McDonald's has 50,000 employees in China. They wouldn't need that many people if demand was solely driven by American tourists. —Jamal Haider of the Paris School of Economics
Orely Ashenfelter had an epiphany about international economics in, of all places, a McDonald's in India. Over Maharaja Macs, the country's version of the iconic Big Mac, the Princeton economics professor debated a former student on the best way to compare the wealth of nations. "How much do you think a person working at this McDonald's makes?" he wondered. His student didn't know, so they decided to ask the franchise manager.
"We found out a worker makes about 25 rupees an hour," Ashenfelter said. "So what that means is they are making about 50 cents an hour."
By American standards, that wasn't a great living. But Ashenfelter explained to his student that wages on their own don't reveal much. A grasp of people's economic well-being only emerges when there is a sense of what they can buy with their wages, he said.
So what can an Indian McDonald's worker buy with an hour of pay? As it turns out, not a Big Mac. The Maharaja Mac costs $1.62, which means that it takes an Indian McDonald's employee more than three hours to earn the money to pay for a sandwich that most Americans can pay for with the loose change in their sofa.
For years, the Economist Magazine has published an index of the prices of Big Macs in countries around the world. The results are an easy to understand indicator of which currencies are overvalued and undervalued compared to the U.S. dollar. For example, a Big Mac in America costs about $4.20. However, an American only has to pay the equivalent of $2.12 for a Big Mac in China, but more than $7 for the burger in Norway. This means that while Chinese goods are relatively cheap for Americans, Norwegian goods are quite expensive.
Returning to America, Ashenfelter decided to look more systematically at how long McDonald's employees in countries around the world have to work to earn enough to buy a Big Mac. His research, published in April, suggests that the rate at which a McDonald's employee earns Big Macs reveals which countries are rich, which are poor and most importantly which are growing.
How many Big Macs per hour a country can afford to pay is shorthand for how productive the country is. Countries that are productive have more money to go around and are therefore able to pay workers more, even McDonald's workers. And when workers have more money they are able to buy more. On the other hand, countries that don't produce a lot aren't able to pay as much because there is less total income to go around. The workers in these countries are relatively less well off and are therefore not able to buy as much.
The nations of the world are diverse in ways that make any economic comparison complicated. But about 120 of them have at least one thing in common: McDonald's. Around the world, McDonald's employees perform similar tasks with similar ingredients stored in similar freezers and prepared according to specific instructions.
Notwithstanding the fact that all McDonald's employees do essentially the same thing, their wages vary country by country. In the West, a McDonald's employee earns between two and three Big Macs an hour, Ashenfelter said. McDonald's workers in India, China and Latin America earn 10 to 15 percent of what workers in the West make. Meanwhile, Russian and Eastern European employees of McDonald's earn 25 to 35 percent of what workers in the West make.
But why the variance? "Some economies are screwed up," Ashenfelter said. It's not that Chinese and Indian employees of McDonald's are less skilled. Rather, wage differences are products of the economy of the country. Ashenfelter's Big Mac study provides evidence for the idea that the gap between rich and poor countries comes down to worker productivity on tradeable goods.
"When a country becomes skilled at making something, they can sell it to foreigners and get rich," he said. As incomes rise, so do prices, including the price on burgers. As the price of a burger goes up, so do the wages of the people who prepare them.
In examining Big Macs per hour over time, Ashenfelter can see which countries are growing and which have plateaued. For example, wage growth was "entirely confined to the developing countries of Russia, India and China during the period of 2000-2007," said Ashenfelter. During the financial crisis of 2007-2011, Ashenfelter found that wages in most countries actually declined. Russia, Latin America and China were notable exceptions.
Ashenfelter travels around the country giving lectures to university students about his Big Mac index. "I tell kids I will pay for the Big Macs they eat in foreign countries if they send me the receipts with a little write-up on the back about what they learned," he said. "You wouldn't believe the receipts I get."
Part of the appeal of Ashenfelter's index is that it is an easy way to illustrate complicated economic ideas. It is as simple as asking someone, "How many Big Macs can you get with X," he said. "You can teach anyone a little bit about economics. Even kids can understand this stuff."
Though eating at an American chain restaurant while traveling internationally is looked down on by many seasoned travelers, Carla Stone, an international public health consultant based in Delaware, thinks the experience can be eye-opening, particularly for children.
When traveling internationally for work commitments, she makes a point of taking her daughter to McDonald's restaurants. "She gets to see how McDonald's adapts to the local culture," Stone said. She noticed that there was chicken but not beef at the McDonald's in India and pasta dishes on the menu in Italy. But more than providing insight about the cultural differences, "Eating at McDonald's teaches families on a real level not just about exchange rates but develops an awareness about who can afford to buy McDonald's," Stone said.
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Critics of Ashenfelter's index, such as Jamal Haider of the Paris School of Economics, suggest that it is a clever gimmick but not an accurate reflection of relative currency values. One of his criticisms is that demand for McDonald's food in many foreign countries is driven by tourists, not locals, which skews the price. Ashenfelter is not inclined to give much credit to this line of thinking, however. "McDonald's has 50,000 employees in China," he said. "They wouldn't need that many people if demand was solely driven by American tourists."
Ashenfelter admits the model has some limitations. "One of my biggest concerns has been that you could have a situation where there is no competition in the product market," he said. So for example in some countries, the government will only give one license to one American fast-food company. If McDonald's is there, then Burger King and Wendy's are not. Without competition, McDonald's has a monopoly, and that will distort the price. Minimum-wage laws in developed countries distort wage rates in a similar fashion.