What’s unfair about this? Or more accurately, how is this different from the optimal arrangement?
Assuming we aren’t talking about a situation where McDs strong-arms the city council into giving them tax breaks or the like (always possible, but outside the scope of economics), then if McD succeeds then it means the local population put a high value on cheapness, consistency, and speed; and conversely a low value on quality and diversity.
Most likely, an equilibrium is met where McD displaces perhaps the worst of the Mom-and-Pops, but does not take over completely, because some people are willing to pay more for a nice burger.
If McD can easily move in, then it means some needs weren’t met; they were able to meet them with their corporate buying power and other advantages. But they don’t have unlimited power.
General good stores have a hard time competing against Wal-Mart of course, because they sell commodities, and there’s not much difference in the quality of the items. But why shouldn’t the mom-and-pop close in that case? Why do their interests exceed that of the population (which is getting cheaper goods with Wal-Mart)?
It’s only unfair in the same way that it’s unfair to pit a child against an adult in some sports game. Sure, it’s a problem if your goal is to have a totally even playing field. But if the goal is to actually find the best player, then it’s completely reasonable.
I’ve always said that the greatest shame of lots of people taking Economics 101 is so few of them then go on to take Economics 102. Labor is a unique economic good in many different ways and there’s an entire field of labor economics which delves into the intricate minutiae of how labor behaves. Within the field, it’s absolutely uncontroversial that large amounts of regulation are required for a functioning labor market and every developed economy around the globe has significant regulatory interest and interference in the labor market. While there is lively debate about the nature and scope of policy, that it should exist is accepted by everyone except the far fringe of libertarian idealogues.
Among many of the largely uncontroversial and commonly enacted statues:
Taxation of income: Every country chooses to tax labor in certain ways. How it’s enacted has an intrinsically distortive effect on the market.
Public sector wages: It’s generally accepted that large portions of work properly belong to the state. Public sector wages aren’t determined by market forces and setting them to be “fair” is more of an art than a science at this point.
Regulations to mitigate positive and negative externalities: This includes everything from paying doctors bonuses to work in rural areas to criminalizing bribes and fraud.
Social Safety Net provisions: It’s generally accepted among most developed countries as a political preference that certain services should be provided to all regardless of ability to pay (primary and secondary education, healthcare, unemployment benefits etc.). Such regulations have an inherent distortive effect on the labor market but other regulations are put in place also as a reaction like minimum wage and OSHA laws.
Certification bodies: Many labor markets suffer from a market for lemons and so regulatory and certification bodies are established like the AMA or the ALA and given regulatory force by the government. While the degree to which certification exists is hotly contested, most economists generally agree that they serve a purpose in making the labor market smoother.
Collective action problems: Many labor market actors suffer from collective action problems of which only the state can resolve. Take minimum vacation or maternity leave for example. It might be better for everyone if maternity leave were standard but if it isn’t made mandatory, a single company could defect and gain profit from its actions. Only if it’s enacted as law will everyone adopt it.
Anti-predatory regulations: Some forms of compensation are deemed as psychologically manipulative and detrimental to the market. For example, the “company store” model from the 19th century was eventually banned most places around the world due to the unequal power balance it created. Similarly, corporate pension funds, options plans and other forms of compensation are tightly regulated to avoid companies trying to take advantage of them.
While Economics 101 presents such a wonderfully clean and elegant explanatory model, the real world is infinitely more complex. How labor actually works has little in common with the “free market” as presented in the model.
“Free” markets only work when they are “free”. I.e., everyone involved has equal power. The labor market is horribly tilted in favor of the employers in most situations.
Unions are a way to partially balance that out, but we are now in an age where the propaganda against unions is accepted as truth.
Another way to partially balance things out is via collective voting, i.e., the ballot box. Hence minimum wage laws. But, again, propaganda against that has been quite successful. The US national minimum wage has fallen far behind inflation. (And a lot of people are making near minimum wage. Over 40% are under $15 an hour.)
If it isn’t fair, it’s not free.
Be wary of anyone extolling the virtues of a “free” market. They are usually trying to prop up the side with the most power against efforts by those with the least power to merely balance things out.
I feel a need to point out that McDonalds and Mom & Pop Restaurants typically operate in different markets in terms of price points and quality.
Big box stores like Home Depot, Walmart and Best Buy are perhaps a better example of economies of scale. From a consumer’s perspective, it doesn’t matter if they purchase a rake, bag of potatoes or CD player from a giant superstore or a mom & pop. It’s the same product. But the M&P can’t compete with the economies of scale enjoyed by the big stores. So while Mom and Pop tend to lose out, consumers in general win with lower prices.
The problem is that the loss of a few M&P stores is more visible to the typical American than an overall increase in purchasing power due to lower prices spread throughout the economy.
That depends a bit on what you mean by visible. In terms of aggregate benefit, yes. But the reason the M&P stores go bust is because their customers defect to the big box store - so presumably they can see the benefits to themselves very clearly. That many of these people will then bemoan the loss of the M&P store is a tragicomic fact of human nature.
What is a fair wage? More generally, what is fair? There is a theorem-like argument in classical economics that “real wages always tend, in the long run, toward the minimum wage necessary to sustain the life of the worker.” Is that what OP means by fair? Note that that theorem doesn’t depend on how much “value” the worker brings to an enterprise!
While it is elegant the way free markets tend to produce efficient allocations, there is a tendency, at least among amateur right-wing economists, to exaggerate the efficacy of a pure market. There are many ways to illustrate this—it could be the topic of an interesting GD thread—but perhaps a simple example will help: Most of us would agree that water is far far more valuable than A.A.Milne’s fictional characters, yet many spend as much or more on the latter. Why? No private entity collects monopoly rents on water but a private company (which BTW had nothing to do with Milne’s creativity) does collect rent on Winnie-the-Pooh.
[off-topic?] I’ve thought of writing a novella about an American capitalist who uncovers an old treaty between Washington and the Omigosh Indian Tribe, where the latter is ceded dominion over “all the air that ever flowed over Omigosh Mountain.” The capitalist buys that right, gets a Supreme Court to interpret it and quickly becomes a multi-trillionaire. The story would focus on the resultant stock market boom and the grand benevolence of the Oxygen Monopoly as it donates billions to charities.
This is essentially correct, all other things being equal (which they never are).
The evidence for this is that, something like 96% of the time, American workers make more than minimum wage, and most of those earning MW are not working full time, not supporting themselves or a familly, and their labor isn’t worth very much on the open market.
There is a bidding war for the best workers, and much less of a bidding war for those workers whose labor is worth less (compared to everyone else in the same labor market). Just like there is a bidding war on pricing. A “fair wage” is the point at which the upward push on wages counteracts the downward push on prices. That point fluctuates, and it varies radically based on the perceived worth of the labor - engineers’ labor is perceived as being worth more than janitors’. Because the supply of engineers is smaller than the supply of people who can push a broom.
A minimum wage job doesn’t have the same opportunity to excel as the job of an engineer (or doctor, or salesman, or computer programmer, or whatever).
The fact that you can hire someone for $X an hour and get $Y an hour in labor value is what causes anyone to get hired, providing Y > X. If you set the minimum wage such that X > Y, no one gets hired, “fair” or not.
I’m not going to yell “Cite!” but can you give an example of this? I don’t care if you can cite a source. I am not a student of historical economics and do not know of an example where allowing the market to set wages does not work (other than where it became necessary to establish regulations to prevent exploitative practices).
The market can set fair wages, but there are many distortions in the market. I’m not talking about government here, although government does play its part. I’m talking about the ways that companies make it harder for the market to work. Which is something they naturally have an incentive to do, but it’s still sneaky and an abuse of their power advantage over the worker. Some examples:
Telling employees not to discuss their pay with other employees. One boss I had actually said he’d fire anyone who discussed their pay.
Treating demands for more money as a disciplinary problem. We had a guy who went from Engineering to IT. The new engineering guy quit and they asked the old engineering guy to do both jobs. Not just til they found someone new, but both jobs permanently. He said, “Pay me more” to his supervisor. The supervisor relayed those demands to the VP who could make that decision. the VP said, “Fire his ass!” That of course did not happen, but he did work both positions for the next year until he found a position with another company that paid him.
Which brings me to the most insidious way that companies prevent the market from working: putting a lair of bureaucracy between the management you work for and you on pay decisions. A manager can see that a certain employee is doing a great job and is very important to the company, but isn’t really satisfied with their pay and is at risk of going where they can get more money. But the manager can’t offer that employee more money to stay, because the manager doesn’t get to do that. He has to go through HR or upper management. Which 99% of the time, respond, “If your star leaves, find a new one. It’s not our problem.”
Job seekers at time of hiring, especially women, don’t negotiate pay. They just take what’s offered. With most companies, the only time you’ll be able to actually negotiate is when you are entering. Most employees miss that opportunity and leave a lot of money on the table. But the market can’t work if only one side is making the decisions.
IANAJD, but I can imagine all sorts of legal reasons why such a claim would never be recognized.
Shalmanese already mentioned the Water/Diamond paradox. Diamonds are far more valuable than water, but water is critical for life and is generally more useful. The reason for this is there is a lot more water in the world and it takes a lot less labor to get it to where it needs to go. The marginal utility of each gallon of water decreases rapidly once you have met your basic survival needs, ergo, water is a lot cheaper than diamonds.
Same reason schoolteachers get paid a lot less than most management consultants. Teachers are probably a lot more important overall for society than overpaid MBAs working at Deloitte or McKinsey, but the requirements to become a teacher are a lot lower (a college degree and some certifications IIRC vs typically an MBA from a top tier university). The marginal utility of a management consultant is also a lot higher as we tend to work on projects that create significant value for our clients.
Of course, the free market allows a schoolteacher who is unhappy with her salary to go get an MBA and apply for a job with some consultancy’s public services / government and education practice.
And for varying definitions of “fair” it would be true.
It has been my experience that “the market cannot set fair wages” means “the market does not ensure that everyone is paid a living wage”. Which is also true. Because the market does not operate on what people deserve, it operates on what they are willing to pay for a limited good, given their perceptions of a given set of supply, demand, and opportunity costs.
Another factor to mention is that the market tends to operate no matter what people do, or want. Governments and other social organizations can raise costs, shift costs, change perceptions, or step back and do nothing. The market will still operate, whenever people want to exchange limited goods.
If you could stop the market from operating, there would be no trafficking in cocaine. The government has raised the opportunity costs of engaging in the traffic and done all that it can to limit supply. But reducing the supply and even decreasing demand (thru drug rehab and so forth) have not stopped the market from operating - it just changes the price. Is that “fair”? Same answer as always - the market isn’t “fair” or “unfair”. It just is.
Even though I was a recipient of longevity raises (step increases), I consider that to be among the most ridiculous reasons for getting a raise. In theory, the longer you do a job, the more valuable you are to the organization, between experience and corporate knowledge, but there comes a point where you can’t possibly be more valuable than you are, regardless of how long or how hard you work.
For example, one of my best friends from high school had been the receptionist at a law firm for close to 40 years. I can’t imagine that those years bring the same value to the firm as a partner who’s been there as long. And in reality, any reasonably competent person right out of high school could learn to do her job in fairly short order. So unless the firm is very fond of my friend, chances are, her pay has been stagnant for a long time. I assume she considers her compensation to be fair, because she’s still there.
Fair means “I get everything I want, and screw the rest of you all.”
That’s the essence of everyone’s intent in a free-for-all economy. Because the first one to stop thinking about Number One is raped for all he’s worth and discarded. It is a race to the bottom, and the best you can hope for is to not be the first to land.
Well, actually as far as selling CPU chips Intel is in a near-monopoly position. The thing driving innovation is not competition with others but competition with the installed base. If Microsoft did not produce operating systems requiring more CPU power, many people would just keep their PCs and chip sales would go down. As happened when Win8 came out and fewer people migrated to it. Other applications needing more computing power are helping to push demand also. But if we go into the cloud see Intel CPU sales plummet.
There is a bit more competition in the CPU IP (intellectual property) market. Though ARM is the market leader, the barrier to entry is much smaller and there is a lot more companies out there.
Compare the current CPU state to that of the old minicomputer days, where, while DEC was the market leader, there was a large number of companies to go to, including some you’d never expect. I worked on a Lockheed SUE in grad school.
I’ve only worked at big companies, and I have been involved in doing salary administration, and in every one the company gives the department a pot of money at raise time and that is it. The managers get to divvy it up, but they don’t get to determine the amount. If it is too low and there are sure to be people leaving, the response is “tough, hire someone cheaper to replace her.”
While I agree with your point 4, those who are valued in the market are in a better position even if they don’t negotiate, since HR has to assume that they are getting offers at market rates and accepting the highest can be done with minimal disruption. Moving when someone does not get a reasonable raise is much tougher. Therefore I’ve always seen salary compression, where long or even medium term employees get raises lower than the increase in offers to new employees, so new people come in higher than some valued veteran employees. Back in the days of inflation and high wages we could handle this some by taking raise money from new people and giving it to old people, but you can’t do much with a 1% pool.
I don’t know if any of this is fair or unfair, that being undefined, but you’ve pointed out realistic issues.
Simple - with lower unemployment there is more competition. There might have been some influence from their bad reputation - and their customer base is probably more sensitive to the problems of low wages than that of Tiffany’s. And maybe they figured out from the Costco example that workers being paid shit wages do shit jobs.
