I occasionally enjoy going to the pub to have a pint. I want the person serving me my pint to be making a decent wage, which I more or less define as enough to live on plus to be able to afford the occasional luxury. I don’t think my bartender deserves to be making as much as a software engineer, because it’s much easier to become a bartender than a software engineer. But I really don’t care how much he makes as long his wages exceed that “decent” threshold. If he’s making more than I think he deserves because he’s found a niche where he can earn more than a software engineer, then more power to him, and to the extent that I care, I’m happy for him.
What I do care about is the price of my pint, and that the pub stays in business so I can go there to have a pint when I want. I can have a beer at home for much cheaper than in the pub, but it’s nice to get out of the house. I’m willing to pay a premium for the pub atmosphere that’s around 300%, depending on which beer I’m drinking. I probably wouldn’t pay 600%, and I expect my willingness to pay a premium is higher than the median for where I live. Wage costs affect a pub’s pricing structure. If they can pay exorbitant prices to their bar staff and maintain their current price structures, then that’s great for the bar staff. The thing is, the pubs can’t pay their staff high wages without having high prices. And if they can only stay open by customers accepting those high prices, then they’ll close. So I recognise that there has to be a balance between my bartender earning a decent wage, and the pub having a viable business model. There’s nothing in that recognition that’s outraged by the bartender making more than I think he deserves.
To quote myself earlier in this thread, anticipating this very retort:
‘I won’t accept an increase in prices for no reason’ he said, munching on the $1.98 Popeye’s two-piece Tuesday special which was $1.29 in 2018 for the same two pieces. ‘Just won’t take that shit at all! I’ll go eat somewhere else.’
Also, WS, ain’t no one guaranteed a right to own a business. If your business model cannot work when you pay people properly, then you improve your model or shutter your business. Pretty simple, to be honest.
Because demand for fast food is elastic based on prices. Quick internet search:
Food away from home was most responsive to changes in prices among other categories (0.81) and more elastic than demand for food at home (0.59;
It’s true that demand price elasticity would affect all businesses within a market rather than a single business. If an individual business with a product similar to its competitors was forced to rise prices above its competitors, it would quickly go out of business. That sort of competition pricing pressure doesn’t apply, at least not fully, when a price change occurs across an industry or multiple competing industries. Pricing point changes for an individual business from mandated costs such as a minimum wage hike, or tax raises, will occur somewhat similarly across all businesses within the industry. However, every business within the industry is going to be affected by the elasticity of demand.
Suppose I’m equally happy to eat both Burger King burgers and McDonalds burgers and they both charge $5 for a burger, which is a price I’m happy to pay. When I want a burger, I’ll go to whichever restaurant is more convenient. Suppose Burger King raises it’s burger prices to $5.50. I may be happy to pay the $5.50, but I’ll go to McDonalds because I’d rather pay $5. But suppose I’m not happy to pay $7 for a burger. If both restaurants raise their prices to $7 a burger, I’m not going to eat a burger from either restaurant. Instead I’ll be eating food I bought from the supermarket at home. Sure, the price for that supermarket food has probably gone up in price as well. But if demand for supermarket food, in this case my demand, is more inelastic than it is for restaurant burgers, then I’ll accept the price increase for supermarket food while rejecting the price increase for restaurant burgers.
Ok. That’s good and all, your model just has to pay people decently or it’s not a business model, it’s just an exploitation model, where you steal from your employees to line your pockets.
It is also elastic based on how much money people have, which you conveniently ignore in your analysis. Add in the people who made $7.25/hr yesterday, and are now making $15, do they buy more burgers? Were they unwilling to pay $5 for a burger when they made $7.25, but now will pay $7 when they make $15?
You have to add them in.
You also have to explain why these negative results didn’t happen when MW was first instituted or any of the 22 times it has been increased.
One sometimes convenient thing about the US is that there are times having 50 different states allows us to run natural experiments.
One such was back almost a decade ago when Washington state raised its minimum wage ($9.19 at the time) while neighboring Idaho did not (federal $7.25). There happen to be towns within throwing distance of the border or even straddling it with competing businesses sometimes literally across the street. For example, Newport, WA vs Oldtown, ID.
And there was a McDonald’s owner who had the choice of renovating/rebuilding a restaurant on the WA side of the border or re-siting it on the ID side and deliberately chose the WA side for business reasons. Too profitable to risk moving it. Turns out people (who earn the wages and spend the money) prefer living/shopping on the side where they make more money. At least up to a point.
Yes, there’s got to be a point when raising wages will drive places out of business to the point it really cuts into employment, but it does not appear to be at the wage levels under discussion.
One thing that’s different today is that automation is becoming very viable at low costs. One reason a burger store hires a human to flip burgers is because it’s cheaper than a robotic burger flipper. But we’re now at the point when something like this robot cook can make burgers and fries and costs about $30k. The $30k is about 1 full-time person for a year at $15. I’m sure there are other costs associated with the robot, but lots of HR headaches go away with a robot cook which make it viable for a lot of reasons in addition to cost. Automation options like these were not practical even a decade ago, so MW workers losing their jobs to automation wouldn’t have been as much of a factor back then. But now it’s conceivable that an entire McDonald’s could be automated and the cost would not be too out of line with having it staffed by humans.
Congratulations to Popeyes on a marketing strategy that used a price to gain you as a customer while betting that you’d pay a higher price later. For you, a $1.29 price and a $1.98 price are inelastic. You’d prefer to pay less, but you’re willing to pay the higher price. Would you pay $19.80 for that Popeye’s meal? If not, you’re demonstrating that you find the price difference between $1.98 and $19.80 to be elastic. Your demand ends at that higher price point. Market-wide, the prices individuals are willing to pay for a product vary, and demand can be displayed graphically as a curve. Companies try to use statistical methods, and often guesses, to figure out where their prices and the resulting profit margins should be on that curve. A company which has its prices lower than the optimal prices is either engaging in non-supply/demand based pricing such as done for a marketing initiative, or missing out on an opportunity to make more profit. A restaurant which, on an ongoing basis, is underpricing its burgers by 28% is missing out on a lot of profit. To rephrase that, if Popeye’s had continued to price their Tuesday special at $1.29 when most of its customers were happy to pay $1.98, they’d be missing out on a lot of profit and would be making a business mistake to stay at the $1.29 price.
I’m guessing this is a reply to my post about pubs and bar staff wages. I think that business owners and managers have a moral obligation to pay a decent wage, which is above a poverty-level wage, but not a prosperous wage. I don’t want a bartender sleeping in a hostel and eating only ramen noodles and potatoes. I think that government is correct in intervening and enforcing that decent wage, which is why a support a minimum wage. Neither do I think society should mandate that a bartender should have wages such that he can have a four bedroom house and a sports car. I don’t object to him having those wages. But I question whether a pub can stay open if it has to meet those sort of exorbitant wages.
Obviously both above examples are extremes, and the proper point for a minimum wage is going to be somewhere in between. My belief is that it should be somewhat above the poverty level, but not greatly above it. This thread started with the OP stating all the innovative things his daughter was doing to have a worklife that surpassed what she would have if she was in a minimum wage job. That innovative spirit to rise above the minimum should be rewarded and is largely what drives society forward. I prefer people striving for better than society stagnating in an environment of undeserved egalitarianism.
The rise of China is attributable to the fact that they developed a market economy, plain and simple. They simply have a bigger market, and they had one hell of a lot of room to expand their industrial and technological capacity. Moreover, they didn’t have a complicated (not to mention expensive) hegemony to maintain.
I think some of the figures like GDP growth and jobs growth are going to be hard to forecast until mid summer, when we start approaching the stimulus cutoff.
My concerns long term are inflation and an increased incentive to automate and streamline/right size that might cut some workers out of jobs they are counting on when the country reopens. Perhaps if inflation’s a real thing then it might be that consumers are forcing shops to hire, but that goes back to the concern about streamlining. The market won’t tolerate a labor shortage into perpetuity; it’ll adapt or adjust somehow.
…firstly my qualifications: I was in the conference and events industry for fifteen year including two years running my own catering company. I was Functions Manager at Parliament and managed State level events that included Prime Ministers and Royalty, I set prices and managed budgets. Since I left the industry in 2009 I’ve been running my own photography (and now creative digital agency) business.
And the reality of your analysis is that its compartmentalised. Superficially the marketing theory you’ve applied here is correct. But this isn’t the sole determinant of your sales price. Its something you obviously take into account.
But in the real world there are multiple factors at play. And in the real world the minimum wage (outside of lobbying the government) is something that is out of the control of your business. It is what it is. And if you want your business to succeed then the only path forward is to just deal with it. Its a fixed cost, just like your rent, or your power, or your rates. You know approximately how much it’s going to cost you every year. So it goes into the giant soup of different factors in determining your price from fixed and variable costs, cash flow, CODB, how you want to position your product and services in the market, and a hundred other things. And you just do it.
A couple of years ago I doubled what I was paying for some of the people that worked for me. Doubled. Why did I do that? Because I looked at where I wanted to take the business, I looked at the people that I was working with, and I decided they were worth more than I was paying them. I didn’t raise prices: in fact for the services I traditionally offered I lowered them. But I also introduced a range of new services that catered for a gap I saw in the market. And those new services were substantially more profitable.
And the thing is I can do that in a country that already has an adequate social safety net, a relatively high minimum wage and where the push towards paying a living wage has increasingly gained traction. There is more than enough wealth in America to accommodate a marginal increase in the federal minimum wage.
This is just a weird thing to say. What matters behind the scenes shouldn’t really matter to you. If the pub can stay open, be profitable and pay a prosperous wage, why would you care?
You’re addressing two different effects. Do wage increases for low-wage workers boost the economy? I believe that’s true and most of the economic articles I’ve read discussing wage increases for low-wage workers agree that that’s true. Really, if you look at developing economies that became prosperous during the second half of the 20th century, it’s indisputable. Even for developed countries, there’s little question that there’s a positive effect from having a minimum wage and keeping it in line with inflation.
The other effect is whether wage increases for low-paid workers increase inflation. They do. Here’s a cite specfic to the US restaurant industry. https://journals.sagepub.com/doi/abs/10.1177/0019793917713735?journalCode=ilra
The question is how big is the impact of inflation, and is it bigger than the macroeconomic effect of the wage increases. Gradual increases to the minimum wage seem to have only small inflationary effects, at least over the short-term. Businesses tend to be risk-adverse to sudden raises in prices and seek to maintain market share, even if it will have an adverse effect on profits. Again, this is in the short-term. Prices do catch up to costs eventually, and ultimately businesses will seek to increase profits. What’s more, demand price elasticity varies based on time span. I pay around £5 for a pint of beer today. I won’t pay £8 for a pint of beer in a pub tomorrow. In 10 years, at a guess, cumulative inflation will be 35%. Will I be willing to pay £6.35 for a pint in 10 years? Almost certainly. Will I be willing to pay £8 for a pint? Again it seems likely. In other words, a willingness to accept price increases over the long term does not negate a refusal to accept price increases in the short-term. That goes back to why businesses are reluctant to instantly increase prices when costs increase even if it means a reduced profit. It’s better to keep your customer base and charge them more later. However, while price elasticity is reduced over time, it doesn’t disappear. Some people will drop out of the market if they have to pay more than £5 for a pint of beer, and others will be affected by above inflation pricing, meaning they would pay £6.50 for a pint in ten years time, but not £8. This has been happening in the UK for the last several years, although the cost and price increases aren’t related to labour costs.
Note that in JohnT’s model, he was discussing price changes based on maintaining a gross profit percentage, and I was discussing why his pricing was low, given that it was ignoring elasticity. Neither of us discussed timespans, probably because each of our posts were long enough already. If he was presenting a business having a cost increase and seeking to have a quickly following profit increase, I would have rejected his model. Over the long term, I stand by my premise that, absent other effects, price rises will reduce sales volume due to price demand elasticity, and the price point to achieve a sales total will therefore be greater than what would be calculated by simply looking at the percentage increase in total costs.
The other unanswered question is whether the macroeconomic benefit of minimum-wage increases exceeds the inflationary costs. History certainly seems to indicate that it does. However, keep in mind that the main driver of economic growth over the past 75 years has been productivity growth based on technological advancement. Other significant factors are the globalisation of trade and the expansion of capitalism. Be careful you’re not presuming that because a boat with a small leak continued to rise with the tide means that the leak had no effect on the boats buoyancy.