Supposes employer A chooses to pay their employees more than other employers. Employer B chooses to pay their employees less. Both employers are selling products or services that the purchaser finds the same, i.e. they have no preference for who they buy it from.
Employer B takes the money they save by paying employees less, and invests in newer, better facilities or R&D or whatever. Now employer B is selling a better product than employer A. Who will customers choose to purchase from? Who will lose business, and end up having to fire employees?
To be a successful business, compensation decisions can't be based on people's feelings. You have to consider when a new store or hotel or restaurant will come around and put them out of business, and stay ahead of the curve. You pay what you need to to get the job done. There are some good examples like Costco, but there are only so many people with sufficient disposable income who can afford to shop at Costco and similar stores, and they're not competing with Walmart/CVS/Dollar Store or other bottom tier vendors.
> To be a successful business, compensation decisions can't be based on people's feelings
Great, good point, so let's base it on what's equitable and humane instead. People aren't mad because their feelings are hurt, they're mad because they can't make ends meet or prepare for the future.
True, but Employer-B now has employees who DGAF about anything in the business, and often have an adversarial, even 'eff them! attitude to the business.
Employer-B's customer service and general care of its facilities & inventory will suck, and they will have much higher turnover costs, even if they have better products.
So, what is the relative advantage?
Moreover, the article was specifically about the tradeoff in executive pay vs low-end pay, and how a small sacrifice at the top made huge differences both for the low-level employees and for profits overall
There’s a reason Walmart and Dollar General are crushing others, and it’s because either their customers can’t afford good customer service or they don’t care for it and choose to shop there anyway. The proof is literally the fact that mom and pop stores and others like Sears went out of business, customers preferred saving $5 over good customer service.
As I prefaced above, this is true for business where customers aren’t differentiating between vendors except on price.
Most DG are out in more ruralish areas where there's simply less choice, and/or the cost of exercising that choice is more pronounced. Drive an extra 15-20 min to save 30c on milk? Probably not worth it to many folks (cost of gas is more, might make you late for work, etc).
Had a lot of discussions with the former manager of our local DG, and... while not 'eye-opening', it was interesting to hear the pressure she was under. $x/week budget to schedule all the staff, targets to be hit (dollar targets, merchandising display targets, etc). It's "retail", but the numbers she had to play with were pretty low given the volume, imo. FWICT, she wasn't on more than perhaps the equivalent of around $13/hr, although I do think there were small performance bonuses thrown in. But, I think she was 'salaried', so lots of 50-60 hour weeks for probably not much more than ~$35k?
This is a somewhat ruralish area, and this was also... 4 years ago? She's moved on since then, and we lost touch so I don't know if things have changed much with the newer managers or not.
FWIW, she did keep that store ticking over. She was a bit bristly at times with other staff, but ... there was a pretty noticeable decline in staff behaviour, sheving, cleanliness and overall experience at the store within a couple weeks of her leaving, and it's never quite recovered. I'm guessing had they paid her an extra $100/week she'd have stayed and continued going above and beyond, but... .hey... profits...
Yes but what he’s saying is that if you take that money from high executive pay then you can offer both. You have three variables rather then just two, most businesses ignore the executive pay. That’s where the example breaks down. Now if you want to keep executive pay high then yes a lot of people select price over service and you are correct. But those aren’t the only two variables then it’s a lot more variable. Pardon the pun.
The grocery business is, and has been for a very long time, a low margin business. You’re not going to get phenomenal service at any grocery store.
That said, anecdotally, I do the grocery shopping and prefer WalMart. The produce is better, there’s a larger selection, and I can get the odd household item while out for groceries without paying an extortionate price. I’m saving at least 10% on my grocery bill without even trying. Hell, Walmart even does free curbside pickup where the other grocery chain wants to charge me.
Enormous selection, and economies of scale (massive purchasing & warehousing ops reducing costs, lower cost/sqft of store area, etc.) are also reasons that Walmart, Dollar General, etc. can out-compete local stores.
It is not only lower labor costs. And they are clearly willing to spend on the appearance of customer service, paying 'extra' people to be greeters, etc.
Viewing it as if the people who produce your products and services are a mere cost instead of an asset is stupid.
And, just because a lot of "successful" finance types implement this view, dies not mean that they are also not stupid.
Oversimplifying is not a solution to most problems.
Don't know about Dollar General, but isn't Walmart successful because they're big enough to dictate terms to their suppliers and simply squash their smaller competition with convenience?
People are willing to put up with shitty service to save a couple of bucks. Not everyone, but almost everyone. People prove it time again. See the success of no frills airlines like Ryanair and Spirit.
Amazon is a pretty good example of people willing to pay more for being able to return anything for almost any reason. There’s more comfort behind the click so more people buy noticeably more.
I still prefer Southwest over Spirit and any other airline but i’m just one anecdote.
For some reason in these scenarios the workers, who literally construct the product, are always framed as the adversary, and a sunk cost that needs to be avoided if at all possible. Workers are keeping the business from being as successful as it could be by being a monetary drain on the business instead of, in fact, being the business.
Labor costs are the biggest, if not one of the biggest costs for any employer, and it happens to be one the employer can sort of control.
Again, I’m not making anyone a hero or adversary, I’m just pointing out that some businesses can’t survive unless they compete on price, and that means lowering their own costs. It’s quite a blessing to be able to work in a high margin business.
In economic theory, this is what’s known as an efficiency wage. If you pay more, there’s more competition for your openings and you attract a better class of employee.
As other comments have pointed out, simply raising the minimum wage doesn’t accomplish the same thing. Instead, all those people who were marginal at $7-8/hour simply don’t get hired, and employers use automation or forego the opportunities that additional labor offers.
If your business is only viable when paying people below what they need to live, then your business shouldn't exist. The fact that you can do that now is simply people in power exploiting the weak.
Effectively what is happening is that those without power are subsidising the business by supplying them labour below cost. Generally in economics, making a business only viable through subsidies is a bad thing. It is much more efficient to give that labour to better businesses.
To provide a slight counter example:
1. Employee A produces 20 widgets an hour
2. Employee B produces 100 widgets an hour
There is a wage where employee A costs more than the value they create. By mandating a wage that is higher than their productivity they are simply not hired, they do not get a chance to gain experience/knowledge, they loose the chance to be as productive as Employee B.
The result is they are now on welfare/unemployed/etc. They lose the chance to get on the employment ladder.
In general people improve so we you shouldn't be making the low wages for long. But what do we do about people who don't improve - either we push them out of the workforce or we subsidize their lifestyle to meet a minimum threshold.
> The result is they are now on welfare/unemployed/etc. They lose the chance to get on the employment ladder.
> In general people improve so we you shouldn't be making the low wages for long. But what do we do about people who don't improve - either we push them out of the workforce or we subsidize their lifestyle to meet a minimum threshold.
That's only assuming that the ladder is just that, and not a single rung. Time spent in most minimum wage jobs are hard to sell as giving you a leg up when moving into the higher professional strata.
The first sentence is the "how do we want society to work" and it is the right one.
Businesses are a thing we've invented to shuffle resources around; there's currently enough resources for everyone in the world to be fat and happy (the world produces 3,500 calories per capita per day), it's just so very unequally distributed that 1 in 10 working Americans faces food insecurity, and 1 in 8 Americans overall lives in poverty.
Anyone working a full-time job should be able to live comfortably, and if you can't work full-time, society should take care of you anyway.
You're just pushing the bubble around under the wallpaper: who defines "living costs" etc? A person can technically stay alive in extremely spartan conditions.
For your second paragraph, that is a bit more complicated than simple economic theory might say.
For one thing, someone has to cook the fries, sweep the back room, and help customers. Unless you invent insanely cheap and powerful automation or raise the wage to a point that it's uneconomic to open a new store (and please take the employers who say "if you raise the minimum wage, I'm going to take my marbles and go home" with a grain of salt), it's hard to actually get rid of minimum wage jobs.
For another, remember that you will be injecting money into a sector of the economy that tends to spend it immediately. Minimum wage workers are likely to buy more fries and day care, causing more demand for other low-wage jobs.
But that’s exactly what happens. A marginally profitable store becomes an unprofitable store and shuts down. Fewer stores serving the same customers more efficiently are able to afford paying the remaining employees the new prevailing wage.
There’s a lot of slack in how many customers per hour a team can serve in a fast food restaurant. Look at In N Out burger at lunch time versus the average Wendy’s.
You can pay an experienced team 2x to serve 5x as many meals. But you’ll need 1/5th as many restaurants.
One interesting result of that is it becomes more viable to look for strategies that eliminate the employees altogether, eg the food-ordering terminals that are going up everywhere, as the relative cost diminishes with wage increase.
In such situations, it becomes an irreversible effect, as the cost to transition was mainly up front.
Which is generally fine. Because that is going to happen one day anyway. You want people to be paid well because then the transition becomes gradual. The most unproductive businesses and positions disappear first. People getting paid just over living expenses is the worst case scenario, because then everyone gets replaced over night as automation becomes cheap enough.
One interesting question: is the tipping point for switching to automation in the range of the minimum wage? Does increasing wages move you across that tipping point, or is it cheaper to get rid of employees no matter what the minimum wage is?
The existence of minimum wage at all enforces the property — you can otherwise just keep lowering pay until its not worth replacement (eg india can get away with paying very low wages, so the threat of automatic replacement isn’t nearly as high).
So the real question is: at what point does minimum wage draw automation as a response?
And that of course depends on the economics of automation at any given point in time — if a human isn’t drawing enough value (compared to the cheaper alternative), then the only rational thing is to replace the job entirely.
But minimum wage is also independent of automation (or any other alternative) costs, which is why its a bit of a hamfisted solution — it ignores the possibility that human labor simply isn’t worth that much. So you get this awkward line where everyone above the line is better off, and everyone below the line is homeless — the line being how much value you can produce.
Using India again as an example, that line doesn’t really exist — you have a fluid scale of wealth, where the bottom-most aren’t jobless (we can always produce enough work, if the price is right; you don’t want a daily maid?), but they barely make anything, and they live a lifestyle that we as a first-world country would deem unacceptable, but they find acceptable (especially compared to the alternative — no job/money at all).
Notably the poor indian probably lives better than the poor american, because the economy of the poor is significantly more developed. Partly because there are so many poor people in india, and partly because their income is allowed to be so much more fluid.
So there’s also the additional question of whether minimum wage “starves out” the poor economy, compounding how bad life can be at the bottommost rungs of our society
They also have a caste society where racism is okay. But in America, everyone is supposed to be considered equal.
India is also a place where if you were to have 10 children and 6 of them survived, that’s good odds. In America, if you have 10 children and 1 dies, that’s a tragedy.
...how is any of that relevant to anything under discussion, beyond the keyword “india”?
India, and every other third world country, has their (many) problems, but nonetheless, the economy of those living on a dime is far superior to whatever exists in the US.
Minimum wage, as all regulation does, strangles such poor economies (there must be an official term for this; anyone know it?) by virtue of creating a hard line where things simply cease to exist, be it half-functional cars, drugs, housing, wage, etc. Anyone above the line is better off (all options are now guaranteed to be at least decent), and anyone below simply has no options.
Whether we really want this depends on the context and subjects (drugs, banks are high-return targets for regulation; cars and wage perhaps less so), but that regulation deletes a market, by-design, should always be a part of the consideration, though it rarely seems to be.
Because if I had responded to everything you had said, I would have had to have written an essay.
About 100 years ago, minimum wage used to be a socialist concept. Now, all parties in America support the minimum wage. The only debate is whether it should go up or stay the same. Your view on minimum wage and absolute deregulation is so radical that only the anarchist party is likely to share your views. I swear, some people just want to see the world burn.
The economics term you are searching for is probably a “deadweight loss”. In theory, when a $1/pack tax is introduced on cigarettes, there is a decrease in the volume of cigarettes packs sold. That volume reduction numeric value is the deadweight loss. In practice, cigarettes are an “inelastic” good and nicotine addicts keep buying packs to support their nicotine addiction even when the price goes up by a dollar. Thus, the deadweight loss on cigarettes is much lower than with usual goods.
Regulation does not delete a market. Just because we have printed nutrition facts and safety checks on almost all of our foods does not mean people have stopped selling food and people have stopped buying food. Just because drivers must stop at stop signs doesn’t mean people have stopped driving. Just because banks are required to only safeguard 10% or more of their account holder’s balance doesn’t mean banks are unprofitable and have ceased to exist. These all just mean the equilibrium has shifted in some amount in some direction and the market has established a new equilibrium.
>Because if I had responded to everything you had said, I would have had to have written an essay.
As far as I can tell, you seem to have instead opted to respond to nothing I said, in the previous post...
>Your view on minimum wage and absolute deregulation is so radical that only the anarchist party is likely to share your views.
Is it really..? It seemed like an obvious thing to me: creating a glass floor traps people underneath it, but (ideally) makes life better for those above it. Glass ceilings are trivially accepted — and ceiling is just a floor to the guy above it. Is it so radical to apply it where the people above aren’t in the top 10%?
Also I’m not arguing absolute deregulation — I’m arguing that regulation inherently removes a subset of the market, and this should be accounted for. It might be worth it, it might not be. But its certainly not without consequence.
That, and that the extremely poor can live a better and more complete lifestyle in other countries than whats found in the US.
>The economics term you are searching for is probably a “deadweight loss”. In theory, when a $1/pack tax is introduced on cigarettes, there is a decrease in the volume of cigarettes packs sold
This doesn’t seem to be exactly what I’m getting at; I’m trying to refer to the idea that, when certain quality controls are globally enforced, the base cost goes up, and those who relied on lower costs can no longer be served. These barriers always existed — there’s a minimum cost to doing anything, really — but that hard-line bar has been raised. And that means the chunk of market that once existed inbetween the previous minimum and the new minimum... vanishes.
>Just because banks are required to only safeguard 10% or more of their account holder’s balance doesn’t mean banks are unprofitable and have ceased to exist.
I’m not suggesting it would remove the entire market of a given domain (I mean, regulation can, but usually doesn’t, and doesn’t strive to) but rather, it removes certain previously available options for banks which perhaps reached a sector that is now no longer served. That is, some people were not well off enough to afford such a safegaurd; the equilibrium shifts, along with the bare minimum required to enroll. Where previously “shithole” banks could serve that population, now a void exists (perhaps replaced by something worse, or better, or nothing at all).
But banks that cheat are probably globally good to regulate out of existence. Banks that safegaurd 10% vs 12% perhaps less obvious. But if 12% drives up the cost significantly, then some group of people are being pushed out.
Loan sharks don’t find borrowers because of a wealth of viable alternatives... they’re all thats left when you’ve exhausted all better options. The higher the minimum bar, the more likely someone ends up in such a state.
Until you realize that no level on minimum wage is adequate in SF, while $10/hr is livable in rural Arkansas.
It's not a silver bullet even with COL factored in. Higher staff costs? Replace them with automation. You can see the largest employers of minimum wage employees (eg. Mcdonalds) hedging against a rising minimum wage with kiosks to replace cashiers. At $15/hr for labor, those capital investments start looking like a mighty fine ROI.
Cashiers helping one customer at a time are a bottleneck in a fast food restaurant. It's not that those jobs are eliminated, food still needs to be cooked and served. Kiosks allow up to 2, 3, 4 times the number of customers to order food at the same time (this also includes food delivery services who can order remotely). Kiosks are just the last part of efficiency that fast food restaurants have been developing over the last 50 years.
Increasingly surprised how we need all these various ipads/terminals in businesses. Seems by now technology should be able to push something to the customer's phone when they walk into the store and have them complete their order on their phone without having to install apps.
But employer B also can now remove employees due to the investments they made in automation - if they can remove the workers entirely they'll have even more money to invest in making a better product to edge out employer A. At the end of the day the worker always loses.
That’s a bit oversimplified. Automation doesn’t fix everything, it may not be a useful option regardless of how much money you just saved.
It’s more likely the best employees will move towards the company that pays more, along with their experience and know how, probably producing a better product. On one side you’ll have the best people and on the other side you’ll have ones that may be good but also very upset about the disparity.
I would still question if saving on personnel brings the most benefit in most cases. It’s short term benefit, enough for an executive to get the bonus. It may also be long term if everyone is doing it so an employee has no option.
In Norma Rae, the main heroine is promoted to a supervisor (with a higher salary) in order to alienate her from others and suppress her pro-union stance. I suspect a similar dynamics can also happen in Walmart.
... And the last time that one was this low was 1970. There’s no arguing the US has been absolutely crushing it in terms of jobs creation for several years now.
A different one is that employees leave Employer B for Employer A (or others). So Employer B makes more money per employee, but he has less of them now.
Employer B takes the money they save by paying employees less, and invests in newer, better facilities or R&D or whatever. Now employer B is selling a better product than employer A. Who will customers choose to purchase from? Who will lose business, and end up having to fire employees?
To be a successful business, compensation decisions can't be based on people's feelings. You have to consider when a new store or hotel or restaurant will come around and put them out of business, and stay ahead of the curve. You pay what you need to to get the job done. There are some good examples like Costco, but there are only so many people with sufficient disposable income who can afford to shop at Costco and similar stores, and they're not competing with Walmart/CVS/Dollar Store or other bottom tier vendors.