Their View: Failing the Big Mac economics test

Some 15 years ago, searching for a consistent way to compare wages of equivalent workers across the world, Orley Ashenfelter, an economics professor at Princeton University, came upon McDonald’s.

The uniform, highly scripted production methods used throughout the McDonald’s empire allowed him to compare workers in far-flung countries doing virtually the same thing. The company also offered a natural index to measure the purchasing power of its wages around the world: the price of a Big Mac.

Some of his findings are depressing. Real McWages — measured in terms of the number of Big Macs they might buy, declined over the first decade of the millennium widely across the industrialized world.

Even before the financial crisis struck, the McWages of McDonald’s workers in the United States, many Western European countries, Japan and Canada went nowhere between 2000 and 2007, a period of steady, though unspectacular, economic growth in most of the developed world. In the U.S., real McWages actually declined.

“It’s puzzling that we can get away with paying so little for what are really terrible jobs,” Ashenfelter told me.

Faced with a tightening labor market and besieged by a vocal, combative movement demanding higher wages for America’s worst-paid employees, McDonald’s, Wal-Mart and other large employers of cheap labor have offered modest raises to millions of workers scraping the bottom of the job market.

The battle for public opinion is fought mostly on ethical grounds - pitting the healthy profits of American corporations and the colossal pay of their executives against bottom-end wages that force millions of workers to rely on public assistance to survive.

But what is often overlooked in the hypercharged debate about corporate morality is how a similar dynamic is taking hold around the industrialized world.

What this suggests is that the job market — that most critical institution of capitalist societies, the principal vehicle to distribute the nation’s wealth among its people — is not working properly. This raises a fundamental question: If the job market cannot keep hardworking people out of poverty and spread prosperity more broadly, how will it be done? Is public assistance our future?

Lane Kenworthy, a professor of sociology at the University of California, San Diego, has disentangled the evolution of household incomes over the last three or four decades. The wages from work, he found, are playing a diminishing role for a growing swath of the labor force.

In some ways, Mitt Romney, with his self-damaging remarks to wealthy contributors during the 2012 presidential campaign that 47 percent of Americans “are dependent upon government,” was right.

Between 1979 and 2007, almost one-third of the income gains of American households in the bottom half of the income ladder came from government transfers.

But Romney’s efforts to blame the victims of an inadequate job market for turning to government help missed the larger point: A combination of sluggish employment and stagnant wages has forced more families to rely on the public purse in many developed nations.

After 40 years of stagnant earnings from the middle on down, Kenworthy said, it’s hard to sustain the argument that things will be all right in the end. “That’s a very long time to be just an aberration,” he told me.

Perhaps it is simply that the demand for skill in the modern job market has grown faster than its supply. The United States, notably, hasn’t increased educational attainment at the rate the labor market requires. And the economy simply doesn’t need as many less-educated workers as it once did.

“We have spent the last three decades not raising education levels at the rate the labor market demands,” said David Autor, a professor of economics at the Massachusetts Institute of Technology. “So we have a growing surplus of less-educated workers.”

But maybe something else is going on. Lawrence Katz, a professor of economics at Harvard, noted how some 40 years ago, the compensation of American workers became decoupled from productivity growth, which continued to advance even as wages stagnated. “We haven’t kept up improving skills as we did before,” Katz said. “But it’s not all about that.”

Globalization, which has moved a large share of industrial jobs to China and other cheap labor markets, has clearly played a role. Or what if robots — information technology generally — are inexorably taking over?

The idea, once considered heretical among mainstream economists, has gained some credence in recent years, as the share of income accruing to workers has been shrinking in many countries, rich and poor. While the reasons for these shifts are still intensely debated, the changes suggest education, the standard prescription, may not be enough to secure a good job.

Professor Richard Freeman, a labor economist from Harvard, argues that we need entirely new mechanisms to distribute income across the economy.

“The best solution is that these people get their income through some citizen’s ownership of the capital stock so that they are like rich people with much nonlabor income,” he said. That “will take some policies to make the most highly unequal part of income — ownership of capital — more equal.”

Katz argues that more must be done to ensure work pays — including achieving higher minimum wages. He suggests that government subsidize complements of work, like day care. Infrastructure investment and public employment also could help. He is skeptical that profit-sharing firm by firm is part of the solution.

“It generates inequality,” he argued. “Not everybody can work at Apple.”

But Freeman’s idea of societywide profit-sharing, to give all workers some share of the returns to capital that now only benefit the rich, should not be lightly discarded. Something is not working right for a majority of Americans. Maybe it’s time to try something different.