Big Mac, Big Real Wage Differences

The field of labor economics seeks to understand the connection between workers’ wages, productivity, and welfare. In a recent working paper, Orley C. Ashenfelter of Princeton University calculates and compares the real wage rates of McDonald’s restaurant workers across twenty-seven countries.

Real wage rates measure how much of a given commodity a consumer can buy per hour of work. While differences in earnings or incomes may be misleading indicators of worker welfare, real wage rates are comparable across time and location.

Despite McDonald’s use of similar inputs, skills, and processes to create and sell a standardized product, the Big Mac, Ashenfelter’s results demonstrate “extraordinarily large differences” in the real wage rates of McDonald’s workers in rich and poor countries. In 2007, McDonald’s crewmembers working in the United States earned $7.33 per hour, while their Indian counterparts earned $0.46. She attributes vast gaps in workers’ real wage rates “almost entirely to differences in the total factor productivity in these countries, not to differences in skill or human capital.”

Ashenfelter cautions, however, that real wage rate comparisons assume the existence of competitive markets and “may be seriously misleading” in countries “where non-work income differs substantially.” Social or economic safety nets, for example, may decrease work effort while real wage rates remain high.

The data also show significant, albeit slowing growth in workers’ wages in the developing world. Ashenfelter highlights, “Growth in real wage rates was entirely confined to the developing countries of Russia, India, and China during the period 2000 to 2007.” The real wage rate slightly declined over the same period in Canada and the United States.

Ashenfelter’s work encourages additional systematic analysis of real wage rates across countries. Real wage rates provide an opportunity to measure not only worker welfare but also the effects of public policies and economic growth models.

Feature Photo: cc/Phil Dragash