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BUSINESS DAY

Big Mac Test Shows Job Market Is Not

Working to Distribute Wealth
APRIL 21, 2015
Eduardo Porter
ECONOMIC SCENE

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 fast-food empire allowed Professor Ashenfelter 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 United States, real
McWages actually declined.

“It’s puzzling that we can get away with paying so little for what are really
terrible jobs,” Professor 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, Walmart 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 Mr. 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.

In Canada, for example, labor market earnings for the bottom fourth of the
income ladder grew by roughly $25 a year between 1979 and 2007. Government
transfers increased by $78. For Canadian households one rung higher — between
the 25th and the 50th percent of the earnings distribution — there were no
increases in labor market compensation. All gains came from the government.

In Germany — often portrayed as the gold standard of the postindustrial labor

market — the entire bottom half of households experienced shrinking earnings
from work. They only got ahead because of rising government benefits.

After 40 years of stagnant earnings from the middle on down, Professor

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,” Professor 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 that education, the standard
prescription, may not be enough to secure a good job.

In that case, argues Prof. Richard B. Freeman, a labor economist from

Harvard, 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.”

Has capitalism reached such an inflection point? Professor Autor says no — at

least not yet. “The amount of concern is out of proportion with the evidence of
what is actually happening,” he said. People look at their iPhones and “extrapolate
from that to mass unemployment.”

The argument that robots are about to wipe out millions of good jobs is
problematic at best. If that were true, our productivity should be rising at a far
faster pace.

What’s more, technology is not merely replacing labor. They are often
complementary. Take ATMs. While they reduced the number of tellers needed at
any given branch, they also reduced the cost of additional branches. One recent
study suggests that, taking all this into account, ATMs may have actually increased
teller employment.

Still, even if the prescription of more education remains sound, it might not
hold forever. And while more education might be necessary, it seems insufficient.

Professor 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 Professor 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.

Email: eporter@nytimes.com Twitter: @portereduardo

A version of this article appears in print on April 22, 2015, on page B1 of the New York edition with the
headline: Job Market Failures in a Big Mac Test.

© 2015 The New York Times Company