Subsidizing Wal-Mart & McDonalds

As more people take sides on the minimum wage debate, and as the antibusiness and progressive movements restart from their occupy disaster it may not surprise many that generally low skill and low paying employees in retail and fast food are angry. Wal-Mart and McDonalds are generally seen by protesters and supporters of minimum wage as the enemy. The argument by many of these people is that Wal-Mart and McDonalds have the ability to increase costs so as to satisfy a $15 per hour pay as a minimum, even more they want legislatures to pass laws to make this the minimum wage federally. Now the idea that Wal-Mart could afford it or not is not principled. In both the fast-food and retail industry a variety of companies exist, all of whom generally pay the similar wages. However, not all have high profit margins and not all preform at the same level all the time. So, the question of asking executives at Wal-Mart to forgo some money so that some employees can get paid a little more is not at all applicable under current mechanisms and also such an argument makes wrong assumptions about labor markets and Wal-Mart financing itself.

Now here is where things get interesting. For me minimum is generally a dumb idea. If the economy is not in a boom and wages aren’t increasing at the historic rate then minimum wage causes unemployment (above equilibrium). If the economy is improving the minimum wage does nothing to effect the well being of individuals and in fact may discriminate against individuals that want to sell their labor at a low price, such people could be disabled individuals, minorities, immigrants, etc. Anyways back to what I found interesting, since the arguments for minimum wage have hardly improved. Recently it was discovered that McDonalds recommends to its employees to take advantage of welfare benefits. Similarly Wal-Mart has many employees that use Medicaid heavily. Unlike McDonalds however they didn’t have a service phone line that told people how to live off of welfare.

If one were to analyze what was occurring correctly it would seem that McDonalds was being subsidized by the government. Of course welfare is available to a wide range of people and anyone in a variety of jobs can apply for some welfare in some form. But McDonalds actively promoting it to employees makes it relatively more direct. In fact, I think it acts the same way as a basic wage subsidy program. Many people have suggested wage subsidy programs as an alternative to many forms of welfare and unemployment insurance. Personally, I don’t think its as bad as current programs, however it would require heavy regulation and administration to actually get wages to increase, and in that case it doesn’t help to keep the firm’s profitability at the rate they want and keep the wages high enough so people don’t complain that they don’t have a “living wage”. The results I fear in the long run will be similar to the ones sounded off today about $8/hr wage for flipping burgers at McDonalds, in the end certain market situations will never allow the person living off of McDonalds alone to be able to afford a comfortable life. Now I understand that we have yet to recover from the recession fully and thus wages haven’t grown (at the rate they should). Thus, the application of wage subsidies could be slightly more effective. But as we have seen with McDonalds, the welfare that employees were pushed into getting so that they can “put up with” minimum wage has not solved their frustration.

Its important to know that I am just making some observations and really the issue is not that this shows that wage subsidies are useless. Personally, it will be very expensive to regulate and administer, and the issues with what sector to apply subsidies too is very difficult. For this and other various reasons I usually support basic income.

Now there have been some attempts at resolving the issue of poor living standards of fast food employees, especially with the advent of the McDonalds revelation. Barry Ritholtz suggests some solutions:

The simplest solution is to raise the minimum wage. If full-time employees are living below the poverty level — especially those with children — its no surprise they are going to need public assistance. Raising the minimum wage over a period of time will eliminate much of this corporate welfare. The costs will be slightly higher prices at fast food restaurants and low end retailers.

The next proposal is more severe: Charge back the amount of public assistance any employee receives to the company he or she works for. It would be separate from tax filings, and simply be a direct penalty charged to the firm. I doubt there is much political will for this proposal, but I can see some people — especially on the Left — supporting it.

I kind of like one or two things but then the rest  is useless. Minimum wage doesn’t stop it really. Most of these individuals may end up paying for the higher prices later as lower income individuals comprise a large portion of the consumers of fast food restaurants and low end retailers. So, really it doesn’t improve their real income (not to forget the other long term side effects of raising minimum wage, especially in a slow economy). This may decrease the amount of individuals on welfare, but thats assuming none are let go.

The second proposal is a little more ridiculous. Charging McDonalds for an employees welfare benefits is a little like triple taxing them. There are corporate taxes, income taxes, and now penalties for the choices of other individuals. I understand that what McDonalds did was not exactly PR friendly or ethical in some cases but really doing this is supposed to be an economically good option. If minimum wage was supposed to increase prices slightly first in most cases then could you imagine what this will do to prices. Effectively McDonalds for example could be paying far above minimum wage or the market price. And if its above the market price it will act like a minimum wage so many desire. One above the general equilibrium and thus unemployment occurs. In this case it may be far more sever than minimum wage in a slowly growing economy.

If you want to stop the abuse of welfare you cut it or means test it. Or just convert basic income or wage subsidies as a full (and only) program already, the can be more fiscal and market friendly.

The last suggestion though is may favourite for good reasons:

The most radical idea is bit of pure fantasy: Guarantee every person in America a minimum salary. That is a proposal under discussion today in Switzerland. Its hard to even imagine such a concept gaining traction in the U.S. outside of the Great Depression era.

I don’t think its as radical as he may believe it is. I think its just that many politicians don’t believe in policy but rather symbology. So, the GOP will say “what government giving you basic income, what next weed and gay marriage” and the democrats will say “its not enough we need to make the corporations pay, this is our America and everyone has the right to [INSERT SERVICE] and a good living” or something flashy. Basic income for me is knowledge neutral (for the most part), meaning that since its a base it doesn’t interfere with the cycle of consumption and production, both of which are driven by the knowledge created through the pricing mechanism.

PS  Another possibility is that welfare gets means tested federally and in most states and McDonalds has to fire employees as really they couldn’t afford them. They could raise prices, but a fall in revenue will cause there to be lay offs. Then maybe McDonalds will invest in automated service and with that there will be a variety of good and bad. Largley good but some economist seem scared of automation. To me bring it on, just make sure the market bares the risks not the government.

3 Comments on “Subsidizing Wal-Mart & McDonalds”

  1. chris says:

    Corporatism needs to end. Large government and large corporations increases the income gap. We need to remove the corporate shield and encourage small businesses.

  2. sabhimanyu says:

    Income inequality has more complex rule than corporatism alone. Moreover, how will jobs be created if everyone’s an entrepreneur? While it’s important for big firms to increase wages for low-paying workers, it’s also important for governments to make sure they aren’t “triple taxing.” On the other hand, guaranteeing “every person in America a minimum wage salary” looks a little radical to me as the US government is under severe debt and although it may be a viable aspiration for the long run, it doesn’t seem practical in the short term.

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