A reader writes,
However, progressives cannot understand that business owners will reduce staffing when labor costs more. It’s incomprehensible to them. They keep talking about the emotions of those who are making low salaries.
From a three-axes perspective, the problem is pretty simple. A profitable firm pays low wages to workers, either at home or overseas. The firm is presumably able to “afford” to pay workers more, so should it not be pressured to do so? In this context, the firm looks an awful lot like an oppressor, and the workers look an awful lot like the oppressed.
The libertarian (or economist’s) counter is that the workers may end up worse off as a result of a “fair trade” boycott or a higher minimum wage. If these measures cause layoffs, then the workers who lose their jobs are certainly not better off.
I think that the hard part is getting progressives past the intuition that firms can “afford” to pay more. One of the reasons that I try to have my class go through the exercise of planning a simple start-up business is so that they can see that profit is not something that automatically accrues to any business. In general, I think that it is important to get people to think about issues from the standpoint of an entrepreneur, rather than simply treat business as “the other” and the enemy.
In aggregate, corporations certainly could afford a higher labor bill. Profits as a % of GDP are basically at record highs. At the same time the labor share is near record lows. Sure, some business cannot afford more but why isolate such instances…is that teaching the proper lesson?
I don’t think it’s necessarily about being able to afford the wage increase or not. I believe it ultimately comes down to “where do I (the business owner) get the highest return from this profit I’ve earned?” Should it be put back into the business via investment in new IT? How about expanding my market reach by opening a new office in Dallas? Should I increase my overall marketing budget? Or perhaps it should it be distributed to shareholders via a dividend? Maybe I’ll purchase back some of my own outstanding stock if I think it is cheap. And so on and so forth. To arbritarily increase wages to those who, I’m sorry to say, are the cheapest to replace from a capital cost perspective doesn’t make a whole of sense to the business owner given all of his other options. As Arnold said, it’s a matter of perspective.
To Effem:
At the end of his post, Arnold states, ” In general, I think that it is important to get people to think about issues from the standpoint of an entrepreneur, rather than simply treat business as “the other” and the enemy.” I completely agree and I may be able to help with that, and address your, “In aggregate, corporations certainly could afford a higher labor bill.” statement as well. I’ll give you the actual operative business perspective – as follows ….
If I am a successful businessman (which I am), I know for an absolute certainty that I have to pay my employees – at all levels – just enough to keep/dissuade them from going to work for my competition.
If that sounds brutal, or “unfair to labor” or whatever, understand that I apply the exact same standard to anything and everything else I buy that is a critical component of my business – the raw materials, the land on which my business operates, my suppliers of capital, my suppliers of capital equipment, etc., etc. I have to pay ALL of those factors of my production just enough to keep them from supplying my competitors instead of supplying me and my business. ALL of those factors of production ALWAYS prefer to be paid MORE. As a businessman, I understand and accept that.
What many “liberals” fail to understand is that Labor is only ONE factor of production preferring higher returns – when ALL factors of production would also prefer higher returns. Again, the task for the successful businessperson is to compensate ALL factors of production just enough to keep them from being diverted to the competition.
In my experience, liberals who argue for a higher minimum wage are committing some form of the Lump of Labor Fallacy; ie, assuming that the amount of labor input needed (particularly the low-skill kind) in any particular production process is relatively fixed, and therefore you can make those workers better off by simply mandating that they be paid more.
here is a perfect example from the new york times:
“The advocacy group Low Pay Is Not OK posted a phone call, recorded by a 10-year McDonald’s veteran, Nancy Salgado, when she contacted the company’s “McResource” help line. The operator told Salgado that she could qualify for food stamps and home heating assistance, while also suggesting some area food banks — impressively, she knew to recommend these services without even asking about Salgado’s wage ($8.25 an hour), though she was aware Salgado worked full time. The company earned $5.5 billion in net profits last year, and appears to take for granted that many of its employees will be on the dole.
Absurd as a minimum income might seem to bootstrapping Americans, one already exists in a way — McDonald’s knows it. If our economy is no longer able to improve the lives of the working poor and low-income families, why not tweak our policies to do what we’re already doing, but better — more harmoniously?”
http://www.nytimes.com/2013/11/17/magazine/switzerlands-proposal-to-pay-people-for-being-alive.html?pagewanted=2&_r=0
Some back of the envelope math:
Yes $5.5B of net income may seem like a lot of money but not when you consider that the market cap of MCD is ~$100B. MCD apparently has about 440,000 full time employees (?) – so if it spent half its profits increasing wages (and yes i no there is a tax shield but cant be bothered) that would potentially increase wages by $3.13 an hour and wipe out ~$50B of market value…great plan…
Lately I’ve seen more and more liberals cite empirical research to justify the minimum wage. “The marginal effects on employment are minimal because Card and Krueger.” I also hear a (bad) keynsian story a lot: “in this depressed economy increasing the minimum wage will boost the marginal propensity to consume will boost the economy will boost business spending as people plan for an economy closer to full employment will eliminate slack will boost employment and counter the effects of more expensive labor.”
Liberals smart enough to make these arguments are often smart enough to call the minimum wage a second-best policy which is simply more achievable than more efficient subsidies.
Obviously these are what I think are the best, not the typical liberal arguments. Matt yglesias is an example of someone I think has made both arguments.
Your three axis model has really helped me to understand where people are coming from. Minimum wage is an example, I think, of where the progressive paradigm causes difficulties. The progressive starting point is to see the world as a collection of groups with disparate power, so progressives tend to see business issues as problems of unequal bargaining power and economies of scale. The image of a poor working parent desperate for a job and getting one from a large low-wage employer because they are willing to take anything and the employer knows there are hundreds more who could take the same job is real and palpable. It’s understandable why this would be a persuasive image.
The problem is, negotiating power and economies of scale are frequently not that important, and represent only a small portion of the complex interplay that leads to prices. But, because progressives enter issues like this with moral overtones, they are operating in Robin Hanson’s “far mode”, and they don’t seek out mitigating details. For instance, large employers almost always pay better than their mom-and-pop competitors. Or, consider how unequal bargaining power is entirely irrelevant to our experience as consumers with large retailers. Obvious examples such as these plainly make the case that power is only intermittently important in these matters.
So, I think that progressives envision a minimum wage as a process of low wage workers using the government as a stand in for a union negotiator, with the minimum wage as the negotiated price. That’s why they don’t think there will be any unemployment. They just think the laborers are negotiating a better deal.
The problem deepens because these misjudgments become part of the evidence. For instance, there is a lot of stink about Black Friday expanding into Thanksgiving Day. This is a complex cultural phenomenon, but for progressives, it’s just a matter of powerful retailers carving an extra retail day out of a cherished holiday where consumers and laborers are cheated out of a national sacrament. This simple interpretation, based on the assumption of monopolistic power among the retailers, becomes evidence of that power, and a vicious cycle of misjudgment just builds up from it.
But nobody is more anti-blue laws than liberals. Shopping on Sunday is a victory over ancient bigotry and oppression. Same must be true for shopping on Thursday.
This is exactly how Obama conceptualized profits in the presidential debates. He treated profits as basically a cost-accounting issue, saying something along the lines of “and then of course a company has to set aside a certain amount for profits.”
Romney was somewhat dumbfounded, and tried to explain that firms cannot simply allocate profits to themselves, and that profits may or may not exist depending on how successfully the company is run. I doubt he won anyone over with that, though.
A few thoughts:
1. As a businessman, I can “afford” to pay my employees “more.” But what determines the limit of that “more”? Should it be $2 more per hour? $3? $10? What determines the “fairness” of the wage? My intuition is that the voluntary nature of the employer/employee contract makes the agreed upon wage fair. (Obviously, that places me on the libertarian axis.) How would a progressive set the limit? The answer can’t always be “More!” can it?
2. The progressives seem to envision profit as a big pile of cash that “The Rich” blow on conspicuous consumption items or just hoard. But most of what is accounted as profit is bundled up in the fixed assets of the business or used to reduce existing liabilities. Sure, it can be accessed by selling assets to generate money for more wages and/or taxes, but this comes at a cost to the operation of the business. Let’s say hypothetically that there are no job losses as a result of minimum wage, that (just as is fantasized) profits are reduced and employees are paid more. How do we know that this reallocation of capital to labor from other uses of the profit (such as paying down debt or purchasing new equipment) really makes sense for the long-term prospects of business growth and thus future employment?