"It profits me but little that a vigilant authority always protects the tranquillity of my pleasures and constantly averts all dangers from my path, without my care or concern, if this same authority is the absolute master of my liberty and my life."

--Alexis de Tocqueville, Democracy in America

Tuesday, July 30, 2013

Let Me Put You Some Basic Microeconomics

Fast food workers in several U.S. cities, including New York, Chicago, St. Louis, Detroit and Milwaukee (all cities run by Democrats for a long, long time), have gone on strike, seeking $15/hr. in wages, or more than double the minimum wage.

Let's do some basic math.   The fast food industry is incredibly competitive, with profit margins often less than 10%.    A McDonalds franchise, for instance, averages profits that are 5.7% of gross sales.   Here is the breakdown.    


Let's assume you operate your McDonalds franchise as a flow-through S-corporation.   That means you make $154,000 a year for your family.   That's a nice living, putting you firmly in the middle-class, but it's hard to characterize a McDonalds owner as a rape-and-pillage robber baron exploiting his workers.   Still, imagine if you raise his labor costs from an average cost of, say, $9/hr. to, say, $9.90, a 10% increase.   That would reduce his profits to $100,000 (because it adds $54,000 to his labor costs for his "crew payroll" of $540,000).   How about if you raise it from $9/hr. to $10.80/hr., a 20% increase.    Now you've reduced his profits to $46,000.   You are probably already past the point where an entrepreneuer would decide to close this business.   At about $11.50/hr. (assuming again that the average wage at McD's is around $9/hr., or already above minimum wage), you've wiped out his profits altogether.   The business closes and all the jobs disappear!

In short, what liberals never understand is that you can't just "raise" the wage at a business like McDonalds.  It's not elastic.   You can't just pass on the higher labor costs to the consumer, because the consumer can go elsewhere for his food.   And besides... who exactly are the consumers at big city McDonalds restaurants?   Other low-income people, for whom the relatively cheap calories at McDonalds are arguably a historical boon.  

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