# "Businesses hire only when more employees are needed to meet unmet demand." - anyone disagree? **URL:** \ **Category:** Great Debates\ **Created:** [August 9, 2013, 12:22pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796 "2013-08-09T12:22:46Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Cheshire\_Human](https://avatars.discourse-cdn.com/v4/letter/c/5f8ce5/32.png) [@Cheshire\_Human](https://boards.straightdope.com/u/Cheshire_Human)\ **Post date:** [August 9, 2013, 2:16pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/21 "2013-08-09T14:16:46Z")
> [@BobLibDem](#): > > I would also propose a corollary that businesses in general have no extraneous employees. Thus if the minimum wage is increased, businesses would either have to eat the cost and reduce their profits or increase prices. If they could reduce their workforce they would already have done so. That’s not entirely true. Say it takes two widgetmakers to handmake 100 widgets a day, but there’s a machine available that can make the same number, but be operated by one widgetmaker. If the machine costs more than the wages of the second widgetmaker, I’m not going to buy the machine, I’m going to hire the second employee. But if you raise the minimum wage, so that the second guy now costs more than the machine, I’m buying the machine, and the second guy is out looking for a new job. ---
**Author:** ![Chimera](https://avatars.discourse-cdn.com/v4/letter/c/8e8cbc/32.png) [@Chimera](https://boards.straightdope.com/u/Chimera)\ **Post date:** [August 9, 2013, 2:21pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/22 "2013-08-09T14:21:01Z")
And then of course there are the employers who will refuse to hire more because they have a fixed notion in their head about the number of people they need, or should have, and are unwilling to adjust this number based on any form of reality. ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [August 9, 2013, 2:42pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/23 "2013-08-09T14:42:20Z")
> [@Chimera](#): > > And then of course there are the employers who will refuse to hire more because they have a fixed notion in their head about the number of people they need, or should have, and are unwilling to adjust this number based on any form of reality. There’s always some form of reality that can make make them change their minds, and that’s in the from of going bankrupt. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 9, 2013, 4:12pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/24 "2013-08-09T16:12:18Z")
> [@Cheshire\_Human](#): > > That’s not entirely true. Say it takes two widgetmakers to handmake 100 widgets a day, but there’s a machine available that can make the same number, but be operated by one widgetmaker. If the machine costs more than the wages of the second widgetmaker, I’m not going to buy the machine, I’m going to hire the second employee. But if you raise the minimum wage, so that the second guy now costs more than the machine, I’m buying the machine, and the second guy is out looking for a new job. This is not theoretical. I saw a presentation from a major electronics company about them not automating their Asian factories, because the workers were cheaper than the machines. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 9, 2013, 4:15pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/25 "2013-08-09T16:15:04Z")
> [@Bozuit](#): > > You’ve never heard of Apple? Making twice the number of iPhones is not going to increase demand, unless this goes along with decreasing their price - and no one argues that you can’t affect demand with price. It would mostly result in a lot of unsold iPhones. Companies do sophisticated supply chain management, which involves predicting exactly what demand is and matching supply to it. Increasing supply and hoping the people will come to buy is a good formula for going broke. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 9, 2013, 4:20pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/26 "2013-08-09T16:20:25Z")
> [@Fuzzy\_Dunlop](#): > > In my experience, no business people think in terms of economics. Not at all, but not in terms of supply and demand in particular. Even if they’re highly educated and completely understand economics, we just don’t think in those terms. We expand a business because we see a “potential opportunity” to make more money. Is that similar or exactly the same thing as “filling an unmet demand”? Sure it is. No, it is predicting unmet demand. Business owners are optimists, if they think or predict or wish that there is going to be more demand they may indeed increase supply. Lots of businesses go broke also. This is exactly why the end of the bubble was so painful. I heard a VP at Intel make incredible predictions about server sales. My company was selling everything it could make, and so was expanding. The telecom companies were building out the network like crazy, and all the internet start-ups were predicting tremendous demand. When it did not materialize, the bottom fell out. And after it, the survivors were very reticent about hiring, which is why people still employed did two jobs. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 9, 2013, 4:24pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/27 "2013-08-09T16:24:26Z")
> [@MandaJo](#): > > Well, a reduced tax burden–if it is long-run–will decrease their variable costs. This means that they can now offer a product at a lower cost. This will increase the quantity demanded (not the demand) because some people that were unwilling and/or unable to buy the product at a previous price can now do so. The demand curve doesn’t change, but the supply curve shifts out. > > Likewise, if windfall profits are put back in the business, that might make some expansion profitable. For example, let’s say I was considering opening a factory in Whereever. I expect the factory to return about 3% profits. However, it will cost me 5% in interest to borrow the money to build the factory. So I don’t do it. However, if I have a windfall profit, I could use that money directly to build my factory. However, if it costs me 5% to borrow money, there is a good chance I could loan my profits to someone else at close to that, which is less trouble, so it would still make more sense to do that than to build. But there could be a sweet spot where it makes sense to use profits to expand but not borrowed money. Price affects demand. Supply doesn’t, unless there is a shortage and unless the increased supply is tied to a decrease in price. Sure there are economies of scale, but unless you have a very good reason to believe there will be massive demand, increasing supply significantly to decrease unit costs is unlikely to be a good idea. As for your factory, you are talking about ROI. Your factory should be built just big enough to meet demand (actually a bit bigger since you never want to run at 100% utilization.) But you don’t build it twice as big as you need it no matter how cheap money is or how low taxes are. ---
**Author:** ![Ann\_Hedonia](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ann_hedonia/32/319_2.png) [@Ann\_Hedonia](https://boards.straightdope.com/u/Ann_Hedonia)\ **Post date:** [August 9, 2013, 5:11pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/28 "2013-08-09T17:11:32Z")
> [@iiandyiiii](#): > > Is there any legitimate doubt to the statement in the thread title? I mean, other than a few business who hire their brother-in-law’s kid to give him a first job (and the like)? > > It seems to me like this is an intuitively obvious statement about economics. A restaurant chain (for example) will open a new store only if it thinks there is demand in the new area- not because they just happened to get a windfall profit or reduced tax burden. I think I would’ve phrased it differently. Maybe 'businesses only hire when employees are needed to meet demand or increase profitability. A business may hire because demand has increased, or because they need workers as part of a strategy to increase demand…ie sales and marketing employees. Or maybe they need employees as part of a strategy to reduce their supply cost…they may have decided they could increase their profitability by making certain components in-house instead of buying them, or by doing their own deliveries instead of using subcontractors. But profitability is the key, a competent business owner isn’t going to hire employees that have a negative cost impact on the bottom line. ---
**Author:** ![gaffa](https://avatars.discourse-cdn.com/v4/letter/g/e68b1a/32.png) [@gaffa](https://boards.straightdope.com/u/gaffa)\ **Post date:** [August 9, 2013, 7:23pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/29 "2013-08-09T19:23:33Z")
I wish some of the Dope junior MBAs had spent a week or so in the kitchen on a McDonalds. They would learn just how automated the whole system actually is. For instance, nobody actually flips a burger any more - they have a system that has an upper grill, so the pattys are cooked on both sidss at once. Condements are precisely deposited on the patties in pre-measured amounts. The day McDonands can replace the person in the kitchen, they will. ---
**Author:** ![bump](https://avatars.discourse-cdn.com/v4/letter/b/7c8e57/32.png) [@bump](https://boards.straightdope.com/u/bump)\ **Post date:** [August 9, 2013, 7:27pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/30 "2013-08-09T19:27:57Z")
> [@BobLibDem](#): > > I don’t buy it. Do you really think if McDonald’s charged a nickel more for a Big Mac that they’d sell fewer of them? You haven’t heard of price elasticity of demand? Back to Economics 101 with you… ---
**Author:** ![Fuzzy\_Dunlop](https://avatars.discourse-cdn.com/v4/letter/f/848f3c/32.png) [@Fuzzy\_Dunlop](https://boards.straightdope.com/u/Fuzzy_Dunlop)\ **Post date:** [August 9, 2013, 7:34pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/31 "2013-08-09T19:34:54Z")
> [@bump](#): > > You haven’t heard of price elasticity of demand? > > Back to Economics 101 with you… You don’t really even have to understand elasticity… just on the most basic level, why on earth wouldn’t they charge $0.05 more if they could do it without selling fewer? Understanding how price changes effect revenue on the margin can be a little unintuitive, but if a restaurant can sell the same amount for more money they would. ---
**Author:** ![Der\_Trihs](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/der_trihs/32/233_2.png) [@Der\_Trihs](https://boards.straightdope.com/u/Der_Trihs)\ **Post date:** [August 9, 2013, 7:43pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/32 "2013-08-09T19:43:31Z")
> [@MandaJo](#): > > Well, a reduced tax burden–if it is long-run–will decrease their variable costs. This means that they can now offer a product at a lower cost. Or more likely the people a the top will simply pocket the money. Businesses are run to profit the people in charge, not out of some abstract devotion to capitalism. > [@aNewLeaf](#): > > Of course supply creates demand, that’s the only way new products are ever sold. That’s not true. Supply just creates idle factories, unemployed workers, and warehouses and dumps full of unsold product if there isn’t a demand for the product in question. > [@Dangerosa](#): > > That isn’t supply, its marketing. > > There is a demand right now for the iPhone 6 - not that its available, there is zero supply, but there is demand. > > There is a demand right now for the next Avengers movie - it hasn’t been made yet. Exactly. You can have a huge demand for things that don’t exist, and a huge supply of things no one wants. > [@gaffa](#): > > I wish some of the Dope junior MBAs had spent a week or so in the kitchen on a McDonalds. They would learn just how automated the whole system actually is. For instance, nobody actually flips a burger any more - they have a system that has an upper grill, so the pattys are cooked on both sidss at once. Condements are precisely deposited on the patties in pre-measured amounts. > > The day McDonands can replace the person in the kitchen, they will. Precisely, [and it’s coming soon](http://www.businessinsider.com/burger-robot-could-revolutionize-fast-food-industry-2012-11). ---
**Author:** ![TheSeaOtter](https://avatars.discourse-cdn.com/v4/letter/t/ed655f/32.png) [@TheSeaOtter](https://boards.straightdope.com/u/TheSeaOtter)\ **Post date:** [August 9, 2013, 7:45pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/33 "2013-08-09T19:45:17Z")
> [@Fuzzy\_Dunlop](#): > > You don’t really even have to understand elasticity… just on the most basic level, why on earth wouldn’t they charge $0.05 more if they could do it without selling fewer? Understanding how price changes effect revenue on the margin can be a little unintuitive, but if a restaurant can sell the same amount for more money they would. I’ve never taken an economics class, but this seems intuitively obvious to me - a multinational corporation spends more money than I can wrap my brain around on market research. I have to assume they have the price point for everything they sell down to a science. If you sell 50 million burgers a day and you could get an extra nickel for each one, without losing sales, that’s almost a billion dollars a year. I can’t imagine they’d do all that research and then turn down the billion dollars for no real reason. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 9, 2013, 7:58pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/34 "2013-08-09T19:58:45Z")
> [@Fuzzy\_Dunlop](#): > > You don’t really even have to understand elasticity… just on the most basic level, why on earth wouldn’t they charge $0.05 more if they could do it without selling fewer? Understanding how price changes effect revenue on the margin can be a little unintuitive, but if a restaurant can sell the same amount for more money they would. Elasticity has to be measured over the entire market, not one supplier. If McDs charged $.05 more, they might lose business to Wendy’s. That is not a measure of elasticity. If all burger shops charged a nickel more due to the minimum wage going up, for example, then we’d see what the impact is. You could probably tell by plotting volume per capita against inflation adjusted price. Which I leave as an exercise to the reader. Look at gas prices. Very unelastic, perhaps a bit over time. California, which has very high gas prices, has stable or falling consumption due to a move to higher mileage cars, as can be seen by the prevalence of Priuses around here. ---
**Author:** ![dracoi](https://avatars.discourse-cdn.com/v4/letter/d/90db22/32.png) [@dracoi](https://boards.straightdope.com/u/dracoi)\ **Post date:** [August 9, 2013, 8:08pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/35 "2013-08-09T20:08:04Z")
I’m going to go out on a limb here. I do disagree with the statement. Businesses do not hire to meet unmet demand. They don’t even hire to meet future, anticipated, etc. demand. Businesses hire because the expected rate of return on the expenditure is higher than the next best alternative use of those funds. Now, to some extent that’s tied up in demand. You generally get a higher rate of return on a product with higher demand, and we all intuitively recognize that. However, the decision making process used by businesses is not explicitly tied up in demand. You don’t say “There’s unmet demand for product A, so we’ll hire.” The decision making process is “$10 million wages is expected to produce $10 million in profit on product A. Our alternative uses for $10 million is as wages to produce $2 million in profits on product B, as debt payments to save $1 million in interest expense, or investment in US Treasuries to produce $0.1 million in interest.” It could even be that product B has more unmet demand than product A, but the company won’t hire because there’s a lower expected rate of return. There are plenty of businesses that have downsized profitable parts of their companies simply because they were not profitable _enough_. In terms of issues like tax incentives, any reduction in taxes will change the expected rate of return. If a tax incentive means product B could produce $11 million in profits, then the incentive would change the business decision. But if the incentive only makes it $9 million in profits, product A is still preferred. ---
**Author:** ![WillFarnaby](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/willfarnaby/32/514_2.png) [@WillFarnaby](https://boards.straightdope.com/u/WillFarnaby)\ **Post date:** [August 9, 2013, 11:06pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/36 "2013-08-09T23:06:56Z")
I agree with the statement generally if i squint really hard, but I disagree with where I think you’re trying go with this. Businesses hire when the potential employee has a greater utility than cost. Capital investment increases the utility of unemployed people so that businesses will profit from hiring them. Say there is a surge in demand for widgets. Market price for widgets is $56. A widget machine takes two people earning $20 an hour to operate at full capacity. Widget Maker A owns a widget making machine working at full capacity and has two employees. Full capacity results in 1 widget every hour. Therefore each employee has a utility of $28an hour and receives $20 in pay per hour. Hiring another worker at this point would make pay a total of $60 for all employees while there was only a combined utility of $56 per hour. The only way Widget Maker A would hire in this situation is if utility of the third worker was increased. One way this would happen is if there was a rise in prices of widgets, say to $70. Of course one way to increase the price is to restrict supply, or for inflationists, increase the supply of money. The keen eye will notice that this expansion of employment is enabled by an erosion in real wages. The inflationists are counting on the rabble not noticing this. One reason this view has dominated policy for at least the last 30 years is that politicians would rather surreptitiously destroy workers wages by inflation than allow the market to bring wages down for a time while resources are better allocated. Another reason is that governments are the worlds largest debtors but I digress. Politicians appoint inflationists like Greenspan and Bernanke to fulfill political goals. Another way to increase the utility of this potential third employee would be for Widget Maker A to invest in another widget machine. This is where the “windfall profit” and tax decreases you dismiss so readily would be beneficial to society. For Widget Maker A could take on two employees making the same wage and still be operating for a profit. Also if the increase in production was economy-wide you would likely see a decrease in widget price over time and an increase in real wages for everyone in society. ---
**Author:** ![Dangerosa](https://avatars.discourse-cdn.com/v4/letter/d/22d042/32.png) [@Dangerosa](https://boards.straightdope.com/u/Dangerosa)\ **Post date:** [August 9, 2013, 11:14pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/37 "2013-08-09T23:14:28Z")
> [@TheSeaOtter](#): > > I’ve never taken an economics class, but this seems intuitively obvious to me - a multinational corporation spends more money than I can wrap my brain around on market research. I have to assume they have the price point for everything they sell down to a science. If you sell 50 million burgers a day and you could get an extra nickel for each one, without losing sales, that’s almost a billion dollars a year. I can’t imagine they’d do all that research and then turn down the billion dollars for no real reason. It actually isn’t much of a science, in part because of its complexity - a Big Mac in Times Square is going to have a different price point than one in Omaha. Different on Friday night than on Tuesday afternoon. And franchisees get some flexibility in pricing as well. The exact price point for maximizing profits is art - and always somewhat unknown - but it is what businesses strive for. ---
**Author:** ![Little\_Nemo](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/little_nemo/32/3120_2.png) [@Little\_Nemo](https://boards.straightdope.com/u/Little_Nemo)\ **Post date:** [August 9, 2013, 11:22pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/38 "2013-08-09T23:22:53Z")
Another factor which too many people ignore is business owners make mistakes. It’s a fundamental principle of the free market. Some businesses outperform others and good businesses supplant bad businesses in the marketplace. But any time you point to a specific business and suggest that it’s doing something wrong, people will jump on you for suggesting a business might be wrong. They’ll tell you business decisions are always made for only rational economic reasons. But if that were true than why are there good businesses and bad businesses? The obvious truth - which is fully in line with mainstream economics - is that sometimes businessmen make irrational decisions. Sometimes when a businessman appears to be doing something stupid, it’s because he actually is doing something stupid. ---
**Author:** ![Icarus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/icarus/32/72_2.png) [@Icarus](https://boards.straightdope.com/u/Icarus)\ **Post date:** [August 9, 2013, 11:26pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/39 "2013-08-09T23:26:08Z")
> [@WillFarnaby](#): > > I agree with the statement generally if i squint really hard, but I disagree with where I think you’re trying go with this. > > Businesses hire when the potential employee has a greater utility than cost. And I will suggest that many people in this discussion have never worked at a very large successful company. Often hiring decisions are very disconnected from demand, profitability, cost, and only loosely tied to productivity. Sometimes people get hired because the manager wants more people to do the work - and the work is fundamentally not really contributing to anything meaningful. Some managers hire to increase the size of their organization for political reasons (empire building). In a large successful company that is not focused on cost containment, it is not uncommon for divisions and managers to try to grab more operational budget money any chance they get. Etc. ---
**Author:** ![WillFarnaby](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/willfarnaby/32/514_2.png) [@WillFarnaby](https://boards.straightdope.com/u/WillFarnaby)\ **Post date:** [August 9, 2013, 11:58pm UTC](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796/40 "2013-08-09T23:58:36Z")
Ok then businesses that make a habit of hiring people who cost more than their utility will not be likely to remain large and successful. Btw I work at one of the largest and most successful companies in the history of planet Earth, but I though we were talking economics not shooting the breeze. [Previous page](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796.md?page=1) [Next page](https://boards.straightdope.com/t/businesses-hire-only-when-more-employees-are-needed-to-meet-unmet-demand-anyone-disagree/665796.md?page=3)