I think that, at least as far as pubs go, most of the bartenders see the job as an entry level position before they move onto something else. The one’s who are serious about it either specialise, such as becoming mixologists or brewers/distillers, or move into management. I think that a YouTube mixologist star or a pub chain regional manager could each be earning more than a typical software engineer. That’s great for them. Someone who started out as a pub bartender and was a pub bartender 35 years later? I admire their fortitude and hope they’ve enjoyed their job. They’ve probably worked harder than someone who was a software engineer for 35 years. Does that mean they should be making as much as a software engineer after their 35 years as a bartender. No. The market price for the bartender job is lower than the market price for a software engineer. A software engineer is likely to be more hard working than a YouTube star. Is it unfair that the YouTube star makes more money than the software engineer, even if all they do is film videos on how to mix drinks? No. The YouTube star has found and exploited a niche, and however much we might externally rate how much they deserve their income, that YouTube star is the one who seized the opportunity and is entitled to what the market is willing to pay him.
Yes, the negative effect you included in your analysis, and the positive effect you continue to exclude from your analysis. Your analysis is appropriate for a unilateral increase in wages, affecting one supplier of burgers, and having no other effect in the market.
Considering that the fundamental purpose of increasing MW is to put money in the hands of lower income people, so they can spend it, I would say it is irresponsible to ignore that effect on the Fast Food market. Now, if you’re talking Landscaping Services, or Yacht Maintenance, you can ignore the impact of increasing MW on the demand side, but not Fast Food.
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Congratulations on your business success.
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From your description, you valued experienced employees who could help you expand your business and decided it would be worth your while to pay those employees to help you expand your business. That’s hugely different than you staying in your previous market and the New Zealand government demanding you pay your employees more. I don’t even think it would be wrong, if you were paying minimum wage, for the New Zealand government make you pay your employees more by raising the minimum wage in line with inflation. However, if the New Zealand government had chosen to raise your employee’s wages by 82% (that’s the figure from the JohnT model discussing wage costing much earlier in the thread), do you think it would have had an adverse effect on your business? Ignoring your new business model, if the wage increase raised your total cost by 20%, do you think you could have raised the prices of your traditional services to your customers by 20% without some of them ceasing to do business with you? Or to be more realistic, suppose you had a mandated 10% increase in wages that resulted in a 3% overall increase in costs. Would that have zero effect on your business because you’d simply pass those costs on to your customers? I’m guessing you’d have lower profits for a while and gradually increase prices in the long term. But if you could instantly increase your prices and pass on the cost to your customers, could you explain your business model and why you weren’t charging more in the first place? Maybe you’ve got really supportive customers who are happy to help you out when your costs go up.
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I’ve already stated that I’m happy for the pub to pay the bartenders as much as they want. I don’t want the government to mandate high wages for bartenders, but as long as the pub stays open and doesn’t increase the price of beer too much, I’m good. If you want to pay your photographers $1 million/year, go for it. But if you’re paying those kind of wages, there’s a pretty good chance you won’t have me for a customer.
Solid argument, bro.
If you had paid attention, I noted the business owner has a multiplicity of options in which to counter the modeled rise in payroll. If you want to assume the only thing the business owner can do is raise prices (one of the options I noted, true), that’s fine, but no one here is making that argument other than you.
If they are good at business, they will figure it out. If not, they close. C’est la vie.
Tell you what, why don’t you go into the model created my John T and enhanced by me and add the macroeconomic effects of an increased minimum wage and come to a price conclusion?
Do you think the increased macroeconomic demand will have a decreasing price effect? Why? Generally increased demand drives prices up. For a decreased price to result, there needs to be increased production that results in per-unit efficiencies based on volume. That worked for Henry Ford. Do you think it’s going to work for 2021 McDonalds when it’s not driven by technological innovation, but driven by a minimum wage increase?
The starting point of my argument is that wage increases result in an overall cost increase to a business. Surely you’ll agree to that? JohnT has presented a model that says a business only needs to raise prices in line with those overall price increases in order to maintain its gross profit margin. (Well, he offers other alternatives, but I don’t find them feasible and don’t see the point of discussing them further.) That’s wrong, unless a business is operating in an environment where price demand is inelastic. Fast food price demand is elastic.
Possibly, the macroeconomic effect of more demand and higher sales volume could create a new pricing point where even though per-unit profit was down, the total profit would go up based on increase in sales volume. I think that’s unlikely, and that the business would have diminished profits instead. But if that’s your idea, or if you have some other argument, please elaborate it.
I thought that a large part of the argument was that the MW increase was going to cause technological innovation in automating all these people out of a job.
You have to assume SOME decrease in demand or else you have to explain why the burger joints aren’t charging more for their burgers now. If McDonald’s can raise prices without a corresponding drop in demand… they would raise prices. Why wouldn’t they? Why would they wait for a minimum wage hike? That would be insane, or criminally incompetent.
We can all argue over how elastic the demand is, but there is SOME impact.
The “if you raise the minimum wage you raise prices” argument just keep running into this wall. Raising burger joint wages doesn’t change the equilibrium price of a cheeseburger. You cannot get that money back by just hiking your prices.
This actually IS possible. It makes perfect sense for McDonald’s to weigh the relative costs of staff vs. those touchscreen thingies, and there is a tipping point at which the touchscreen thingies and all the associated costs become a better deal than having X additional staff in the restaurant.
But, well, okay. Businesses gotta business. The existence of Quickbooks means I don’t need a bookkeeper, and the existence of affordable color printers means I don’t need to pay someone to print things. There’s little point trying to get in the way of technology.
Minimum wage laws have an affect on the economy, there’s no point ignoring that fact; if they didn’t, we wouldn’t have them. But it’s not the simplistic “stuff will be more expensive” effect some people claim it is.
Among your other arguments were to diminish the product by decreasing burger size and making tomatoes available only upon request. I’m not going to write an essay on that, but decreasing product quality in response to cost rises is a sure-fire way for a business to go bankrupt.
Or the business could suddenly find efficiencies to offset the rising wages. That’s reasonable, and could actually be justifiable based on a cost/benefit argument derived from rising wages. Maybe a kiosk system doesn’t make since with an $8/hour cashier, but does with a $15/hour cashier. However, that’s not the argument you chose to quantify. Furthermore, I suspect fast food restaurant kiosks were a side benefit of enabling mobile phone ordering, which was marketing aimed at smart-phone users who like apps. But that’s a digressions as you didn’t really say what those efficiencies would be. Just that they’d somehow appear.
Or the burger restaurant could suddenly increase it’s sales volume. Through advertising? You didn’t elaborate or explain why the restaurant didn’t take that action before the minimum wage rise. Nor did you include it in your numerical model, which was really the only bit of your post I was interested in discussing.
Any other arguments of yours you’d like me to pay attention to?
If not, then back at ya’, bro.
Is there a lower demand for burgers, or is there now a more competitive price across the street for Burger King? If people can get a burger cheaper somewhere else, that’s where they will go. If they can’t get a burger cheaper, then very few will decide that they don’t want a burger at all. Some will, but you may have as many or more who couldn’t get a burger before that now can.
I don’t think that everything works out to be perfectly equal, as that’s unlikely, but I think the point is that the people who would want to eat cheeseburgers now have more money with which to purchase them.
OTOH, there is the psychological part. I’ve kept my prices fairly steady for the last few years, while giving raises, and somehow also made more money for myself. By giving raises, I encourage my employees to be more productive. If I give an employee a dollar raise, they suddenly start making me a few dollars more an hour.
OTGH, I’d love to make even more money by raising my prices, but I’m a bit worried that people will go to my competition. However, if MW goes up, then my competition will be raising their prices as well. It also gives me an excuse to give to my clients when they ask why my prices went up.
And this is a great time to do it, as they don’t have enough people who want to work at their restaurants for the wage that they are offering. If it’s cheaper to put in robots than it is to pay what people are willing to work for, then robots it is, and we are all better for it.
There are already fast food restaurants that charge extra for tomatoes and lettuce; I don’t see McDonalds going bankrupt anytime soon.
Sure, I definitely think that could happen. A restaurant might analyse an innovation and conclude that it would cost $50 million, but only save $45 million in wages. After a minimum wage hike was announced, they might redo the analysis and conclude it would save $55 million in wages. If the $5 million in cost savings through automation matches their other wage cost rises, the restaurant might see no need to adjust its price structure.
I suppose that’s a theoretical argument against minimum wage rises, but I’m not actually making that argument. Suppose no minimum wage rise occurred, but two years later the innovation only cost $40 million. I hope those minimum wage employees enjoyed their extra two years at the burger restaurant. There’s always going to be technological innovation that saves labour costs. Farmer’s didn’t start using tractors because the minimum wage for ploughmen went up. A minimum wage is needed to ensure that workers are not in a state of poverty, and should be based on cost-of-living, not on its potential effect on business automation. That’s not to say that minimum wage increases shouldn’t be balanced against other economic effects such as inflation.
Two reasons. #1 is Burger King, Wendy’s and all the others. If McD raises their prices right now, without collusion, they would be perceived as more expensive than equivalent substitutes, and quantity sold would drop. This is not a factor if all FF purveyors see an equivalent increase in labor cost.
#2 is the demand curve. Raising the MW fundamentally changes the demand curve, pushes it to the right. This provides for a clear opportunity to raise prices without reducing quantity sold. This does not necessarily mean they can raise prices enough to cover additional labor cost, but neither is it clear that they cannot.
Correct, but raising the wages of ALL low income workers in the market will.
I don’t go to McDonalds or similar fast food joints very often, but I like burgers and am fortunate enough to have a good selection of mid-market burger joints around me. If I like a place I’ll go back to it. If I have a burger from a place that I think wasn’t as good as it used to be, the first time I’ll think the restaurant is having a bad day. The second time, that burger restaurant has lost me as a customer. Being “not as good as it used to be” seems to be a pretty common theme for why restaurants, and indeed many other businesses end up going out of business.
On that note, I think I’m done discussing burger restaurants. I might jump in on questions related to the OP, or non-burger economics, but I kind of feel like I’m leading a hijack parade into a topic I’m not really that interested in.
Huh? Monopsony is the situation where you have a single buyer for a good or a service, meaning that it’s kind of the flip side of a monopoly.
A situation where companies collude to keep wages down would be something else; a cartel, or some other sort of anti-competitive practice.
And really… the folks saying that if companies are paying more than minimum for certain jobs right now, then reducing the minimum wage isn’t going to affect them much are right.
Minimum wage is just a floor; the thinking being that without one, there would be jobs that might pay considerably less than $7.25/hr, some that pay $7.25/hr, and some that would still pay more. The ones that would pay $7.25 and that pay more wouldn’t be affected- their prices are already being set by the market based on market forces. It’s the ones that would pay less that are forced to be higher by the minimum wage laws.
I think it’s an argument for MW raises. Few workers means you can pay the remaining ones more.
I’ve worked MW fast food jobs, trust me, they didn’t enjoy it.
As I said above, companies in similar businesses in an area know what others are paying, and can keep wages down without illegally colluding. In tech there are detailed wage surveys which companies use to set starting salaries, for instance. I know this as a hiring manager working with HR on salary offers.
That doesn’t prevent some companies, like Costco, from paying higher wages as part of a business model.
You make it sound like it’s a bad thing for companies (and prospective employees) to know what the going rate is for a given job in a given market. That’s all that is, not some sinister plot to screw workers.
Look at it this way… if you’re going to buy a dishwasher, do you just go buy the first one you find, or do you price it online, look at a couple of stores, etc… to get a sense of what various price points of dishwashers offer, and then make your decision based on what you’re willing to spend vs. the features you want?
Why should an employer be any different? They’re effectively shopping for labor, and knowing the price is an important part of deciding what you’re going to buy. Prospective workers can do the exact same thing- if the job is offering 50k, but the going rate is 60k in that market, they can demand 60k, or just not apply.
It’s not a bad thing, it is just one part of the power imbalance between workers and employers, which is worse for MW type jobs than for, say, CEO jobs.
Companies pay good money to get a good idea of what other companies are paying, and obviously consider it worth it. As I said, I was on the employer side of things. Most workers don’t know and don’t have time to find out what each potential employer pays. Even for high paying jobs you don’t find out what it will pay until you get an offer and spend a lot of time interviewing. (Published salary surveys are pretty much worthless, out of date and too general to be useful.)
When we had unions the unions knew what companies paid, and had negotiating power. Without them, the only power workers who are basically commodities are comes from the government setting a lower limit on wages.
Free markets depend on a balance of information between buyer and seller - which is why insider trading is illegal. That doesn’t exist for MW workers.
The difference in demand curve, though, is vastly outweighed by the price difference. The percentage of workers who make minimum wage isn’t that great; the price difference affects everyone.
The “raise wages and people can afford more” argument fails for a lot of reasons, but that’s the main one. Minimum wage workers aren’t the only ones who buy Big Macs and their indifference curve won’t have exactly the same proportions of goods after a MW hike, either. You’d introducing a little bit more consumer spending money into the economy, and that does have an inflationary effect, but what are we realistically taking about in terms of that effect? One percentage point sounds high, if anything. Would McDonald’s even be able to detect that, and raise the Big Mac price from $3.99 to $4.03?
As to the “competition” argument I’m shocked that wasn’t self evident but maybe I should have spelled it out already; of course McDonald’s is up against competition. That’s one of the things that creates an equilibrium price. If they were not already at that equilibrium price, either they’d be BELOW their competitive price point, or everyone would inexplicably be below it. The fact all the burger chains offer essentially equal prices for products of equal quality should tell you they’ve arrived at the equilibrium price. If they weren’t at that price, they would have raised them already.