The Real Change In The Cost Of A Big Mac If McDonald's Workers Were Paid $15 An Hour: Nothing

I will admit to having been amused at the error strewn Huffington Post piece which insisted that doubling the wages of McDonald’s workers to $15 an hour would have only a minimal effect on the price of a Big Mac or the dollar menu. Clare O’Connor here at Forbes describes what went on. My amusement isn’t at the errors in the calculation, nor in the way that it was subsequently re-reported. We all make errors at times and the important thing is what one then does: just as Mother always said, ‘fess up and try not to do it again. On which point everyone has acted excellently.
My amusement rather is about the fact that a doubling of, or a halving of, or any other change in, the wages of McDonald's MCD +0.11% workers will have absolutely no effect whatsoever on the price of a Big Mac or the dollar menu. For prices are not set by the cost of production of something, but by the supply and demand for that item.
Adam Ozimek makes an excellent point here about changes in labour costs. The choices available are not only whether to raise prices in order to cope with those changes in costs. Instead, a change in the price of labour leads to the opportunity to substitute capital for labour.

Doubling of labor costs will simply increase a fast food restaurant’s incentives to adopt technology like this. And if fast food wages doubled everywhere it would spur the development of these technologies even faster.

The obviousness of this point is demonstrated by the way in which Apple AAPL +1.48% gets its kit manufactured in China. There’s, as we all know, some 250,000 people working at Foxconn to make all that shiny shiny gadgetry. They’re paid $400 to $500 a month to do so. If all that manufacturing were done in the US people would be being paid $2,000 to $3,000 a month for the job: but there would be many fewer of them and many more machines. A change in the labour costs changes the trade off between employing labour and employing capital to reach the same production goal. This is of course why a rise in the minimum wage does indeed increase unemployment. Perhaps not much, not as much as some alarmists claim, but it really does.
But my major point is this that Adam alludes to:

What do people expect will happen when prices go up 17%? If McDonald’s could raise its prices by that much without lowering demand they would.

Take a step back a moment. We all know that McDonald’s is indeed a rapacious capitalist organisation. It cares only about the profits being made for its shareholders, not for the wider group of stakeholders that is its employees and the community. We know this absolutely because this is the very thing that everyone is complaining about: McDonald’s cares so much about profits that it’s not paying a living wage to its workers.
Hmm. Well, what else can we surmise about a rapacious capitalist organisation? In that ruthless pursuit of gelt and pilf for its shareholders it is going to gouge the customers for the absolute maximum that it can, yes? This is what capitalists do: we hear people complaining about that all the time as well. What limits McDonald’s ability to entirely empty our wallets every time we want a hamburger is that there are other people who will also sell us one. Wendy’s, Jack in the Box, In and Out, there’s a multiplicity of places where we can go to fur our arteries. Which leads to our conclusion on pricing in a capitalist and free market economy. The capitalists charge the absolute maximum they can get away with, that ability being limited by the competition that comes from alternative suppliers.
Thus the price is not determined by the cost of production of an item. Which means that, if we raise McDonald’s production costs by increasing the wages of the workers, the price isn’t going to change. For it’s not production costs that determine prices: it’s competition that does. Another way to put this is that McDonald’s is already charging us the absolute maximum that it can for its current level of sales. Thus it cannot raise its prices if its production costs go up.
All of which means that the real change in the cost of a Big Mac, or the dollar menu, if McDonald’s workers were paid $15 an hour is: nothing. For production costs simply do not determine the prices that can be achieved in a competitive market.