Art Carden explores some of the microeconomics of accepting an increase in McDonald’s minimum wage. The starting premise is as follows,

Proposed hikes to minimum wages and improvements in working conditions are not free lunches, and at least part of the cost gets passed on to consumers in the form of higher prices. The reply from advocates of the higher minimum wages or better working conditions is usually something like “I’d be willing to pay an extra fifty cents (or two dollars or whatever) so workers can have a decent wage.” But what are the unseen costs of the benefits we seek to confer upon others?

The best point Carden makes, in my opinion, is his use of the substitution effect to show how an increase in the prices of McDonalds’ food would induce people on the margin to exchange their salads for Royales with Cheese. He also points out the income effect, which is to reduce overall consumption of fast food, especially amongst those who are less able to afford much of anything. Framing it as an act of benefiting some at the cost of the worst off is a great way to sell an argument. Although, I wonder how many of the worst off earn a minimum wage salary, or close to it (implying that a rise in wages will offset the income effect Carden has in mind).

But, if we assume close-to-homogeneity in relevant preferences, with regards to paying fast food employees more, I think Carden’s point weakens. If we suppose that everyone accrues a benefit from increasing fast food employees’ wages then the increase in costs comes with an increase in benefits. In other words, the marginal productivity of the fast food employee rises. If we weaken the homogeneity assumption the point still more-or-less stands, although it’s really an empirical question. How will the margins of supply and demand shift once we consider the fact that people benefit from knowing that minimum wage workers earn a certain minimum income? If the margins shift up and to the right, this would both push the price of fast food up and it would increase wages. Why would it increase wages? If we assume that the whole price rise in caused by an increase in the marginal productivity of labor, in a competitive market rival firms will bid up wages until they equal the workers’ marginal productivity.

The thing is, the modern fast food market is a relatively competitive market. If we do derive value from a higher wage, why is this not reflected in the current price? It’s possible that maybe your preference is above the mean, and that the price represents that mean. I don’t think this is right, because my guess is that over 50 percent of people prefer the minimum standard of living to be higher. I include people who think that a wage floor above the market equilibrium will cause unemployment, or that some interventions can make the conditions of the poorest worse still. These people (this group incudes me) would still like to see economic growth, so that the standards of living of the worst off will improve over time — we can still be bleeding hearts. So, why aren’t fast food workers’ wages higher?

My guess is that there’s a market failure. We would all like to improve the quality of life amongst society’s worst off, but the effect between higher food prices and higher wages isn’t immediately visible. That is, a single McDonalds’ customer could get away with paying a lower price and still benefit from higher wages, as long as everybody else is still paying the higher price. Economics call this the free rider problem. The benefit of a higher standard of living for the poorest is a non-excludable good; in fact, even those who don’t buy fast food will benefit. The result is that the good is under-provided, the good in this case being the higher standard of living.

The solution to this market failure, in my opinion, isn’t an increase in the minimum wage, but a policy of income redistribution. This, of course, includes private charity, although one could argue that charity also suffers from a free rider problem. In a free society, where we decide on a set of constitutional rules, we may finally agree that income redistribution is within the jurisdiction of collective action, and then, to the best of our abilities, we do an analysis of comparative costs to know whether the costs of collective action offset whatever benefit.