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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Exactly. You can have a huge demand for things that don’t exist, and a huge supply of things no one wants.
Precisely, and it’s coming soon.
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.
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.
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.
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.
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.
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.
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.
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.