Sub-standard Pay = Super-sized Profits

Chinese staff at McDonald'sThe big news in China the past couple weeks has been about Western fast food chains (McDonald’s, KFC and Pizza Hut) underpaying their staff in China – particularly the part-timers.

The issue was sparked by accusations from China’s top trade union that McDonald’s was underpaying their employees (Reuters/China Daily), in some places by almost half, and also forcing them to work full-time hours, while only providing part-time benefits.

From Shanghaiist:

Out of the cities mentioned … the largest gap is in Zhengzhou McDonald’s, where the wage is 3.9 RMB/hour and the legal minimum wage is 7 RMB/hour. By the way, working for 3.9 RMB an hour sucks.

To put the money into perspective, the 7 RMB/hr. minimum wage is $0.90 USD. So, according to reports, many McDonald’s employees are making about $0.50/hr.

My problem with this is not if McDonald’s (or other IJFPs) are not paying the required minimum. My problem is, why the hell are they paying just the minimum?

Charlie over at Positive Solutions has a good post where he makes the point that these multi-national corporations are only following what is common practice in domestic restaurants.

In a country where 10% of the 1.3 billion people still live on less than a dollar a day, it is inevitable that there are always going to be a huge number of people prepared to accept chronically low wages – because that’s the best they can get.

Should McDonald’s and KFC adopt a higher ethical standard and ensure their staff get paid a comfortable wage? Maybe, but wages starting at 4 kuai per hour and rising is actually above what the market necessitates. After all, working in a fast-food joint requires a minimum in skills and training – when the vast majority can do the work, why pay well above what the vast majority would expect and accept?

Now, I agree that it’s 100% hypocritical for Chinese media to overplay the “Imperialistic West taking advantage of poor Chinese” line, as Chinese businessmen are quite happy to do it to poor Chinese as well. However, it’s just wrong.

And though noodle restaurants pay paltry sums, they also charge equally minimal sums. Their margins, when compared to big Western franchises, are relatively small (a bowl of noodles is rarely more than 5 kuai).

The IJFPs however, charge near Western prices for their products, but exploit a cheap local labour market to fluff their bottom-line. Starbucks, for example, charges about the same price for their Tall Cappuccino here in China as they do in Seattle. However, their employees back in the US make a considerably higher wage.

Lets, for a moment, assume fair play to the crafty multinational that can boost profits by bringing big franchises to the masses of China. And lets again assume that they are actually paying minimum wage. Then the argument really becomes: “They’re paying the required amount, a waged based on the country’s cost of living, so what’s the problem?”

Surviving does not equal living

Well, the problem, quite frankly, is that a minimum wage of 7 RMB/hr. is a joke and doesn’t at all reflect the cost of living. What equals “cost of living” in the West becomes “cost of surviving” in China – a subtle semantic difference that translates heavily for those that live it.

Lets make some gross assumptions about people and assume that the Europeans work too little, the Asians work too much and the North Americans are somewhat of a median between them. Using this, a work week of 40-44 hours with two days off, is somewhat standard.

In the US, with an average minimum wage of about $6.50 USD, an employee can expect to make approximately $1,250/mo. Whereas in China, using the same standard of life, the average employee would only earn 1,350 RMB or $175/mo.

But the cost of living is much lower in China, right? Well, as shown above, not if you want to buy Lattes or Big Macs. Though it’s true that many things in China are considerably cheaper, they are only so if you recognize that they do not meet quality standards matched in the West.

Western brands of food, apparel, electronics, etc., all come with a price tag that looks remarkably like the ones in New York, Sydney and Toronto, for one reason – quality. Domestic brands are plagued by poor quality standards with limited avenues for customer recourse. There’s a reason there are tight quality controls on products in Western countries – the consumers demand it. In China, the consumers can’t afford to demand it, but don’t they deserve it?

In a common second-tier Chinese city you can expect to find moderate two-bedroom accommodation for about 1,500 RMB/mo. Using the figures above, it’s easy to see this is more than the average Chinese person makes using our “standard of life” model. Compared to the equivalent in the US (with rent of about $600/mo.), it quickly shows the vast inequality in the two standards of what “minimum wage” is.

When you couple in food, bills, savings for health related expenses, etc., the number of hours needed to work quickly gets inflated, and/or the quality of expenses are forcibly lowered; creating a market for shoddy products, dilapidated accommodations, and cheap restaurants – and so the cycle continues.

Business Karma: what goes around, comes around

In my opinion, though ultimately it is the responsibility of a government (and its people) to create greater equality and narrow the wealth gap, I do think that these Western companies could be doing a lot more to encourage it themselves. The thing is, narrowing the wealth gap by paying people a better wage is not without profit.

When you’ve got a small, but rich, group of elite burger-buyers on one side and a massive mob of poor wishing they could on the other… it’s not much of a market. Most Western companies looking to sell in China are developing their brand here now, so that as the country “rises”, they’ll be on the ground floor to take profit from all those new consumers.

So, why aren’t these companies helping create those consumers? Why do they sit and wish they had more people buying biscotti and burgers, Adidas and iPods, but only pay their staff enough to eat instant noodles and a boiled egg five nights a week?