Still Waiting

About a month ago I brought you a short rant (short for me, anyway) about the realty of how corporate governance works, and in particular how the people who own and operate for-profit companies are under no obligation to act in the public interest rather than their own. Indeed, one could argue that the senior management personnel of any corporation have a fiduciary obligation to act in the best interest of their stockholders, regardless of any outside expectations, and should probably be fired if they do anything else. But apparently, no one has bothered to explain this concept (or share my post about it) with the current Administration, any of their more ardent followers, or the business reporters at The Atlantic…

The magazine appears on that list because earlier this week they published another article on the subject, explaining how Starbucks could have given every one of their employees a $7,000 raise with the proceeds from their tax break, and how Home Depot could have given out raises as high as $18,000 per employee. I’m not going to bother checking their math – somebody else almost certainly has, and the precise number isn’t important anyway. None of these companies are going to start offering people massive increases in salary any more than they are going to start manufacturing vast amounts of product that they can’t sell, because that’s not how a free-market economy works…

Companies don’t set their prices by calculating the very lowest amount they can charge without going bankrupt, they work out the highest price they can charge at which customers will still buy the product. Salaries work the same way – no employer is trying to offer its workers the highest possible amount of money, they’re trying to calculate the lowest amount they can pay before people will decide that the job isn’t worth the effort and walk away. These amounts may rise during times of high employment, or drop during downturns, but expecting a company to give away money when it doesn’t absolutely have to doesn’t even work in Command economies, let alone free-market ones…

Now, I don’t imagine that any of my readers (assuming I have readers) are really unclear on these concepts; all of this stuff is extremely basic economics. What seems to be getting lost on a lot of people who should really know better is that this is precisely why the idea of giving money to the owners and leadership of a company and expecting them to distribute it to their employees (or the public) for no apparent reason – the infamous “Trickle-Down Economics” – will never work. It’s not difficult to imagine why the tax reduction scam would be attractive to very wealthy people who will benefit from it directly, or to the elected officials who will be rewarded for passing it; what continues to baffle me is why anyone else would support this measure…

As I mentioned in my last post, I understand that economics can be a daunting subject, particularly for people who have spent decades being told that economics is difficult to understand. But the truth is, Trickle-Down economics can’t work in much the same sense that water won’t run uphill, trout don’t live in trees, and the ocean is not above the clouds. It didn’t work when the Reagan Administration tried it; it didn’t work when either Bush Administration tried it, and it isn’t going to work this time either. But it will suck $1.5 trillion out of our budget at a time when we supposedly can’t afford to heal the sick, feed the hungry, or educate anybody, let alone take care of the rest of the world…

Pass It Along

I didn’t really intend to do a follow up to the “automated ordering kiosk” stories this quickly, but then I suppose I should remember that I don’t make the news, I just report it. Or at least make nasty, sarcastic remarks about the news, anyway. One of the things I’ve been talking about for a while now is the question of how companies that are suddenly forced to begin paying a higher minimum wage will respond to the situation. With rare exceptions, there are only three ways to deal with an increase in a specific cost (in this case Payroll): lower other costs to compensate, accept a lower profit margin, or raise prices. In theory, if the Federal minimum wage were to be increased to $15 per hour, businesses that employ low-paid workers could attempt to lower other operating costs, raise their prices, or just settle for making less money. Unfortunately, as I’m sure you’ve realized by now, things in business policy and strategy are rarely that straightforward…

Consider, for example, one of the hot spots for this debate: the Restaurant business. Unless you’ve worked in the Food Service industry you may not be aware of it, but in addition to the quick-serve personnel, who almost always start at minimum wage, most of the states allow employers to pay anyone who routinely gets tips at an ever lower rate; often as low as $2.13 an hour. Clearly, getting a salary increase to $15/hour, or even to regular minimum wage, would be a significant improvement for any of these employees. At the same time, the increase in salary costs would hit those companies even harder than usual, since they’d be going from $2.13 to $15 instead of the $7.25 to $15 that everyone else would have to absorb. At that point it seems quite likely that companies in this industry would respond by raising prices – especially considering that they are already doing so…

You can pick up the original story off of the Wall Street Journal site, and the Consumerist site commented on it, too, if you don’t happen to have a WSJ subscription. According to the Journal, restaurants in a number of states are experimenting with a “labor surcharge” added to the bottom of your bill to cover the cost of wage increases. It’s not a new idea, really; as the Consumerist people note, other restaurant chains have tried this before, and the cable television and telephone companies have been using exactly this tactic for years to obscure the amount you are actually paying them each month. Whether or not this will work on a large scale in an industry where people will routinely spend hundreds of dollars on a drink and then balk at leaving anything for their server remains to be seen, of course…

Another interesting question is whether any of these companies will abolish tips altogether, and just attempt to pay their employees a living wage. All of the data we’ve seen over the last few years suggests that forcing people to work for tips does not improve either performance or service, and contributes to several kinds of counterproductive work behaviors. Meanwhile, the handful of companies that have tried eliminating tips have reported better performance, higher morale, and improved customer relations, although some people do have trouble adjusting to not leaving a tip after a lifetime of habit…

I’ve worked on both sides of this issue, as well as seeing it from the consumer side, and I have to admit that while I’ve never had a problem leaving a tip, I’ve seen and felt the corrosive effects of people stiffing tipped employees, either because they are miserable cheapskates, or just sadistic assholes having fun. I’d be perfectly okay paying a bit more for my meals to ensure that nobody ever had to experience any of that crap again. I’m not sure how many customers share my point of view, or how many business owners would be willing to take a chance on this new approach. But unless something derails the $15/Hour movement soon, I suspect we’re all going to find out…

Not That Hard

For some time now I’ve been saying, both in this space and in real life, that while I have no quarrel in principle with the $15/hour movement, I don’t believe that the people involved with it have really considered the economics of the situation. As a business consultant and a business teacher I don’t buy into any of the “robber-baron” mythology; business owners are driven by the desire (and occasionally need) to make money, not to make the lives of their employees difficult. No one is saying that capitalists are a bunch of saints and angels, but the concept of them as comic-opera villains, plotting the destruction of their workers, is every bit as silly as the far-right mythos, in that most people would rather work for a living than exist on handouts. Unfortunately, this also cuts both ways…

In most unskilled and labor-intensive jobs, people are used because they are cheaper to recruit and train than it would be to equip the business with automated equipment capable of doing the same tasks. There are exceptions, of course – some civic-minded companies will retain sub-optimal production systems, either out of concern for the communities in which they are based or because without job income their customers won’t be able to purchase their products. But for the most part, if any part of a company’s operations can be replaced or reorganized in such a way as to lower operating costs or increase revenue, one should expect them to do so…

The corollary, and the place where people seem to be having conceptual issues, is that any artificial change in the relative costs of different methods will also impact the desirability of operational changes, such as automation. That is, if the Federal Minimum Wage is increased to $15/hour, the breakeven point for new equipment will rise with it. To take a common example from the last few years, once it became possible to replace a crew member making $7.15 per hour ($14,872 per year, plus taxes and benefits where applicable) with a machine that could fill soft drink cups automatically for less than $14,800 per year, many of the larger fast food chains began buying such machines…

Even worse, however, are the automated ordering kiosks that McDonald’s has been testing, and that Wendy’s is apparently going to start installing starting later this year. Not every fast food location needs to have a dedicated person making drinks on every shift, but every such operation does require order takers whenever it is open for business. For a 24-hour location, that’s 8,760 hours per year, or a whopping $131,400 just on salaries for each available register position per calendar year. When you add in recruiting costs, training costs, retention costs (fast food counter positions turn over several times per year), employee-related shrinkage and accidents, and the aforementioned taxes and benefits, it becomes somewhat surprising that the automated kiosks haven’t already reached widespread deployment…

Now, no one is suggesting that people don’t deserve a living wage in return for a day’s work. Even to a business leader, the concept that you can’t sell goods and services to consumers if there aren’t any who can afford your products and/or services is fairly elementary. What appears to be getting lost in this conversation is that if costs rise, but revenue does not, eventually the company will go out of business. One could argue that if senior management and the stockholders were to accept lower incomes the company could divert those funds into higher salaries, but that isn’t realistic either; if investments with higher returns exist then the stockholders will invest in them, and if higher salaries exist then the top management personnel will pursue them. Unless you are planning to run the entire economy by government commandments – and the large-scale experiments on command economies conducted during the 20^th Century did not end well – then any artificial increase in costs is not the long-range solution to this problem…

And while finding a workable long-term solution to this problem may be difficult, identifying the problem and realizing that a simple artificial salary (cost) increase would not work really wasn’t that hard…