When It Comes To Danish Wages, Mind The VAT

Liz Alderman and Steven Greenhouse wrote in the New York Times about the relatively high wages of fast food workers in Denmark. It's an excellent piece in many ways, but I have some quibbles.

Why Exactly Can't You Compare Denmark to the US?

At one point, Alderman gives voice to those who try to dismiss Denmark's high fast food wages as somehow uniquely possible only in Denmark:

Many American economists and business groups say the comparison is deeply flawed because of fundamental differences between Denmark and the United States, including Denmark’s high living costs and taxes, a generous social safety net that includes universal health care and a collective bargaining system in which employer associations and unions work together. The fast-food restaurants here are also less profitable than their American counterparts.

Leaving living costs aside for the moment, none of these points provide any explanation for why fast food restaurants in Denmark can pay 2.5 times as much as a fast food restaurants in the US. I take the arguments in order below.

First, I can't even fathom what the tax argument is. What is it about having a higher tax level that makes employer able to pay higher wages? I can't even begin to guess as to how this is supposed to make sense. But hey, if upping the tax level causes low-wage workers to get raises, we should get on that.

The social safety net argument is slightly more comprehensible, but it can't possibly explain 2.5x higher wages. The social safety net argument would be that, because welfare benefits are handled by the state rather than each particular employer, the employers can plow a higher percentage of their labor compensation into wages than they do here. The problem with this argument is that low-wage employers in the US are not well known for the provision of robust welfare benefits of any sort. I can't find numbers on what percent of labor compensation in low-wage industry goes to benefits, but we can be pretty certain it isn't anywhere near as much as would be necessary to close a 250% compensation gap.

The collective bargaining system argument is also somewhat comprehensible, but very narrow in its scope. I gather that the point here is that industry-wide wage setting makes it easier for fast food employers to pay the higher wages because they don't have to worry about other employers in the industry undercutting them by competing on labor costs. Here, on the other hand, it would be harder for a fast food employer to pay more because it would make them less competitive. The problem with this argument is that we have ways of setting industry-wide wages for low-wage employers. That's what the minimum wage does.

Finally, the profit point is comically bad. Danish fast food restaurants presumably have lower profits because of the higher wages, not the other way around. Indeed, delivering higher wages at the expense of profits is a nearly ideal outcome to bumping the wages of fast food workers. The fact that fast food restaurants in the US have higher profit margins than fast food restaurants in Denmark suggests that the US actually has room to move in the Danish direction.

Mind the VAT

The article dabbles quite a bit in talking about living costs and comparing prices between Denmark and the US. Here are the other instances beside the one quoted above:

In interviews, Danish employees of McDonald’s, Burger King and Starbucks said that even though Denmark had one of the world’s highest costs of living — about 30 percent higher than in the United States — their $20 wage made life affordable.

True, a Big Mac here costs more — $5.60, compared with $4.80 in the United States. But that is a price Danes are willing to pay.

I've said this before and I am going to say it here again: if you are going to compare prices and costs of living between Denmark and the US, you must take into consideration the Value Added Tax (a type of consumption tax). Unlike the US, Denmark has a 25% VAT, which has the effect of making everything (except some exempted products) 25% more expensive than it would otherwise be.

When researchers create cost-of-living comparisons (e.g. for PPP), they do not adjust for the VAT. This is because these cost-of-living comparisons are meant to be applied against disposable income, not market income. The idea is that the revenues of a consumption tax will find themselves back into the pockets of people (e.g. through in-kind and cash benefits), and so the VAT poses no measurement problem in net. It makes the cost of living higher on the front-end, but increases people's incomes on the back-end (through benefits). Comparing disposable incomes across country with these kinds of cost-of-living adjustments is therefore doable (at least in theory, there are other difficulties that aren't relevant here).

But when we are talking about wages, we are talking about market incomes, not disposable incomes. Adjusting market incomes by "cost of living" in order to do cross-country comparisons is entirely unworkable and just produces meaningless garbage. If you have two countries that are literally otherwise identical (i.e. totally identical economies with workers making totally identical wages), but one country relies on a VAT to raise revenue while the other relies on income taxes, workers in the VAT country would register as receiving much lower wages than workers in the income tax country, as adjusted by cost of living. But this just isn't the case. An employer in the VAT country has the same labor costs (and whatever challenges those entail) as an employer in the income tax country. If the employer in the VAT country can pay the wages, then the employer in the income tax country ought to be able to as well.

Alderman and Greenhouse give no indication that they appreciate how the VAT plays into all of these numbers. This is especially true when it comes to comparing the price of Big Macs. They tell us the U.S. price for a Big Mac is $4.80, while the Danish price is $5.60. I have no idea if these figures are adjusted for differences in consumption taxes. Normally in cost of living comparisons, they aren't. If they aren't here, then the easiest way to adjust them would be to slap a 25% VAT on the $4.80 burger, bringing the price to $6, which is notably higher than the price of the $5.60 price of the Danish Big Mac.

Conclusion

As the number one fan of transfer incomes, I come into this whole debate rather uninterested in the outcome. The ability of a society to build a high social minimum is not contingent on its ability to pump up paychecks at the bottom. However, the arguments I keep seeing for why Danish fast food wages can be dismissed as irrelevant to the question of fast food wages here are not good arguments. They are, in fact, bad arguments.

Comments