Why McDonald’s has been raising prices

Even socialists are bristling at the rising cost of fast food. 

A McDonald’s worker hands a paper bag to a customer at a drive-through window in Houston, Texas.

A McDonald’s customer receives his order at a drive-through in Houston, Texas. Brandon Bell/Getty Images

Over the holidays, extremely online progressives debated the most important theoretical question facing the American left today: Is grousing about the price of a Big Mac counterrevolutionary?

For months now, political observers have been squabbling over whether the Biden economy’s unpopularity reflects its genuine weaknesses or voters’ collective failure to recognize its virtues. On the one hand, the president did preside over a sustained period of exceptionally high inflation. On the other, Americans’ real wages and net worths are higher than they were before the pandemic, unemployment is near historic lows, paychecks are rising faster than prices, and economic growth exceeded 5 percent in the third quarter of 2023.

But in late December, the socialist commentator Doug Henwood noted that a far more important economic indicator showed the US economy in crisis, posting on X, “Can’t imagine why people think this isn’t a great economy. Lunch for three at McDonald’s: $44!!”

Many liberals proceeded to accuse Henwood of tacitly lamenting fast food workers’ wage gains. After all, such workers had secured large raises in recent years, thereby increasing their employers’ labor costs, and thus, menu prices. As Matt Yglesias noted, Big Macs had historically been $1.53 more expensive in social democratic Norway than in the United States. Complaining about a $44 McDonald’s bill was, therefore, a textbook case of bourgeois deviationism.

All this was a bit unfair. Henwood insisted that he was merely citing his extraordinary Mickey D’s bill as an illustration of elevated food prices. Which is reasonable; the costs of commodities like bread and beef are major determinants of burger joint prices. And the socialist radio host was also, almost certainly, a victim of price-gouging: Henwood said he had purchased his meal at a highway rest stop, where fast food chains often exploit famished drivers’ limited options by charging them a premium for quick calories.

Nevertheless, Henwood is far from alone in bristling at inflation in the quick eats sector. Recent months have witnessed many a viral complaint about, say, $18 Big Mac combo meals. And for progressives, such discontent may be symptomatic of a genuine political challenge.

Reducing wage inequality typically requires increasing the cost of labor-intensive services, at least for a period. In the long run, thinning the ranks of the working poor can leave almost everyone in society better off. In the short term, however, middle-class households can experience low-income workers’ wage gains as a burden. Ideally, we would mitigate that burden by tackling other cost pressures through public policy. But at a minimum, progressives should avoid affirming the idea that the measure of our economy’s vitality is the affordability of its quarter-pounders.

As income inequality fell, public discontent with the economy rose

In recent years, the US economy has grown less unequal and more unpopular.

Between 2020 and 2022, workers at the bottom of America’s income distribution saw their real wages grow by 5.7 percent, even as those at the top saw their real pay drop by 5 percent. As a result, income inequality shrank. Since the height of the pandemic, roughly 40 percent of that post-Reagan jump in inequality has been erased, according to a recent working paper from the economists David Autor, Arindrajit Dube, and Annie McGrew.

As low-wage workers’ living standards rose, however, the American public’s assessment of the economy soured. In January 2020, more than 60 percent of US adults described their nation’s economic conditions as “excellent” or “good” in Gallup’s polling. By last fall, that figure had dropped to 20 percent.

These two trends aren’t necessarily related. After all, the median US worker saw their purchasing power decline for most of 2021 and 2022 as prices rose faster than wages. And while inflation slowed markedly in 2023, the price level remains elevated. Inequality is an abstract concept; prices are a concrete burden. We wouldn’t expect the typical American to care more about a reduction in the Gini coefficient than an increase in their grocery bills.

Yet there is some reason to worry that the newfound bargaining power of low-wage workers is contributing to the broader public’s discontent. With a high demand for labor, such workers have been able to demand better compensation or quit unremunerative jobs. That in turn has reduced the availability and affordability of labor-intensive services. Child care has grown harder to come by as workers have left that industry for higher-paying jobs. And, as Henwood’s controversial post illustrated, fast food has grown more expensive as food service workers have secured better pay.

The Republican Party was quick to politicize the latter phenomenon. In June 2021, the National Republican Congressional Committee (NRCC) — the body responsible for electing a GOP House majority — released an official statement blaming Joe Biden’s “socialist stimulus bill” for the fact that Chipotle was raising its menu prices by 4 percent in order “to cover the cost of increased employee wages.” In so doing, the GOP effectively bet that opposing raises for food service workers was good politics.

Since then, menu prices at fast food restaurants have increased considerably. Such prices rose 6 percent last year, after advancing by 6.6 percent in 2022 and 8 percent in 2021. Inflation has been even more pronounced at some signature chains. In its earnings call in October, McDonald’s said that it expected to have raised menu prices at its US locations by roughly 10 percent by the end of 2023, after hiking prices 10 percent the previous fiscal year.

Many viral complaints about burger prices have ensued. Last year, a Financial Times journalist expressed shock on X at a $17.59 Big Mac combo meal and had his incredulity written up by the New York Post. TikTok influencers have turned their anguish at exorbitant McDonald’s bills into hit video content, with legions of commenters expressing their own outrage at the cost of such unhappy meals.

How do we know that rising wages have helped supersize McDonald’s prices?

Fast food prices are determined by a variety of factors. According to Michael Reich, an economist with University of California Berkeley’s Center on Wage and Employment Dynamics, food accounts for one-third of the quick-service industry’s operating costs; commercial rent and non-food materials account for another third; and wages make up the rest. Therefore, when rent and meat get more expensive, that puts upward pressure on fast food prices.

Businesses don’t merely charge what they must in order to meet expenses; they charge what they can get. When consumers have more money to spend, fast food chains tend to have more scope for raising prices without losing business. Since the pandemic, we’ve seen substantial increases in both demand for quick-service meals, and the costs of food and rent. So, wage growth is by no means solely responsible for the rising cost of Egg McMuffins.

Nevertheless, the improving fortunes of low-wage workers is a key part of the story. Between the pandemic’s onset and August 2023, the average hourly wage at a limited-service restaurant increased by nearly 30 percent, according to Labor Department data reported in Bloomberg and the Wall Street Journal. According to Reich, for every percentage point increase in a fast food firm’s labor costs, one might expect to see a bit less than a 0.333 percentage point increase in menu prices. This is a rough estimate, but it’s a decent rule of thumb. And it would imply that rising wages have nudged fast food prices up by more than 9 percent since the pandemic’s onset.

In other words, to an extent, costlier quarter-pounders are the price of progress on wage inequality.

When workers get raises, the economy can profit

If the burgeoning bargaining power of less-skilled workers comes at middle-class consumers’ expense in the short run, almost everyone stands to benefit from rising working-class wages in the long term.

Middle-class households can more easily afford servants in many developing countries than they can in the United States. Yet America’s middle class is nevertheless far wealthier than its counterparts in India or Pakistan. Even the privileged are generally better off in an economy with high levels of labor productivity than in one with a large pool of hyper-exploitable workers.

And there’s reason to believe that rising working-class wages are a key driver of productivity gains. When workers’ time is cheap, businesses have little incentive to develop labor-saving technologies or production methods. As wage bills rise, by contrast, innovation often becomes imperative.

Ironically, conservatives often cite this reality as an argument against increasing the minimum wage. Specifically, right-wing economists and commentators have often warned that raising the wage floor will cause employers to automate jobs away. Yet this is another way of saying that minimum wage hikes increase investment in productivity-enhancing technology (which is the ostensible aim of just about every Republican tax cut plan).

In any case, it is true that when wages rise at the bottom of the labor market, firms invest in labor-saving technology. In 2018, Grace Lordan and David Neumark demonstrated this empirically. Those economists reviewed 35 years of government census data, identified jobs that could be automated given existing technology, and found that after minimum wage increases were enacted, “the share of automatable employment held by low-skilled workers” declined. In other words, minimum wage hikes spurred capital investment and increased productivity by mechanizing tasks that did not require uniquely human skills.

The notion that high wages spur productivity gains is consistent with the American economy’s broader historical record. As Neil Irwin observed in 2018, productivity booms have tended to follow labor market booms, while deep recessions have given way to productivity slumps.

This relationship between wage gains and productivity can be witnessed within today’s food service industry. As Bloomberg’s Justin Fox notes, as restaurant wages jumped between 2020 and 2021, the sector’s output per worker hour soared by 21 percent.

In the short term, these productivity gains have not been sufficient to reduce restaurants’ operating costs and, thus, prices. But in the long term, when businesses increase the labor efficiency of their production processes, their wares tend to become more affordable.

A world of cheap burgers and high working-class wages is therefore possible. Middle-class consumers need not see the rising fortunes of less-skilled workers as a threat to their standard of living.

For the moment, though, there is a genuine tension between boosting compensation for America’s most vulnerable workers and minimizing the cost of labor-intensive services for the nation’s consumers. Precisely how liberals can best navigate this tension isn’t easy to say. At the very least, though, we should not encourage our fellow Americans to mistake the symptoms of rising worker power for those of a deepening economic crisis.

Sourse: vox.com

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