Sunday, August 5, 2012

Labor Shortage, Misallocation, and Abuse: Big Mac Edition

Let's start with an interesting photo from a McDonalds restaurant:

Similar to my past observations on KFC, this Shanghai McDonalds seems really eager to hire. I'm always amazed by how happy and cute the pictured workers always are. Happiness is also the theme of the banner message: Join McDonalds and take the first step towards happiness. The message is particularly clever because it capitalizes on how the character that makes the "Mc" sound has the same pronunciation as the character 迈, which means to step.

McDonalds is also a great example of Balassa-Samuelson effect. Even if aggregate productivity grows much faster in China  than in the United States, it's unlikely that a Chinese McDonalds franchise can raise its productivity any faster than an American McDonalds franchise. Just look at the registers; how do you expect the cashiers to ring people up any faster?

The low productivity growth can ultimately be traced to one factor: there's not much space for innovation within McDonalds. No doubt, running a McDonalds franchise is no easy task, but for the individual cashiers, cooks, and janitors, there's only so much you can "learn-by-doing". Compare this with other sectors such as, solar panel production or apparel, and you can see why there's a large productivity differential between fast food and manufacturing.

These two factors, aggressive hiring and low productivity growth, are connected; the second can lead to the first. This is not necessarily only because low productivity growth requires a higher amount of labor to produce the same amount of product, but rather also because low productivity enables employers to abuse an initial probationary period to hire more aggressively with minimal downside. During probation, employees can be fired without cause and are paid lower wages. Limited room for innovation means there's little need to train employees to create new techniques, thereby shortening training times. Since  training time for an average employee is relatively low, McDonalds can afford more worker turnover without significantly impacting productivity. But to fill this demand for workers, they need to aggressively hire. This is arguably a violation of Chinese labor laws, but given McDonald's other violations, it should not a surpise. Chinese labor laws such as minimum wage and worker's insurance have also been frequenly abused by Yum Brands, the parent company of KFC, Pizza Hut, and Taco bell.

This story is problematic because it contradicts the idea that there's a labor shortage. If workers are hard to find, how can McDonalds and other fast food restaurants afford such high turnover? A possible explanation is that they pay high enough of a wage to entice workers from other restaurants, and therefore exacerbate the worker shortage for other businesses. Yet because they do not advertise as aggresively, I do not notice.  

Another possibility is that the target demographic, college students, is not the same demographic of workers that coastal plants are lacking. College students often won't or can't hold low-skill manual manufacturing jobs, but they may be willing to take up a job at a McDonalds while they go to school. College workers also reside in a grey area of labor law. Guangdong marketing director of Yum Brands has been on record saying "part-time workers are neither full-time workers or non-full-time workers (既不属于全日制用工也不属于非全日制用工)" to justify the low pay of part-time college student employees. Ignoring whether this is ethical, if college students are advantageous from a labor/wage perspective, this would match both the type of advertising we see on both the KFC and McDonalds hiring notices with the concept of a skill mismatch. The firms would have an incentive to hire college students to save on wages and insurance fees, not to capitalize on their unique skills.

The story from here would be that China does not suffer from just a lack of workers, but rather that there's a severe skill mismatch. College students, who should be building human capital, are being cycled through low-skill, low productivity jobs. This pushes the unskilled to even lower productivity jobs such as street sweeping or selling road-side trinkets. Yet while all this happens, coastal firms struggle to find enough talented workers to stay open. This, of course, does describe the Chinese labor market in much depth, but it does point to a key structural problem holding back further Chinese growth.


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