Australia, Big Mac and the Minimum Wage

australiaCourtesy of US Uncut, with over 21,000 likes and 49,000 shares.  This meme attempts to show that raising the minimum wage doesn’t translate into an increase in prices by showing the price of a Big Mac in 3 different countries.  There is some truth to these stats, but it’s very misleading in its contention.  When context and logic are brought in, this argument falls apart.  For the sake of brevity, we’ll focus primarily on Australia and the US, as that is the most common example shown on social media.

The Big Mac Price Debate

The burger prices shown in the meme come from the “Big Mac Index“, which compiles the average price of a Big Mac in various countries around the world.  This is done by the Economist magazine, as a lighthearted way to see which currencies are overvalued, and they even admit it’s not a precise measurement for economic calculations.

For 2015, it lists $4.79 for the US and only $3.92 for Australia, which actually bolsters this meme’s case (it’s unclear where they got $4.65).  However, $4.79 seems wrong for American prices, just go to your local McDonald’s and see for yourself.  The Meme Policeman did some detective work and visited a Minneapolis McDonald’s, finding a price of $4.19 (see picture below).  This website seems to be a better indicator of the actual price of a Big Mac in the US, and puts it at $3.99 (the only item at $4.79 is a double quarter pounder w/cheese).

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Big Mac at a Minneapolis McDonald’s: $4.19

Perhaps the Big Mac Index takes into account airport, or other expensive locations, it’s not clear.  It certainly doesn’t seem to accurately capture American prices, but then again it’s not supposed to be taken that seriously.  In any case, it seems that the Australian Big Mac may be slightly less expensive, so we’ll continue with that in mind.

Australia’s Big Mac is Smaller

No, really!  It’s about 20% smaller than in the US for some reason.  This obviously skews the whole price relationship.  Assuming you had to buy 1.2 Australian Big Macs to equal an American one, it would set you back $4.70.

Other Consumer Prices

It shouldn’t be too controversial to point out that using a dubious measure of one sandwich at one fast food restaurant as a measure of consumer prices is ridiculous.  You’d probably be laughed out of any economics class for that.  What’s more relevant is what are the average consumer prices in the US vs. Australia.  Using Numeo we find these comparisons as of November 2015:

  • Consumer prices are 5.67% higher in Australia
  • Consumer prices including rent are 6.5% higher in Australia
  • Restaurant prices are 8.28% higher in Australia
  • Average meal at an inexpensive restaurant is $12 in the US vs. $12.92 in Australia

Contrary to what this meme insinuates, consumer prices, including cheap restaurants, are higher in Australia.

The Real Minimum Wage in Australia and US

The meme lists $15.58/hr for the Australian minimum wage.  This is a bit outdated, as it’s currently $17.29/hr.  However, this is in Australian dollars.  Using the current exchange rate, this is about $12.31 in US dollars.  Furthermore, Australia’s wage scale is graduated based on age, which is a tacit admission that high minimum wages hurts the young and low-skilled workers.  It’s a complicated scale that depends on several factors, but using their wage calculator, here’s the breakdown for a part-time, minimum wage fast food employee:

  • 16 years old- $9.49 ($6.73 USD equivalent)
  • 17- $11.39 ($8.09 USD)
  • 18- $13.29 ($9.43 USD)
  • 19- $15.19 ($10.78 USD)
  • 20- $17.09 (12.13 USD)
  • 21 and above- $17.29 ($12.31 USD)

While it’s true the US minimum wage is $7.25/hr, that’s only the federal law.  Most states, 29 in fact, have rates higher than that.  Many larger cities, like Los Angeles, Seattle and New York, have rates at or above Australia’s 21+ year-old rate.

What About the Laws of Economics?

This is really the proper way to think of the issue.  Pointing to statistics can be interesting, but there are so many factors clouding the price of products in various countries.  Different taxes, regulations, tariffs, labor markets, monetary policies, natural resources, the list goes on.  It’s just not possible to know which factors are directly contributing to the difference in Big Mac prices or to what extent.  In economics, they use the term ceteris paribus, which is Latin for “all things being equal” in order to isolate variables and make logical judgements about economic effects.

For example, in looking at the price of Big Macs, we could say if the supply of beef went down, ceterus paribus, the price of a burger would rise, due to the law of supply and demand.  This doesn’t mean that if the beef supply decreased it must result in a more expensive Big Mac, as there are countless other factors at play.  Perhaps the economy was bad, and people had less money to spend, thus decreasing the demand for Big Macs.  Maybe a competitor comes out with a better sandwich, and McDonald’s had to lower the price just to attract customers.  Who knows?  All economic theory can tell us is in this case is that a decreasing beef supply will put upward pressures on the price, not that it must increase the price.  This is why statistics are often a bad way to look at economic effects.

In looking at the minimum wage vs. Big Mac prices we need to think the same way.  If you force companies like McDonald’s to increase their labor costs, ceteris paribus, there will be an increase in their prices.  This is just basic economics.  Labor is one factor in the price of production, so increasing the price of producing something will tend to increase the price of the product.  Saying it has no effect, or the opposite effect would be nonsensical.  How much the minimum wage affects the price can’t be known for sure, but it does have an effect, and it tends to increase prices.  That tendency is greater the more the minimum wage increases.

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The 2015 Big Mac Index

Conclusion

This meme is a classic case of misleading with statistics.  Even using the Big Mac index, we clearly see a trend in countries with higher wages having higher prices.  The countries with the highest minimum wages (Norway, Denmark, Sweden) tend to have the most expensive Big Macs, while we find the countries with the cheapest burgers (India, Venezuela, Ukraine) tend to have lower wages.  As we saw above, the price can’t be directly correlated to the minimum wage, but it definitely has an effect, and it’s the opposite of what the meme purports.

 

9 Comments on "Australia, Big Mac and the Minimum Wage"

  1. Currency exchange rates fluctuate as the $AUD was $1.10 US in 2011 . Also the employer contributes 10%of the employees wages to a superannuation fund to fund his or her retirement . I don’t buy the corporate argument for low wages .Don’t attack the worker for trying to have raises to keep up with inflation , but rater direct your energy going after the bailed out banks , the corporate welfare and ENDING THE FED

  2. Why don’t you convert those Australian wage figures converted to US dollars back when the $AUD was $1.10 US Meme Policeman? Australian workers are far better of working the same job than their US counterparts

  3. Restaurant prices may be $8.28% higher than in the US , but you are not required to tip in Australia because they give the workers a decent living wage . Part timers are given higher wages than a full time workers.

  4. The meme also forgets to account for the fact that mcdonalds is a global company, and thus it cane take small gains in a country that has huge min wage. It can only run their because of the gains made in other places.

    ALso, we shouldn’t forget the most importent thing, aiming a gun at an employee and employer and setting a low limit on how much they can agree on. Cause people are too stupid and childish to agree on something. So better force them!

    • Forgets or ignores as not applicable? Most stores are franchises and independent owned and what one owner makes in one country has zero bearing on another owner in another country. People seem to think there is one owner of all macdonalds and he’s the guy with a monocule in the game of monopoly

  5. Another question would be how much of equal work is done by Automation? Thus requiring fewer employees

  6. Where I live, Wisconsin, most fast food workers make more than the minimum wage. Labor supply also plays a major role in wage rates. The best way to increase wages for workers is to grow the economy to the point that demand for labor at all levels exceeds the supply. On an individual basis, a person can improve one’s earning capacity by acquiring skills that are in demand.

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