Facebook, McDonald’s and the divided American workforce

By Reihan Salam
April 25, 2014

On Wednesday, Facebook released data on its performance in the first quarter of 2014, and the results were very impressive. The social network has succeeded in monetizing its enormous audience, having generated $642 million in profit on $2.5 billion in sales. The expectation is that Facebook profits will amount to 25 cents per share, quite a bit more than the 9 cents per share it generated last year.

McDonald’s, a much larger and older company, reported $6.7 billion in revenue in the first quarter, slightly higher than its revenue from last quarter. Yet its net income fell to $1.2 billion and its profits per share to $1.21, down from $1.26 last quarter. Analysts attribute McDonald’s lackluster performance to a modest decline in U.S. comparable store sales.

I mention Facebook and McDonald’s not just because they are both iconic American brands, but because they represent the contrasting poles of American business. Though both Facebook and McDonald’s are innovative firms operating in a competitive landscape, Facebook is a social media company that lives almost entirely in the cloud. McDonald’s, meanwhile, is the quintessential quick-service restaurant, which, like Wal-Mart, depends on an extensive, expensive and labor-intensive logistical apparatus to meet the needs of its franchises.

This difference helps account for the fact that Facebook had a 102.27 price to earnings ratio in 2013 while McDonald’s had a 17.99 price to earnings ratio that same year. It’s much harder for a brick-and-mortar company like McDonald’s to grow than its code-driven counterpart.

Yet the contrast between Facebook and McDonald’s that interests me most is the difference in how each approaches human capital investment. Facebook is a high-wage employer. Its workers pay relatively high taxes and get relatively little in benefits. You might think of them as net contributors to America’s public coffers.

McDonald’s is a low-wage employer. Its workers pay relatively low taxes and get a relatively high level of benefits, particularly if they’re members of low-income households, as many of them are. This has led many observers to conclude that while employers like Facebook are the good guys, employers like McDonald’s are the bad guys. If McDonald’s employees can’t get by on their wages, and they need the earned-income tax credit, food stamps, and Medicaid to lead decent lives, surely their employer is a corporate villain that is forcing taxpayers to take on the needs of its employees.

This notion that McDonald’s and companies like it are bilking taxpayers undergirds the case for increasing the minimum wage. Andrew Biggs of the American Enterprise Institute has criticized this argument by observing, correctly, that wages primarily reflect skills, and that the “bilking taxpayers” thesis suggests that all social programs should be abolished, as they allow companies to get away with paying their workers a pittance. That’s a rather odd argument coming from the left.

I would go further than Biggs. McDonald’s and other low-wage employers aren’t just not bilking taxpayers. Rather, they are taking on a task that many American families and schools are failing to perform. To put it bluntly, McDonald’s is a company that hires large numbers of people with limited skills, many of whom are teenagers and young adults, and it introduces them to the ways of the workplace.

There are many bright young people in this country who lack the non-cognitive skills — like grit, self-regulation, motivation, and the ability to work constructively with others — that one needs to climb the economic ladder. Schools generally rely on parents to impart these skills, and for good reason.

Parents who don’t have the presence of mind to provide a stable environment for their children expect the schools to pick up the slack. The result is that children who don’t have stable families that impart the habits and skills necessary for steady employment can find themselves struggling in the labor market, if not locked out of it entirely.

In order for McDonald’s to be successful, it either needs to inculcate these habits and skills in its workers, or it needs to de-skill the work of operating a quick-service restaurant to such an extent that it can withstand high turnover without going out of business. McDonald’s, like many businesses that employ workers with limited skills, pursues a mix of both strategies.

Facebook does not, as a general rule, hire people from difficult backgrounds who lack cognitive and non-cognitive skills. Yes, one assumes that Facebook is willing to hire people who lack certain social skills if they’re excellent software developers. But those employees generally make up for their lack of social skills with an excess of grit, self-regulation and motivation.

Leaving aside our stereotype of the rebellious college dropout coder, Facebook and companies like it tend to hire people who’ve already made large upfront investments in their human capital by going to college and graduate school, and often by taking unpaid internships or underpaid entry-level jobs that essentially serve as apprenticeships. Once these workers arrive at Facebook, or at a place like it, their employers assume that they will get up to speed quickly, since they have been pre-trained.

If we’re going to condemn McDonald’s for employing people who need to rely on anti-poverty programs, should we condemn Facebook for employing people who’ve already been trained — by parents, educators and other employers — to do their work at a high level?

If anything, Facebook wants to go even further by dramatically increasing the number of employer-based visas, a step that would allow it and other tech companies to hire employees who’ve been educated in other countries, where training is often generously subsidized by the state. This type of hiring suppresses wage growth for skilled employees who already live in the U.S.

I have no problem with Facebook’s approach, as I think society benefits from its eagerness to assemble talented, capable teams of workers. I do think, however, that it is unfair to blame McDonald’s for pursuing a human capital strategy that is far more inclusive, and far more challenging, than Facebook’s.

One of the central developments in modern economic life is de-verticalization, or the process of separating the parts of production that might have once been undertaken by a single business. Globalization is often understood as nothing more than an increase in the volume of international trade, in which the Chinese sell us more of their stuff and they buy (maybe) more of ours.

But what globalization really means, and why it really matters, is that it represents a transition from vertically-integrated businesses to a world in which companies orchestrate complex multi-firm, multi-country networks to achieve their goals. A company like Apple might own valuable intellectual property, and it might even manufacture a few key components of its devices itself. Yet it outsources much of the rest of the manufacturing and assembly work.

The central question about the future of the American economy is whether we can make this de-verticalization process work for us. In the context of globalization, the United States needs to retain the most valuable parts of the production process — like software design — that pay lucrative wages and lead to more companies and jobs. More importantly, we need to separate out the services and functions that companies perform in ways that better serve the interests of American workers.

Employers have always outsourced human capital investment to other institutions, like families and schools. Yet as families deteriorate and schools fail to keep up with the changing demands of the economy, employers need new solutions.

The good news is that a handful of innovative businesses and non-profits are entering this space. Clearly Innovative, a Washington, D.C. app developer, is hiring people with little or no training as web developers and teaching them the tools of the trade. The non-profit Coalition for Queens launched Access Code, a program that teaches people how to code iOS apps and provides them with mentorship as they search for jobs. The results have been extremely encouraging so far.

One wonders how the business model for training workers will evolve. Perhaps the employers who makes a risky bet on a raw employee, and who take the time and effort to train her, should be entitled to a small portion of her lifetime earnings as she moves on to more lucrative employment. That would create a powerful incentive for employers to devote real resources to building the skills of their workers. Or perhaps some entirely new model will emerge. But one way or another, we need to find a better, smarter way to train workers. Demonizing McDonald’s, or for that matter demonizing Facebook, won’t cut it.

PHOTOS: An employee writes a note on the message board at the new headquarters of Facebook in Menlo Park, January 11, 2012. REUTERS/Robert Galbraith

McDonald’s worker Keyana McDowell, 20, (L) strikes outside McDonald’s in Los Angeles, California, December 5, 2013. REUTERS/Lucy Nicholson 

14 comments

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Nicely written article. You do have good points. I might offer some from my experience.

A business also has to depend on the managers/work trainers to do a good job. If they don’t or they only halfway do training, it leaves an employee having to learn a lot on their own. Some make, it some don’t. I’ve had a trainer, an older worker, that told me half of what I was suppose to do, even though there was no way I wanted her job and I’d told her so. Yet, she made each task as difficult to figure out as possible. For instance, when she was showing me how to use an electronic scanning device, she held it in her left hand and deliberately kept me to her right so I couldn’t see much of the screen. No biggie, since I wasn’t going to be ordering stock ever but it was one of the things that some trainers do. I suppose it’s a power/authority thing. haha

Trainers should be graded on employee retention and training.

Another aspect is the cost of transportation to and from a job. Transportation in the US is mostly by car in a lot of the US. Teens and even older find the cost prohibitive or they have a used car that needs maintenance. They usually wind up being told they are unreliable but no one seems to question the method of their transportation and why they can’t make it to work or on time.

Managers that accept no excuse or don’t find out what the problem with transportation is, should get some training in that area. A few local managers were complaining about employees not staying. I told them than get behind public transportation. Your business doesn’t pay enough for the workers to own reliable transportation (car) nor the cost of insurance, driver’s license, registration, license plates, gas or car maintenance.

States are consistently raising the cost of having a legal car, another consideration.

Posted by mstan4408 | Report as abusive

Apples to oranges comparison. First of all, Facebook doesn’t make or produce anything that requires massive amounts of physical resources that take time and money to produce and transport. For that reason restaurant profit margins are small with the bulk of their profits being made off beverages. All FB does is sell advertising based on hype. If corporations stopped dolling out advertising dollars, FB would fold like a cheap suit. FB is basically just a fad that people haven’t figured out they don’t need yet. McDonald’s has been around since 1940. They not only feed hundreds of millions of people everyday, they keep millions of farmers, ranchers, etc. in business as well. Plus they have way more potential legal problems, laws and regulations to deal with, and way more competition to deal with than Facequack.

Posted by RD137 | Report as abusive

Good spin writing. I believe the primary perspective presented is interesting but flawed in several aspects. McDonalds does make a profit at the expense of paying employees as little as they can. Many businesses do. The “me generation” has manifested and we all reap the distasteful burden when looking at today’s corporate America.

What is out of whack is not the corporation seeking profit but the society that allows this system to such an extreme. We the people now allow profit without social responsibility. Who gains? Mostly this is a corporate bonanza. Who pays the bill – the taxpayer. We have allowed corporate America to create and sell a twisted version of capitalistic ideology where only profit matters.

Posted by bbazz | Report as abusive

“. . . and that the “bilking taxpayers” thesis suggests that all social programs should be abolished, as they allow companies to get away with paying their workers a pittance. That’s a rather odd argument coming from the left.”

and that the “educational investments in their human capital” thesis suggests that universities should be tuition free, as they allow companies to shift the cost of training onto individuals and families. That’s a rather odd argument coming from the right.

Posted by jphn37 | Report as abusive

It is an interesting thought experiment, but I’m afraid that RD137 is right, it’s an apples and oranges comparison.

Facebook employees can be anywhere. It’s California office could closed and work moved to their India office or the anywhere for that matter. McDonalds must hire local.

McDonalds pays an effective tax rate of 32% in the US, while Facebook plays the “double irish” tax game and pays only about 2-3% on its revenue. So, if we are looking at who is investing in America to provide education & public transport, it’s McD’s.

Which company makes the biggest lasting impression on America – McDonalds makes us fat and Facebook makes us stupid. But a job is a job right?

Posted by euro-yank | Report as abusive

I don’t see a point in subsidising large corporations through social programmes. Large companies (as anyone would do in their position) like to put problems in others’ hands, but this is not justified. They should share in solving social problems as well.

Afterall, business is supposed to work for the citizens and not the other way around. At the moment, the system doesn’t seem to work for its citizens.

Posted by Radek.kow1 | Report as abusive

Until you own your own business capitalized by your own money and have taken on the responsibility of hiring and training employees, you know nothing. Those who can, do, those that can’t, judge.

Posted by alwayslearning | Report as abusive

Gibberish.

Posted by Oldbizeditor | Report as abusive

McDonalds has 1,800,000 employees at 35,000 locations. Facebook has 7,000 employees. Neither of these companies represents a model for a strong economy. McDonalds wages are too low and high tech companies like Facebook will never provide enough jobs to have a meaningful impact on overall employment levels.

If you want to provide a meaningful macro economic analysis you should consider how utterly stupid the US was to let go of millions of decent paying manufacturing jobs in the name of globalization. You may say this is part of “de-verticalization” but it is really George Carlin’s “pussification” of America where we do not make the goods we consume (decades long trade deficits), think it is OK to promise more than we can pay for (government budget deficits), and do nothing but talk as wealth and income continues to polarize. Capitalism and globalism require limits or we get a crappy economic environment.

Posted by smith_9000 | Report as abusive

If we look at corporate profits in terms of profit per worker, low wage employers earn much higher profits per worker. A recent analysis of Walmart, determined that a more or less 50% wage increase to $ 13 could be covered with a 1.4% increase in prices, or OMG a slight decrease the top end wage.

Posted by jmad34 | Report as abusive

@alwayslearning – as a matter of fact I started a business with my own money. Your argument is void. Entrepreneurial people are here in this world to make it better, not worse.

Posted by Radek.kow1 | Report as abusive

Those who would blame McDonalds or Walmart for the problems of the world will never open their minds to concepts or information that conflict with such view. That said, this is a well thought out article that has sparked further thought among commenters.

“We, the people” are going to have to actually do some deep thinking as our society transitions to one that needs fewer and fewer people to do what needs doing. Raise low paying jobs to a higher minimum wage” and all you do is advance the pace of automation.

Advance the pace of automation and you have fewer and fewer employed that can buy the goods and services that represent the life’s blood of the economy. As America moves into uncharted economic territory the world awaits to see it’s economic future unfold.

It is a time, if ever there were one, to “measure twice, cut once”. We REALLY need to get this right, and NO has yet traveled the path that must be traveled.

It is not a matter of recognizing greed and penalizing it, but in exploiting the greed in each of us and harnessing it and it’s effects to positive result. This CAN be done!

Posted by OneOfTheSheep | Report as abusive

You can teach a parrot to say spud and another to say potato, is one smarter than the other?
The author has some insight but at times seems no better than Cliven Bundy. Let the trainer own part of ones income perminately. Then he speaks of isolated occurrences as if this is an actual working model that is producing results on any scale past the gloss factor, a gloss factor that does dominate the article.
The casual swipe at the American education system is my main objection, I wonder if the author has been in a school this year? In the last five years? Why does he not volunteer to help a child, he needs to go to a school and ASK what he could do to help an individual. Self serving articles of his opinions help no one, real change happens at the local level.

Posted by Stanley7746 | Report as abusive

Spot on. Wages are not the propose of jobs; production is. Jobs are not the purpose of an economy; production is. Citizen influence on what is produced or how is EVIL, except as reflected in what they chose to purchase, at what price/quantity from whom and when.

People in groups are irrational idiots. The same people one at a time are not.

What’s purchased drives what’s profitable, which is what drives what those with savings to invest, invest in. UNDER CAPITALISM in a constitutional republic, the PEOPLE rule – one at a time.

Anything else is a Communist Nazi King Progressive Barbarian. Destroying prosperity progress peace liberty and people.

Posted by johnwerneken1 | Report as abusive