth in recent years in corruption-prone regions such as China and Russia. In Russia, it owns most of its franchises, which it says has been salvaging its European revenue stream.
Traditionally, being a McDonald’s franchise owner was a ticket to wealth. But in recent years McDonald’s has been pushing franchise owners harder with bigger fees and higher standards. It can afford to do so, as its success continues to attract a long line of eager candidates.
But franchisees have in turn responded by fighting higher wages among their employees. In short, this three-way battle pits the workers, franchises, and corporate in a battle against each other.
For corporate, pure profit is at stake. An estimated 65 percent of McDonald’s shareholders are large institutional shareholders — many of which are owned or controled by America’s wealthiest hundredth of a percent. In 2013 McDonald’s paid out $1.810M USD in stock repurchasing (from the 10-K) and $3.115B USD in dividends to shareholders. So small shareholders pocketed around $1.7B USD, while some of America’s wealthiest investors pocketed around $3.2B USD.
VII. Independent Franchisees Also Rewarded, but Are at a Disadvantage Tax-Wise Versus Ultra-Wealthy
So what about the franchisees? Last year the average franchisee was estimated to make $153,900, if you peruse the numbers from Janney Capital Markets (the investment wing of Philadelphia, Penn.-based Janney Montgomery Scott LLC). Here comes a twist — roughly 20 percent of franchises (according to Calvert Investments, who participates in such investing) are owned by large institutional shareholders.
What’s more, thanks to state tax laws, the insitutional franchisees pay an average tax rate of 8 percent (according to the Federation of Tax Administrators (FTA)) versus a tax rate for individual tax payers (treated as income) which tops out at 39.6 percent. Of course that’s a bit high. Studies have suggested that the highest brackets of tax payers (traditionally making $250,000+ USD) paid an effective rate of 20 percent — half of what they “officially” might pay, but still roughly 2.5 times what the insitutional investors pay.
McDonald’s franchise owners can make decent profits, but are at an inherent taxation advantage versus institutional investors, given the inequitable tax code.
So an insitutional investor will make roughly $141,600 USD per franchise, where a franchise owner $122,700 USD per franchise, based on the information/estimates from Janney Capital and the FTA.
Entrepeneur estimates that there are 12,678 McDonald’s franchises in the U.S. It also states that roughly 88 percent of frachisees own multiple units. So somewhere in the 3,500-5,000 range would be a fair estimates of the total number of franchisee owners (given the multiple franchise figures).
McDonald’s New Zealand Managing Director Mark Hawthorne states:
There are two things people don’t understand about McDonald’s: first, most of our franchisees have worked their way up from crew and second, you don’t have to be a multi-millionaire before you can become a franchisee. We ask for a minimal fee – currently $75,000 – which in the context of a 20-year franchise agreement and the financials involved is quite minor. The company owns the land and the building, so the franchisee only has to be able to fund the equipment package. The cost of fitting out a new restaurant now is about $1.4 million, which means that ideally we are looking for people with equity from $500,000 to $2 million.
The reason we franchise is not because we need our franchisees’ money. It’s because we think franchising offers us a competitive advantage in the way the restaurants are operated, especially in the regions. A local couple will push the brand in their market at levels we’d get nowhere near, but only if they’re on the front line themselves, working the business hard. So basically we’re looking for people who have their entire skin in the game, not people with millions using McDonald’s as an investment vehicle.
But despite his insistence that McDonalds franchises are not an “investment vehicle”, they’re fast growing into that as insistutional owned franchises have been vastly outpacing independent franchises in terms of growth. That rapid growth has been driven, in part thanks to America’s tax code — as usual — favoring the ultra-wealthy over the upper middle-class.
VIII. The Middle Management
At last count there were roughly 14,200 McDonald’s restaurants in the U.S.
To gauge the workforce’s pay or lack thereof, it’s important next to turn to the well-known management structure. Typically a franchise owner (or corporate) employs three management level (“career”) employees, plus an entry-level management employee.
The top of these is a restaurant manager who can make between $20,000 and 92,000 USD working “full time” (40 hours, at least, per week, officially, 50 weeks per year). The average manager makes around $45,000 USD — according to the site GlassCeiling.
McDonald’s typically has two full-time assistant managers — a so-called “first” and “second” assistant manager. The First Assistant Manager tends to handle more crucial decisions, such as firing and hiring employees, whereas the Second Manager handles more of the day-to-day operations. The first manager typically makes between $27,000 and 50,000 USD a year, with an average salary of $35,000 USD. The second manager typically makes between $24,000 and 35,000 USD a year, with an average salary of $29,000 USD. Manager trainees (if applicable) typically make around $15,000 USD.
The U.S. Department of Health & Human Services (HHS) defines poverty in most states as:
2014 POVERTY GUIDELINES FOR THE 48 CONTIGUOUS STATES
AND THE DISTRICT OF COLUMBIA Persons in family/household Poverty guideline For families/households with more than 8 persons, add $4,060 for each additional person. 1 $11,670 2 15,730 3 19,790 4 23,850 5 27,910 6 31,970 7 36,030 8 40,090
Most McDonald’s managers (aside trainee) presumably are above poverty level. Still McDonald’s encourages its managers to apply for welfare if they can, the first hint of just how low wages — even among the management — at the typical McDonald’s franchise are.
So outside of corporate offices, at its actual restaurants, McDonalds hires as many as 50,000-60,000 employees in the U.S. who it pays above poverty level wages. An official webpage seemingly confirms this writing that of the company’s 860,000+ employees at U.S. franchises, 6.1 percent are in “management and support staff positions.” So that works out to around 52,500 employee managers — about what our quick and dirty calculation yielded.
VIII. The Toiling Masses
As mentioned, the majority of McDonald’s employees are part-time workers, making anywhere from minimum wage to a dollar or two above it.
An estimated 32 percent of McDonald’s U.S. employees are in college or are teenagers. But the majority — 68 percent — are working adults who aren’t in college. And 26 percent in fact are parents raising children.
The low wages are costing all Americans — not just those who work at McDonald’s.
A recent study funded by Fast Food Forward, performed by economist Professor Sylvia Allegretto and others looked at the impact of fast food corporations on taxpayer-funded public assistance. Sponsored by the University of California at Berkeley’s Labor Center and the University of Illinois at Urbana-Champaign, the researchers found that one in five families with a member in the fast food industry live in poverty
The dispute is drawing greater criticism of the fast food industry at large, particularly in the U.S. In the U.S., restaurant and food service workers far and away are the most dependent on public assistance.
An estimated 52 percent of so-called “front line” workers — workers who interact with humans — are on public assistance. On average America as a whole sees 25 percent of employees on public assistance, so this is about twice the average. A recent report by The Huffington Post citing data from Reuters and the National Employment Law Project says that of America’s top fast food chains, employees collect nearly $3.8B in public assistance from their fellow taxpayers.
According to the study by Prof. Allegretto’s team, the entire fast food industry accounts for roughly $7B USD in taxpayer funded assistance. The most common forms of public assistance are Medicaid and the Children’s Health Insurance Program — which cumulatively stack up to around $4B USD. The remaining $3B USD comes in the form of the Earned Income Tax Credit, food stamps, and the Temporary Assistance for Needy Families.
The authors write:
Public benefits receipt is the rule, rather than the exception, for this workforce.
Of course the situation is complicated by the fact that fast food productivity is typically quite low, according to the study by the neoconservative Heritage Foundation based on a study by the Bureau of Labor Statistics (BLS) .
And while many employees are forced to work part-time as a cost cutting measure, some do so willingly as they don’t want to work the extra hours.
On the flip side, a fresh federal lawsuit filed earlier this year by 27 plaintiffs at seven McDonald’s franchise seeking class action status accuses the chain of shorting them on wages and overtime, violations of the Federal Labor Standards Act (FLSA).
McDonald’s say its “is reviewing” the lawsuit filed on the employees’ behalf, and claims it takes employee rights seriously. Since 1985 the U.S. Labor Department has found McDonald’s in violation of federal labor laws 300 times, forcing it to pay back wages.
So it’s hard to accurately gauge employee productivity in an unbiased section, when McDonald’s and other top fast food companies have repeatedly been caught forcing employees to work extra hours without pay and shorting them overtime pay.
IX. The Man at the Top
Acknowledging the protesters outside, the top employee of the corporate McDonald’s Donald Thompson reportedly remarked to shareholders:
I know we have people outside. I think that McDonald’s provides more opportunity than any other company … We continue to believe that we pay fair and competitive wages. [McDonald’s leads to] real careers. McDonald’s has done that throughout time, and will continue to do that.
Regarding accusations that his company was contributing to America’s obesity epidemic via predatory marketing to children, he blasted that claim, citing the 1.1 billion apple slices Apple had sold — primarily to children — since that healthy option was introduced. He remarked:
We are not predatory. It’s the truth. [Our marketing is] not intended to be anything other than fun for kids. We are people. We do have values at McDonald’s. We are parents. My parents eat McDonald’s and they are here today – they are quite healthy.
The CEO is under fire, in part, over how much he’s making. At last week’s meeting, despite the protests shareholders approved a $9.5M USD pay package for Mr. Thompson in his first year as CEO. And that’s just salary — the actual pay is much higher once stock options and other perks are factored in. In 2012, the year Mr. Thompson became CEO, he “only” made $1.1M USD in salary, but was paid $12.9M USD in total compensation, factoring in bonuses and stock options.
A tax loophole allows corporations like McDonalds to directly deduct performance pay off their earnings, to make themselves look less profitable than they are. So it’s in McDonald’s best interest to keep the salary low and the performance bonus high. Retired McDonald’s CEO Jim Skinner and Mr. Thompson — who split the CEO spot in 2012, cumulatively made $11.6M USD in bonuses according to a report by the Institute for Policy Studies.
This year Mr. Thompson should make over $20M USD between salary and bonuses. Demos.org estimates in their study that he is making 2,000 times the average fast food worrkers salary.
By comparison a retail sector CEO, on average makes 304 times the wage of an average employee, according to the study by Demos.org. In construction the CEO to average worker pay ratio is only 93. This has largely arisen in the past decade. Since 2008 wages for fast food CEOs has skyrocketed, thanks in fact that the companies can write of this corporate handout.
Wages of fast food CEOs are among the most inflated of any business sector, with an average multiple over 1,200. [Image Source: Demos.org]
Meanwhile wages remain low for the average worker.
The disparity is creating a headache in some ways for shareholders. While most of the money is still going to large institutional investors and smaller investors (e.g. franchise owners), the single massive salary is highlight the deeper issues of inequity in this industry that thrives on paying its unskilled workforce sub-poverty level wages.
X. I, Robot
McDonald’s will likely eventually be forced by growing unrest to make a tough choice on whether to give in to worker demands. But it doesn’t necessarily have to give in as it has a trump card of sorts; an alternative to $15 USD/hour wages — automation.
Researchers at the University of Oxford’s Martin School of Business published a widely cited paper, which uses simulations of current employment and automation trends to suggest there is a 92 percent chance employees in service jobs will be replaced with robots in the next few years.
That’s not hard to believe given the inventions that are coming to the market. San Francisco, Calif.-based startup Momentum Machines is among the disruptive technologists aiming to come up with robots capable of creating common fast-food items with minimum human intervention.
The Alpha Machine burger maker uses tubes stocked with common condiments to create its customer burgers.
Its “Alpha Machine” is a 24-square foot burger maker, which roasts burgers, chops condiments, and toasts buns, all without a single human hand (other than to load the ingredients). It can churn out 360 burgers an hour, all without ever whining about how it’s unhappy with its poverty-level wages.
The result may be cheaper and more appetizing than a Big Mac.
Comments the company on a sales page:
With our technology, a restaurant can offer gourmet quality burgers at fast food prices. Our alpha machine frees up all of the hamburger line cooks in a restaurant. It does everything employees can do except better.
A similar startup is the Burrito Box. While Momentum Machines is pitching the Alpha Machine to large fast food chains, Burrito Box’s owners are selling it directly to gas stations. There are real burrito boxes in the wild, selling premium burritos for $3 USD plus tax. That’s a little more than YUM! Brands’ Taco Bell and unlike Taco Bell you can’t customize your order. But it provides nice convenience on the run and may just be taste of things to come.
As robots like the Burrito Box and Alpha Machine increase in production volume and become more refined, within a decade or two they should be able to to do most functions currently produced by cookstaff at a fast food chain.
XI. Robotic Kiosks
And on the front end, robotic ordering kiosks are allowing customers to order and pay for their meals faster and more accurately than the traditional model of relying on a fleshy human working the cash register.
Panera Bread Comp. (PNRA) CEO Ron Shaich supports raising the minimum wage, but has used robotic replacements of cash register employees as a means to cut costs. The company announced earlier this year that it would be testing a system designed to reduce its register count by 1-2 registers (leaving typically 1 or 2 remaining registers, depending on the store size). The replacement would be eight robotic kiosks.
Panera’s new kiosks
The sandwich-bread-and-soup fast food chain says it will spend $42M USD on the technology and hopes to have it deployed to all 1,600 stores by 2016. Judging by the kinds of media reactions we’ve seen thus far, the program will be controversial.
But Mr. Shaich insists it’s not about firing or laying off humans. He says the new kiosks will improve quality, stating:
The dirty little secret in the food industry is one in seven orders is wrong. We’re one in ten, a little better than average. Half of those inaccuracies happen during order input.
He points out that employees will still man at least one register and make the food. Still, many view it as a step towards doing away with the pesky humans.
DineEquity, Inc. (DIN) — owner of the IHOP and Applebee’s restaurant chains — is testing similar ordering kiosks for appetizers at its Applebee’s restaurants. Currently the kiosks operate in a support role and do not fully replace the waitstaff.
McDonald’s Europe President Steve Easterbrook is currently pursuing a similar bold rollout of automated ordering, with a planned 7,000 touch-screen kiosks across France. While just a test of sorts, the system — like Panera’s — will examine whether it is feasible to use current automation to eliminate cash register staff. While humans would still need to linger around as backups if the software fails, robotic cashiers would ostensibly lead to less theft, less errors in orders, and less wage complaints.
A robotic ordering kiosk is seen here at a French McDonald’s branch.
Between the robotic cooks and the robotic cashiers, restaurant payrolls could be dramatically slashed via automation, as the only employees needed would be humans to perform maintenance, loading of ingredients into cooking machines and employees to provide customer service in the event of errors.
In other words fast food could see a similar shift in numbers and roles of humans as the auto manufacturing industry saw in the 1960s and 1970s. The first employees to go, of course, would be those manning the lowest-paid, easiest positions. That means that McDonald’s — the hotbed of the wage debate — could become the proving ground for robotic fast food.
The key question is when to roll out these solutions. While some workers would rather never see them, clearly they’re coming. Their arrival will largely be dictated by how long human employees can deliver superior earnings to the machines. Hence, having discussed the possibility of automation; the financial factors putting pressure on corporations to raise wages or automate; and, lastly, what automation has occurred, we must finally turn to the one thing we have not yet looked at — what it would cost to give in to worker demands and not automate.
XII. An Alternative to Premature Automation — The Australian Answer
A major danger facing not only McDonald’s but the entire U.S. economy is the risk of premature automation as a means of ducking the minimum wage debate.
At its heart the minimum wage debate boils down largely to problems created by America’s inequitable tax code, which more so than any other factor favors large, established insitutional investors, killing meritocracy by percentages and degrees. And unfortunately that problem isn’t being fixed anytime soon.
On the flip side there are common sense solutions that could be adopted to allow the market to bide its time, easing the pain of the transitition to robotic service workers. One such solution comes from the “Land Down Under”, as The Atlantic notes.
[Image Source: The Atlantic]
In Australia, the minimum wage for adults is $15.30 USD/hour, while 16- and 17-year-old workers are allowed to be paid only $8 USD/hour. The result is seemingly positive. In Australia, positions at McDonald’s really are typically a teenage job, although a smaller portion of adults to still fill the ranks, largely populating low-level managerial positions like the role of shift leader.
The result is a very subtle rise in prices — 6 cents to 70 cents extra for a Big Mac, according to data from The Economist. But a 1 to 17 percent rise in prices in order to get a roughly the wage doubling that employees are demanding in the U.S.
That’s similar to a much ridiculed paper by University of Kansas undergraudate student Arnobio Morelix who created a firestorm of controversy when he suggested wages could be doubled in the U.S. by increasing Big Mac costs by $0.68 USD. The fault wasn’t so much Mr. Morelix’s. He did an admirable job in the study for an undergraduate college-level business student. But his paper had some flaws and given the hype it received from The Huffington Post and other outlets, many complained the paper had injected dangerous misinformation into the already volatile wages debate.
Indeed the methodology of Mr. Morelix’s paper was very flawed, failing to account for the franchise business model and balance between profit preservation and competition. Subsquent analyses suggested a price point of between $1.25-5.25 USD more per burger were themselves potentially flawed, as well. That estimate came courtesy of the Employment Policies Institute — a group opposed to increasing the minimum wage, which owns the coveted domain “minimumwage.com”. Still other experts argued it would cost nothing at all, given the highly competitive nature of the market.
The debate remains ongoing, but if there’s one take home it’s that we don’t really know what the change would be, even if we perform a much more complex and comprehensive estimate that Mr. Morelix’s work.
But the answer that the price increase would eventually come to almost nothing is probably the closest to being right, if a bit off. Mr. Morelix’s numbers likely accidentally coincide with an early jump in price amid rising labor costs. According to July 2013 figures from The Economist‘s Big Mac index, the price per Big Mac burger on average was:
That’s an eye opener.
It shows while Europe’s move of raising the minimum wage has backfired somewhat via higher prices and the replacement of employees with kiosk robotic order-takers in France, that there was a better solution. The solution appears to be to adopt a split wage with a higher wage for adults and lower for teens. As a result, in Australia not only are teenage jobs thriving (while teens still enjoy wages similar to the U.S.), but adults are now no longer paid at poverty levels.
XIII. Automation Won’t Fix America’s Social Problems, But Rushed Automation Could Damage the Economy
It’s a great solution, but unfortunately no one seems to be taking note.
President Obama has suggested that he supports a bill sponsored by Senate Democrats, which would move the needle on the minimum wage from $7.25 to $10 USD/hour — an increase of nearly $3 USD/hour. California has already passed a law requiring wages of $10 USD/hour by 2016.
Some Republicans even agree. President Obama’s 2012 Republican presidential race rival, former Massachusetts governor Willard Mitt Romney told MSNBC’s “Morning Joe” program:
I, for instance, as you know, part company with many of the conservatives in my party on the issue of the minimum wage. I think we ought to raise it. Because frankly, our party is all about more jobs and better pay.
If you’re going talk to the talk about being for the middle-class working person, if we have a minimum wage, it should be reasonably adjusted from time to time. For all the Republicans who come on and talk about, you know, ‘We’re for the blue-collar worker, we’re for the working person,’ there are some basic things that we should be for.
Historically the U.S. minimum wage has seemed to track with prosperity. The first permanent minimum wage was put in place by Congress with the Fair Labor Standards Act of 1938 (following a prior law being deemed unconstitutional by the U.S. Supreme Court), the prescribed amount was $0.25 USD/hr — $4.20 USD/hour in 2014 dollars. But that was in a post-Great Depression U.S.
By 1968 the wage was increased to $1.60 USD/hour — $10.90 USD in 2014 dollars. If linear growth continued (as economic growth of the U.S. did) that would have produced a spectacular wage of around $28.20 USD/hour by 1998. Instead the minimum wage was froze in 1981 $3.35 USD/hour ($8.74 USD in 2014 dollars), a freeze which lasted until 1990 (at which time the wage was $6.08 USD) in modern dollars.
Some helpful folks have graphed the minimum wage versus inflation and the results are pretty interesting:
U.S. minimum wages, inflation adjusted [Image Source: Financial Ramblings]
Still more interesting is the graph if you factor in the consumer price index (which provides a more accurate estimate of actual buying power than just inflation adjustment):
The minimum wage, adjusted to buying power has been steadily declining since 1968.
[Image Source: RaiseTheMinimumWage.com]
Both results suggest that the minimum wage is relatively low at present. But neither suggests that doubling the minimum wage is a practical possibility.
XIV. The Likely Results (Hint: It’s Bad)
But those are just the U.S. results. The Australian success story suggests that you can have your doubled wages and eat your Big Mac too — if you get a bit smarter and suggest a lower pay rate for teenage workers. It certainly sounds like a no-brainer, but the great minds of Congress appear oblivious to this possibility.
As a result, either wages will go up or public unrest will increase. Either way the issue will be unnecessarily destructive for all parties involved. Under pressure fast food companies will likely move more quickly to adopt automation in an attempt to avoid the issue.
But in the process they will likely face fresh outrage from the current generation of workers. And the unemployment that will result will likely create serious structural issues for the U.S. economy.
The key issue is that unless the U.S. can solve the flaws in its education system and welfare system that have caused so many adults to enter such a low paying position in the first place, we’ll arrive at a scenario where corporate fast food has preserved its profit by laying off most humans in lieu of machines. But now there will be more workers competing for less remaining jobs and less public buying power. As other service sectors eye similar solutions, there’s a great danger of jumping too quickly to automation without first creating high-tech jobs.
McDonald’s and its workers are on a collision course. [Image Source: AP]
You can’t fight change, as was previously stated. These changes would come sooner or later. But it remains to be seen whether high-tech jobs can be created in time — or arise in the eleventh hour, perhaps — which can preserve buying power if the fast food becomes the first major service sector to phase out humans beings for robotic service workers and a lingering skeleton crew of skilled humans to service those machines.
The problem — and potential solutions — lies in the inequity just not in the pay disparity between McDonald’s CEO and workers, to a great extent. Rather, the most offensive forms of inequity lie in the unequal taxation when it comes to CEO bonuses and higher taxation on indepenent franchisee income, versus taxation of large institutional investors via franchise profits and dividends/stock repurchasing (capital gains). In other words, it’s not just the rich guy versus the poor guy that’s the issue at hand. It’s also an issue of the super rich guy (insitutional investors) versus the somewhat rich guy (independent franchise owners) that’s driving the problem.
[Image Source: Best of the 80s]
That gets to the heart of the issue — and what could ultimately leading to a problem plagued campaign of premature automation. The core problem, is simple — America’s inequitable tax code.
Adopting Australia’s strategy to wage increases won’t fix the tax code. But it could be the ticket to preventing the situation from further deterioriating if no fix is in sight — which appears to be the case in America’s current political atmosphere.
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