Big Maconomics: How many Big Macs can you buy with an hour of work?
By Cynthia Than
McDonald's (MCD) recently made headlines when it published a monthly financial budget guide for its employees, which unintentionally added to the current minimum wage controversy. As hundreds of fast-food workers in the United States strike in organized one-day walk-outs demanding higher pay and the right to unionize, China continues to raise the minimum wage and improve workplace conditions for factory workers.
Studying the wage rate of an economy can provide an important indicator of its standard of living but recorded wages aren't comparable across countries. The "diverse way" in which countries report wages to the International Labor Organization (ILO) adds to the difficulties of testing economic models when evaluating inequality or public policy.
Also, nominal wage comparisons between wealthy nations and transition economies can be misleading, so the Big Mac Index, which moonlights as an economic indicator, allows us to have an apples-to-apples comparison of real wages. Put out every year by The Economist since 1986, it is a lighthearted measure of whether currencies are undervalued or overvalued because in the long run, prices should adjust to reflect an identical basket of goods and services.
So why is calculating the purchasing power in Big Macs per hour better (or at least more interesting) than simply looking at the Consumer Price Index? First of all, CPI is an index of the cost of living within a country but doesn't offer any information on the relationship between countries.
Consumer Price Index 2013
Sources: Trading Economics; U.S. Bureau of Labor Statistics (BLS); National Bureau of Statistics of China.
Even if we were to compare CPI between the U.S. and China, the goods and services used in the calculations are not the same for both countries. We can't make any meaningful inferences about labor productivity with this data alone.
The Big Mac Price Compared to the McWage
Notes: The regression line is from a log line regression with a slope 0.586.
Source: Orley Ashenfelter (2007).
However, when graphing one hour of work (the "McWage") against the purchase of the same good (the "Big Mac"), we see the value that a Big Mac trades at in 60 countries. We can make inferences about the productivity of these countries based on the Balassa-Samuelson model, since average prices are higher when average incomes are higher.
(For calculations in this article, the local minimum wage is substituted for the "McWage" since McDonald's only provides data for the entire country and not individual data for cities, provinces and SARs. The Ashenfelter data on Big Mac pricing is also not segregated by city, so provincial data from The Economist is used instead.)
Another advantage of using Big Macs Per Hour instead of CPI to measure the standard of living is that it allows for comparisons of wage without assumptions about competition in product or labor markets. Moreover, this index is not affected by the presence (or absence) of wage regulations, which can distort welfare differences.
Below is a visual representation of what a minimum wage earner can buy, in Big Macs, for one hour of work at McDonald's restaurants in the largest cities in China (and Hong Kong). Since both the labor and the ingredients are sourced locally, looking at how many Big Macs one hour of work can purchase gives us insight on real wages, labor productivity and individual well-being throughout China.