Big Maconomics: How McDonald's Explains the World

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The Big Mac isn't just a greasy hallmark of modern technological wizardry. It's also a tool for economists to measure the wealth of nations.

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The Big Mac is a triumph of technology.

For thousands of years, families devoted the majority of their lives to food. Their waking hours were spent growing and harvesting crops, and most of their income from growing and harvesting went right back into eating. Deep into the late pre-industrial era, unskilled laborers worked grueling hours in fields to earn an income that could often barely feed their family. As Gregory Clark explained in his book A Farewell to Alms, up until the 1700s, the English diet consisted, monotonously, of mostly bread and beer, won only after hours that would make a modern i-banker blush. Food output per person was so meager that "British farm laborers by 1863 had just reached the median consumption of [primitive] forager and subsistence societies."

Today, food is faster. The Big Mac takes very little work for any one person. It is a product of as much automated manufacturing as human labor. Even U.S. food-prep workers, by some measures the poorest-paid major occupation in America, earn enough to buy more than two Big Macs -- that's 1,000+ calories -- in just an hour of their work.

McDonald's is a restaurant, but it functions much like a factory. Labor is supported by a deep well of technological innovation, such as vacuum packing, exceptional preservatives, deep freezing, vibrant artificial flavors, and high-speed microwaves. Workers assemble specific parts at great speed to deliver dependable and replicable products. "[McDonald's doesn't] put something on the menu until it can be produced at the speed of McDonald's," CEO James Skinner said in 2010, sounding not unlike Henry Ford from a century earlier.

20120114_INC380.gifIn addition to being a technological marvel, the Big Mac moonlights as an economic tool. Every year the Economist calculates a Big Mac Index for the purpose of (being cheeky and) testing what currencies are overvalued compared to the U.S. The results are often illuminating. This year identified Switzerland and Brazil as particularly overvalued. The flight from euros is lifting the franc and the real's appreciation has blunted Brazil's export growth. So, the Big Mac isn't just some dumb lump of something resembling meat. It's an international barometer of economic activity.

And now, in a research paper released last week, Princeton's Orley C. Ashenfelter has done something truly fascinating with the Big Mac. He used the world's most famous sandwich to help us answer one of the trickiest questions in all of economics: 

How do poor nations get rich?

BIG MACONOMICS

The world's nations are diverse in ways that defy easy comparisons. But at least 118 of them share something similar. They have a McDonald's.

In every McDonald's around the world, workers perform similar tasks with similar, shipped ingredients stored in similar freezers and prepared according to similar international protocol. This matters to economists, because McDonald's offers an international apples-to-apples comparison of wages and prices.

Ashenfelter comes up with a clever way to measure wage growth, or purchasing power parity, across the globe. By recording wages and Big Mac prices over time, he computes how many Big Macs one can buy on an hour's salary in the U.S. vs. Western Europe vs. the developing world. Tracking Big-Macs-per-hours-worked, he says, should tell us who's really rich, who's getting rich, and who's not.

And, as it turns out, Big Macs and McWages explain three of the most important ideas in international economics: (1) The Rise of the West; (2) The Rise of the Rest; and (3) The Great Recession.

The Rise of the West. Countries get rich because they become particularly skilled in certain industries that they can sell in exchange for money. So why are McDonald's workers in the U.S. or Western Europe earning up to 10-times more than in India, China, or Latin America? It's not that Chinese and Chileans are less skilled at heating burgers. Rather it has everything to do with the economy outside of McDonald's kitchens.

The gap between poor and rich nations has bedeviled economists for decades.  But one elegant explanation, known as the Balassa-Samuelson hypothesis, says it comes down to worker productivity in sectors that can "trade" their goods and services abroad. If a country gets better at making, say, cars, it can sell cars to foreigners and become rich. As income and investment flow into a country, incomes and prices rise across the board. People have more money to buy burgers. The price of burgers rises, and the price of workers who prepare those burgers rises too.

Ashenfelter finds evidence for this elegant theory in his data, which demonstrates that developed countries, including the US, Canada, Japan, and Western Europe have similar wages for McDonald's workers -- they can all buy between two and three Big Macs with each hour of work. But in parts of the Middle East, Latin America, and India, an hour working at McD's will hardly buy you a third of a burger. That's a great divergence of wealth on the order of 10x. But it's not the end of the story ...

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The Rise of the Rest: For the last few decades, real income growth has been flat in the U.S. and other developed countries. Manufacturing and other middle class jobs went overseas and fed rising living standards in other countries.

McDonald's can tell this story, too.

Wage growth was "entirely confined to the developing countries of Russia, India, and China during the period 2000‐2007," Ashenfelter writes. This graph shows percentage-growth in Big Macs-per-hour-of-work in the last decade. It's a striking picture of flat purchasing-power growth in the developed world juxtaposed to a gosh-wow boom out of China, India and Russia (which started the decade in a recession and got a big lift from oil prices through 2007). Upshot: It's not just top-line GDP that's growing in the developed world. The wealth is trickling down. Middle-class families can buy more for each hour of work.

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The Great Recession: After a period of remarkable growth among low-wage countries, the financial crisis has had an uneven effect on wealth. Once again, McDonald's explains the world. In the graph below, we're looking at Big-Macs-per-hour-worked, from 2007 to 2011. This time, we've got a scattershot of messy growth and outright decline, complicated by wild commodity inflation, which raises the price of burgers and also raises wages in commodity-rich Russia and Latin America.

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The history of the world is pretty boring, if you're only interested in middle class wealth. Wages were remarkably similar across countries for most of human history, and "only modestly above subsistence levels," Ashenfelter writes in the conclusion to this paper on Big Macs, McWages, and the wealth of nations. But then the industrial revolution happened. Some parts of the world saw explosive wage growth, while others saw nothing, or worse.

The Big Mac did not rescue the world from the Malthusian Trap. McDonald's did not single-handedly proclaim the end of the pre-industrial age. And yet fast-food sandwiches represent a microcosm of industrial efficiency, and their price offers a keyhole into the world of wages and the growth of wealth. Economists have studied wages through the millennia and seen no growth. They have studied wages across the world and been flummoxed by the diversity of goods and services, which complicate any easy comparisons. But today, McDonald's and the Big Mac are both a symbol of our wealth and tool for comparing wealth, burger-to-burger, across time. That iconic double-decker, 500-calorie sandwich enriches us in more ways than one.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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