Tag Archives: minimum wage

Companies forget that they pay wages; don’t understand complexity of economy

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Apparently 68 out of the top 100 retailers are concerned about flat or falling wages. Huffington Post did some poking around their 10-K forms and aggregated the top risks for the top 100 retailers. Huffpo found that low spending, unemployment, and falling or flat wages were the top 3 items. To me this is really interesting. Apple was recently identified as part of a wage fixing scheme that looks like it could have cost employees something on the order of $3.2 Billion, Wal-Mart has cut hours of their employees as to prevent themselves from paying for ObamaCare for those employees, which means that those employees have to pay for their insurance out of pocket, as they have to insurance now.

All of these things together impact the web of our economy. What we’re seeing is local optimization which leads to sub-optimization of the entire system. Companies that are cutting wages or benefits to maximize their profits are likely taking a cut out of their own revenue stream. It’s likely that many Wal-Mart employees shop there because it’s the lowest priced place in most areas for most goods. The fact that WinCo is Wal-Mart’s largest threat now, is pretty indicative that wages are falling.

When Henry Ford raised the wages of his employees to a real living wage, it wasn’t out of kindness or some perceived social good. It was so that his employees could buy his car. If a large mass of people are unable to buy a good you produce because of your own wage policies you’re creating a problem for yourself. Furthermore, economies are networks, they interact with each other. Each and everyone of those employees would then become representatives for the Ford brand and be able to show off the good they were manufacturing. With every new employee hired, Ford knew that there would eventually be one more sale.

Companies today have clearly forgotten this. Retail is one of the largest segment of our economy, with a huge number of employees. If this entire swath of our population cannot afford to buy consumer goods, then it’s likely that we’re going to be continually be at risk for another recession. People buying stuff is what keeps our economy going. If the companies that staff the most people do not pay them well enough to keep buying stuff beyond food, then we’re at a great risk.

Wages are a very difficult thing. There’s a Socialist party in Seattle that’s trying to get minimum wage up to $15, but offered a job starting at $13/hour. Employees have gone on strike to get higher wages. I’ve written about it several times, however, whenever companies are indicating that low wages are a risk to their business, it’s time for them to start looking in the mirror. There are large retail industry groups, these groups should start to investigate the root cause of these risks and propose recommendations to address these concerns.

Should the Fed look to take action to protect the companies from themselves in order to protect the economy? Should the minimum wage be increased to address the problem? Should the government take action at all, it’s the businesses fault if they fail because they didn’t pay their employees enough. What do you think?

Minimum Wage, labor, and economics

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Last night on the twittars I had an invigorating discussion related to minimum wage, the mobility of labor, and the economics. The basics of the argument started over the fact that in MA minimum wage will be slowly going up from around $8/hour to $11/hour. $8/hour already is pretty good for the US where the federal minimum wage is closer to $7.25/hour – which is an annual salary of $15,080 (poverty line for an individual is $11,490/year). Obama is proposing to raise the national minimum wage to $10.10/hour or $21,008/year and MA’s eventual minimum wage at $11,440/year. If minimum wage had kept up with productivity gains seen throughout the economy a study argues that the minimum wage should actually be $22/hour or $45,760.

The unfortunate thing about minimum wage jobs is that you typically don’t work 40 hours per week, in fact places like Wal-Mart try to keep employees under 30 hours per week to avoid the requirement of paying any healthcare benefits (at least 1/3 of Walmart employees are limited to 28 hours/week). This requires minimum wage employees to have two or three jobs which creates an extra layer of uncertainty for scheduling of work and getting from one location to another using public transportation. (as a side note WalMart is holding a food drive for their employees)

Why don’t they move to another location that pays better for a job though? There are a couple reasons, first moving is expensive. Even if you’re renting on both ends a cross country move costs several thousand dollars. You have to put money up front for a deposit, go without pay for some period of time as you transition between jobs, you need to move your stuff, and finally, many places won’t hire you if you don’t live there, but you can’t rent unless you have a job. It’s even worse if you own a house, and the worst case is a house that’s underwater.

Now, under utility theory all that won’t matter because it’s a sunk cost. It’s the cost of doing business, all that matters is the amount of money you’ll gain on the other side. Now, if we were all perfectly rational “Econs” that would work, however we’re Human and we don’t think that way. According to Prospect Theory we are extremely loss adverse and would much rather have a small chance at a with with a worse downside than a guaranteed downside. For example, we’d rather have a 10% of winning $0, but 90% of losing $1,000 than automatically losing $900. From Utility theory or expected value they are the same, but from Prospect theory they are very different. This drives our behavior when it comes to relocating for jobs, and is especially true when you’re unemployed. Because your baseline is set at your previous salary, you’d rather wait and risk making no money than taking a job that’s more than 10% less than your previous salary. From an “Econs” perspective this is irrational as you should take any job that’s offered to you, because it’s more than $0. This theory can be applied to corporations as well. They are risk adverse in many cases. In one way this manifests is through the controllable costs of employees salaries. In many cases managers will let employees go or hire employees at a lower salary than deal with something that’s a sunk cost.

Prospect Theory FourFold, Thinking, Fast and Slow Daniel Kahneman

Furthermore, corporations are under pressure do to short term requirements of the market to continually beat the previous quarters. This pushes activities in to the lower right quadrant, which also negatively impacts innovation and employee salary.

Based on the rationality here, should we increase minimum wage? Based on both Utility theory and Prospect theory companies would dramatically reduce the number of employees they have to avoid a sudden massive loss. Companies should move or relocate elsewhere, however, many studies have shown this simply isn’t the case. I think that this can be explained by something else that’s unexpected, unemployment benefits help the economy grow. According to a Moody’s study several years ago and another talk a single dollar of unemployment benefits creates between $1.64 – $2.00 of economic activity. This is because it creates demand that otherwise would have been missing. It’s likely that the higher salary of people that are making minimum wage generates additional demand for goods and services that otherwise would have been unable to be fulfilled.

I believe, this is why Switzerland is looking into providing a living wage of $2,800/month or $33,600/year. It’s a way of being both moral (not allowing citizens to starve and live on the street), but also stimulate the economy to continually grow. The idea of lower taxes is to put more money into the economy so people will spend more money. However, there are a lot of people out there that don’t benefit from this all that much because they already pay little to no taxes (40% before 2007). Providing tax relief doesn’t help this portion of the economy. Providing a higher minimum wage would provide relief for them, but a tax on corporations, but would be recouped through additional demand. A living wage provides relief, but a tax on the broader public, but would be recouped through additional demand.

In the first case, people are working and providing a service to a corporation for the salary they earn. In the second case, there’s a higher chance of free loading – however I see no reason why you can’t put requirements on accepting the money such as community service, using the money for education and training, or volunteering somewhere.

Do these thoughts address every issues we’ve seen regarding minimum wage? No, but it’s helps frame the discussion a little bit and hopefully addresses some of the concerns. I believe that much of debate comes from non-rational sources, such as the economic theory you fully support. Prospect theory, Behavioral Economics, and Evolutionary Economics are disdained or unknown by Libertarians and Conservatives which paint a very different picture on the economic policies we should enact than neo-classical economics. Which puts this to something closer of a religious battle than a logical rational debate, because these theories are incommensurate with each other in the same way that Newtonian Physics and Relativistic Physics were to each other. It’s either one or the other not both.

Edit: I miscalculated on the salaries for minimum wages. I have corrected them.

You always have a choice

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The phrase “You always have a choice” is extremely prevalent in super hero movies. Ranging from Batman Begins to Spiderman 3 to Wolverine. In whatever situation you’re in, you can do the right thing do the wrong thing or through brute force come up with an alternative that you can force to occur. This really epitomizes the rugged individual and the ideal American to some extent. No matter how down on your luck you always have the choice to be or do something better. The GOP really pushes for this, where many of the candidates argue that they were self made men. I think this is also the root cause for a typical response to the 99% protesters (or someone asking for an increase in minimum wage) – “Get a job.” If the choices are get a job, or not work, the C -brute force response now is – “start your own company” or “make your own job.”

Before, you assume I’m just bashing the GOP, this also comes from the left. The environmental movement also assumes this is possible in regard to personal behavior and reducing your carbon footprint. In many cases they assume that it’s easy for people to change their behavior, because they want to protect the environment. If we wanted to we could drive less, we could buy the less impactful light bulb, we could turn off our computers at night, etc, but people are lazy or don’t care.

So, are the GOP and environmentalists right? We’re all lazy and don’t want to make the right choices? That we don’t want to work or that we don’t want to do what’s right for the environment? I think that for the most part neither is true. You will find freeloaders or people that protest saving electricity by turning on as many lights as possible. However, most people don’t behave that way. So what’s the problem? Why do we have uneven unemployment in some areas, why don’t we all work to save the environment?

It goes back the the choices we can make. One of the big assumptions in economics is that the work force is mobile, that when there’s unemployment in one part of the country people move to where the work is. However, we saw that in the US that isn’t true with this recession. The only people moving were migrant workers which may have been illegal. Why? Why wouldn’t someone with no job in California move to another state to find a job? Well some of it comes down to their ability to move. If they own a house and the choice is to lose everything end up in deeper debt because selling your house (if you could sell it) would leave you hundreds of thousands of dollars in the hole with nothing to show for it, do you really have a choice?

In this way our choices are bounded by our situations. A woman may want to drive less because she wants to do what’s best for the environment, but she has a difficult choice. Move closer to work so she could walk and take her children out of a great school and move them into a lower quality school. I think it’s a no brainer which one she would choose. However, let’s say that the schools are the same, her children may not want to move because they’d have to make all new friends. The gains would be very minimal. There are a lot of costs to moving closer to work even if everything else would stay the same. This case also assumes that there’s only one driver. In many cases this choice would involve two people and the trade offs for one driving farther could complete negate the benefits of moving.

Unfortunately, I don’t believe that we are able to make whatever choices we want. Our choices are constrained by the circumstances we live in. There are ways to work around these constraints to improve our ability to make choices, but that is not easy and certainly not free. When we make policies that impact choices and make assumptions about people’s ability to make choices we need to be aware of these constraints and work to remove them.