President Obama visited a CostCo today to champion the wages they pay their workers and boost support for increasing the minimum wage. Other businesses should follow suit, he said, as a higher wage “helps build a strong workforce and profitability over the long run.” And he's right: the main motivation for CostCo's wages is because it builds employee loyalty. Henry Ford knew this well. One hundred years ago he offered twice as much as other employers which led to boosted productivity and low turnover. But that logic does not translate to the larger economy. To use it as a justification for increasing the minimum wage is completely backwards.
Economists call the strategy an "efficiency wage." It's a wage purposely set above the market wage so they improve the pool of job candidates, retain good workers, and encourage productivity. Because it's above market wage, this high wage will attract the best workers. Because it will be hard to find a comparable wage elsewhere, they are less likely to quit and more likely to work hard.
But if everyone has a higher wage, many of these benefits disappear. It becomes an expectation, not a perk, and because everyone offers it, fewer workers will be particularly motivated by it.
If politicians think companies should embrace raising the minimum wage because it will increase their profits then they should remember that these companies don't need government permission to increase them. If they're not doing it on their own, one can only conclude it's not the free lunch the President is telling us.
Showing posts with label Employment. Show all posts
Showing posts with label Employment. Show all posts
Wednesday, January 29, 2014
Monday, December 09, 2013
Wages Are Not Special Prices
Americans are calling for an increase in the minimum wage and the airwaves and internet are filled with commentators claiming increasing the minimum wage won't have any unemployment effects, or any ill effects at all.
The problem with studies which claim there's no immediate employment effect is that they don't or can't examine other reactions to price controls. Employers could respond by cutting worker hours or hiring less (which would play out over the course of several years). They could raise prices, effectively reducing the wages of their customers. They could cut wages or raises from higher-paid workers which could hurt the underlying functionality of the business as these employees work less hard or quit. Indeed, many studies point to a real and negative unemployment effect to the minimum wage.
We know legally fixing prices make a mess of things. Pegging gas prices artificially low back in the 1970s created huge lines and massive shortages. Capping bread prices caused Washington's army to starve at Valley Forge. FDR and Hoover encouraged high prices during the Depression (on the theory that it would increase wages and employment), which helped transformed the 1930s into America's worst economic crisis in history.
Wages are prices for labor. Proponents of increasing the minimum wage are so willing to overturn over two centuries of economic thought, yet have no explanation why this particular price control won't have well-documented unintended consequences. The demand curve slopes down.
The problem with studies which claim there's no immediate employment effect is that they don't or can't examine other reactions to price controls. Employers could respond by cutting worker hours or hiring less (which would play out over the course of several years). They could raise prices, effectively reducing the wages of their customers. They could cut wages or raises from higher-paid workers which could hurt the underlying functionality of the business as these employees work less hard or quit. Indeed, many studies point to a real and negative unemployment effect to the minimum wage.
We know legally fixing prices make a mess of things. Pegging gas prices artificially low back in the 1970s created huge lines and massive shortages. Capping bread prices caused Washington's army to starve at Valley Forge. FDR and Hoover encouraged high prices during the Depression (on the theory that it would increase wages and employment), which helped transformed the 1930s into America's worst economic crisis in history.
Wages are prices for labor. Proponents of increasing the minimum wage are so willing to overturn over two centuries of economic thought, yet have no explanation why this particular price control won't have well-documented unintended consequences. The demand curve slopes down.
Thursday, July 04, 2013
In Praise of Unpaid Internships
Companies, of course, want cheap labor. It's hard to get cheaper than free so some firms will let people work for nothing. Why would anyone take this deal? Seems bizarre to be willing to work well, well, below minimum wage.
But millions take these jobs, better known as unpaid internships. In fact, more than half of all college-level interns weren't paid. And that doesn't include post-college internships.
Why so much interest? Being in an internship--paid or not--demonstrates a level of legitimacy to future employers, signals responsibility and professionalism, unlocks networking opportunities, opens the door to one or more professional references, and may even lead to a full time position. Of course, many of these things may not happen but you can say the same thing of going to graduate school (another way to stand out in a crowded job market). And graduate school takes a lot longer and is a lot more expensive.
So here we have a system of mutually benefiting participants. Interns get experience and networking. Companies get free labor. They would be willing to pay more if they knew the interns were worth the extra cost, but they don't...that's why interns are willing to work for free. It's their chance to prove themselves. Why would anyone have a problem with this?
Enter Eric Glatt, the Black Swan intern-turned-law-student who sued for wages. To be clear, he knew the position was unpaid. He knew it could lead nowhere (or was foolishly optimistic). But he sued for something that was never ethically owed him anyway. (Granted, he was probably right on the law but as a matter of justice and fairness, the company owed him nothing.) Last month, the court ruled in his favor.
Glatt recently appeared on Q on NPR advocating and end to minimum wage internships. Virtually none of what he said made sense. Most of what he says isn't worth repeating as it's ignoring the logic of why people eagerly take unpaid internships.
But of note he claims "interns who do get paid...get better paying jobs when they finish their degree than those who did unpaid internships. Some studies even show that people who did unpaid internships have a lower starting salary than people who did no internships at all."
Great workers are hard to come by so companies are willing to pay them more to make sure those workers work for them. Interns who do get paid are probably very talented compared to those who don't and thus will naturally go on to higher paying jobs. But internships aren't the only way to stand out in a competitive job market: those who do no internship at all might not because they have particularly impressive grades, extracurricular activities, or recommendations. Causation is not as clear-cut as Glatt implies.
There is nothing immoral about offering an unpaid internship and nothing foolish about taking one.
But millions take these jobs, better known as unpaid internships. In fact, more than half of all college-level interns weren't paid. And that doesn't include post-college internships.
Why so much interest? Being in an internship--paid or not--demonstrates a level of legitimacy to future employers, signals responsibility and professionalism, unlocks networking opportunities, opens the door to one or more professional references, and may even lead to a full time position. Of course, many of these things may not happen but you can say the same thing of going to graduate school (another way to stand out in a crowded job market). And graduate school takes a lot longer and is a lot more expensive.
So here we have a system of mutually benefiting participants. Interns get experience and networking. Companies get free labor. They would be willing to pay more if they knew the interns were worth the extra cost, but they don't...that's why interns are willing to work for free. It's their chance to prove themselves. Why would anyone have a problem with this?
Enter Eric Glatt, the Black Swan intern-turned-law-student who sued for wages. To be clear, he knew the position was unpaid. He knew it could lead nowhere (or was foolishly optimistic). But he sued for something that was never ethically owed him anyway. (Granted, he was probably right on the law but as a matter of justice and fairness, the company owed him nothing.) Last month, the court ruled in his favor.
Glatt recently appeared on Q on NPR advocating and end to minimum wage internships. Virtually none of what he said made sense. Most of what he says isn't worth repeating as it's ignoring the logic of why people eagerly take unpaid internships.
But of note he claims "interns who do get paid...get better paying jobs when they finish their degree than those who did unpaid internships. Some studies even show that people who did unpaid internships have a lower starting salary than people who did no internships at all."
Great workers are hard to come by so companies are willing to pay them more to make sure those workers work for them. Interns who do get paid are probably very talented compared to those who don't and thus will naturally go on to higher paying jobs. But internships aren't the only way to stand out in a competitive job market: those who do no internship at all might not because they have particularly impressive grades, extracurricular activities, or recommendations. Causation is not as clear-cut as Glatt implies.
There is nothing immoral about offering an unpaid internship and nothing foolish about taking one.
Tuesday, July 03, 2012
There Is No Such Thing As Wrongful Abandonment
Alex Tabarrok rightly defends a company's ability to fire someone for virtually any reason noting there are no restrictions on the reasons why a person can quit their job. Some might be skeptical of this analogy: being unexpectedly fired causes immense financial harm to the employee. Unexpectedly quitting causes no such harm to the firm.
Both are only true sometimes. If you've saved smartly and adjust your consumption, being fired won't be financially devastating. It's why folks like Suze Orman suggest you have 8 months expenses in liquidity at all times. Sadly, few people meet this benchmark; sometimes it is their fault, sometimes not.
It's harder to see the risk of an employee quitting, but it can be immense. If the employee is working on a project, leaving the company will cause the project to stall or even fail. Just as a person can be overly reliant on their job, a company can be overly reliant on a particular project, whether it's creating a new product, securing a big account, or reworking its internal structure to cut costs. Again, it's foolish to put too many eggs in one basket but sometimes that's all you can do.
Even if an employee isn't crucial to some project, quitting creates costs for the employer. They have to go through reams of CVs. They have interview applicants. They have to pay for background checks, fill out paperwork, take days to train the new guy, all while other employees work extra hard to fill the gap.
If an employee leaves for a silly reason, no one sues anyone. It never seems to cross anyone's mind. We have laws against "wrongful termination" but not against "wrongful abandonment." This is a good thing--my point is we shouldn't have laws against either--but one must wonder, even hope, that if we had more firms suing on the grounds of the latter on the basis of equal treatment, we'd have fewer opportunities to do either.
Both are only true sometimes. If you've saved smartly and adjust your consumption, being fired won't be financially devastating. It's why folks like Suze Orman suggest you have 8 months expenses in liquidity at all times. Sadly, few people meet this benchmark; sometimes it is their fault, sometimes not.
It's harder to see the risk of an employee quitting, but it can be immense. If the employee is working on a project, leaving the company will cause the project to stall or even fail. Just as a person can be overly reliant on their job, a company can be overly reliant on a particular project, whether it's creating a new product, securing a big account, or reworking its internal structure to cut costs. Again, it's foolish to put too many eggs in one basket but sometimes that's all you can do.
Even if an employee isn't crucial to some project, quitting creates costs for the employer. They have to go through reams of CVs. They have interview applicants. They have to pay for background checks, fill out paperwork, take days to train the new guy, all while other employees work extra hard to fill the gap.
If an employee leaves for a silly reason, no one sues anyone. It never seems to cross anyone's mind. We have laws against "wrongful termination" but not against "wrongful abandonment." This is a good thing--my point is we shouldn't have laws against either--but one must wonder, even hope, that if we had more firms suing on the grounds of the latter on the basis of equal treatment, we'd have fewer opportunities to do either.
Monday, January 09, 2012
Everyone Fires People. Every Day.
Mitt Romney's been under criticism for talking about his love of firing people:
We fire people all the time. We do it so much, we don't even think about it. Today I went to Cakelove and had a cupcake. It cost over $3, but it was not worth $3, so I fired them: I won't go there again.
Then I fired the local AFI movie theater. I was going to go see Tinker, Tailor, Solider, Spy there but I kept reading reviews about how confusing it was if you haven't read the books. Not for me. I'll get it on Netflix so I can re-watch scenes, thank you very much.
For lunch I fired Einstein Bagels and Panera Bread. I usually grab something to eat at either of those places but I've grown tired of the limited number of things I like on their menu. Craving something new, I went to Baja Fresh. Will I fire them tomorrow? Probably; I'm thinking about making lunch in-house.
How many times have you fired someone today?
At a breakfast event in Nashua, Romney told an audience that his health care plan would allow them to dismiss insurers and health care providers. "If you don't like what they do, you can fire them," he said. "I like being able to fire people who provide services to me."Why is this so controversial? Because his critics use it to paint him as a Gatsby-like 1%er, firing his maid or butler just to watch them cry. But he's actually describing how average he is.
We fire people all the time. We do it so much, we don't even think about it. Today I went to Cakelove and had a cupcake. It cost over $3, but it was not worth $3, so I fired them: I won't go there again.
Then I fired the local AFI movie theater. I was going to go see Tinker, Tailor, Solider, Spy there but I kept reading reviews about how confusing it was if you haven't read the books. Not for me. I'll get it on Netflix so I can re-watch scenes, thank you very much.
For lunch I fired Einstein Bagels and Panera Bread. I usually grab something to eat at either of those places but I've grown tired of the limited number of things I like on their menu. Craving something new, I went to Baja Fresh. Will I fire them tomorrow? Probably; I'm thinking about making lunch in-house.
How many times have you fired someone today?
Friday, April 22, 2011
The Female Premium
Mark Perry has an excellent take on a NYT editorial advocating regulation to close the pay gap between men and women. Because women get 88 cents for every dollar men get, clearly there is an unjustice to correct. Or so the story goes (Perry's alterations are in bold)...
Chung's work is just one study, of course, but it's not the only one which comes to this conclusion. Thomas Sowell's Economic Facts and Fallacies reports a similar result from a different study, also finding a wage premium. The one cited in Sowell (I don't have the book handy at the moment) controlled for the nature of the job as women also tend to go to low paying occupations (e.g. administrative assistants). I assume Chung's research did this as well. Those concerned about the supposed pay gap rarely acknowledge this other important fact.
A large part of the pay gap originates from biology and social norms concerning children. When a female employee becomes pregnant, the company she works must find and train a replacement. When such employees have children, they are more likely to be spending time away from work caring for them in case of illness or unexpected conflicts (e.g. the nanny is ill). When there is no child and when the possibility of pregnancy is small (the female employee is single), that pay gap turns into a pay premium.WomenMen now make upalmostmore than half of the American work force, but, according to data compiled bytheCensus Bureau, James Chung of Reach Advisors, who has spent more than a year analyzing data from the Census Bureau's American Community Survey, single, unmarried, childless full-time female employeesstillmake, on average,only 77 cents$1.08 for every $1 earned by men in America's largest cities.
Chung's work is just one study, of course, but it's not the only one which comes to this conclusion. Thomas Sowell's Economic Facts and Fallacies reports a similar result from a different study, also finding a wage premium. The one cited in Sowell (I don't have the book handy at the moment) controlled for the nature of the job as women also tend to go to low paying occupations (e.g. administrative assistants). I assume Chung's research did this as well. Those concerned about the supposed pay gap rarely acknowledge this other important fact.
Monday, February 02, 2009
The Illusion of the Pay Gap
The first homework of the semester informs my students that one of the reasons men get paid more than women is because women can get pregnant. Because contracts promising to not get pregnant are illegal, hiring women is riskier for employers. An employee could take several months leave with relatively little warning. What a coincidence that President Obama's first bill addresses the same issue, but ignores the explanation.
Insisting that employers pay women less for malevolent reasons, Mr. Obama made it easier to make pay discrimination suits. Notes CNN,
Risk of pregnancy isn't the only reasons for pay gap. Women tend to enter less technical jobs. Part of that is a natural tendency; for whatever reason, women are less likely to enter the sciences and, save economics, more likely to enter the social sciences. Go to any college math class and I bet you'll see mostly men (no going to an all-women school; that's cheating).
The other reason for the draw to the less technical is, you guessed it, pregnancy. Technical jobs have a high degree of obsolescence, meaning you have to stay on top of the latest developments to keep pace. But when you leave the job market for months at a time to care for a newborn, this is really hard to do. Hence women become secretaries, not engineers.
Biology's a sneaky thing and even seeps in after the children are born. Women also tend to work part-time, since women are still the gender that tends to take of kids. Being restricted to part-time adds additional restrictions to where they can work; again, these places that accept part-time employment tend to be paid less. Fringe benefits are usually off the table as well.
The nice thing about this story is it's easily testable. Simply look at groups where the biology issue isn't relevant and control for education. Thomas Sowell from Economic Facts and Fallacies:
Insisting that employers pay women less for malevolent reasons, Mr. Obama made it easier to make pay discrimination suits. Notes CNN,
companies will need to meticulously document pay decisions and retain detailed employment records, legal experts say. In this, small companies may be at a disadvantage - few have access to the attorneys and human-resources professionals that will help larger businesses comply with the newly expanded law.A strange thing to do in rough economic times.
Risk of pregnancy isn't the only reasons for pay gap. Women tend to enter less technical jobs. Part of that is a natural tendency; for whatever reason, women are less likely to enter the sciences and, save economics, more likely to enter the social sciences. Go to any college math class and I bet you'll see mostly men (no going to an all-women school; that's cheating).
The other reason for the draw to the less technical is, you guessed it, pregnancy. Technical jobs have a high degree of obsolescence, meaning you have to stay on top of the latest developments to keep pace. But when you leave the job market for months at a time to care for a newborn, this is really hard to do. Hence women become secretaries, not engineers.
Biology's a sneaky thing and even seeps in after the children are born. Women also tend to work part-time, since women are still the gender that tends to take of kids. Being restricted to part-time adds additional restrictions to where they can work; again, these places that accept part-time employment tend to be paid less. Fringe benefits are usually off the table as well.
The nice thing about this story is it's easily testable. Simply look at groups where the biology issue isn't relevant and control for education. Thomas Sowell from Economic Facts and Fallacies:
Among college-educated, never-married individuals with no children who worked full-time and were from 40 to 64 years old--that is, beyond the child-bearing years--men averaged $40,000 a year in income, while women averaged $47,000. (p70)Women are paid 17.5% more than men! Maybe we'll see that new legislation end the tyranny of male bosses upon his fellow man.
Tuesday, May 13, 2008
Playing with Statistics
Bill Moyers appeared on The Daily Show tonight and fretted over the rising gap between "the rich" and "the poor." That these terms are arbitrary and vague didn't seem to bother him. Nor did he seem to mind that the numbers are useless. Comparing a gap now and a gap twenty, ten, or even five years ago assumes nothing else has changed.
But lots of things have changed, including the people the numbers are looking at. People are moving higher up in incomes and starting at lower incomes (because of immigration, more schooling, etc). This is a great scenario but Moyers' naive examination of it would suggest disaster. When we follow the individuals (which we don't do enough of so the data is a little old), "....the bottom 20% in 1975 were also in the top 40% at some time in the 16 years follow." (Sowell, p135) Here's a table from Steve Horwitz's page that gives us a more complete picture:
But lots of things have changed, including the people the numbers are looking at. People are moving higher up in incomes and starting at lower incomes (because of immigration, more schooling, etc). This is a great scenario but Moyers' naive examination of it would suggest disaster. When we follow the individuals (which we don't do enough of so the data is a little old), "....the bottom 20% in 1975 were also in the top 40% at some time in the 16 years follow." (Sowell, p135) Here's a table from Steve Horwitz's page that gives us a more complete picture:
| Bottom 20% (1991) | Fourth 20% | Middle 20% | Second 20% | Top 20% | |
| Bottom 20% (1975) | 5.1 | 14.6 | 21.0 | 30.3 | 29.0 |
| Fourth 20% | 4.2 | 23.5 | 20.3 | 25.2 | 26.8 |
| Middle 20% | 3.3 | 19.3 | 28.3 | 30.1 | 19.0 |
| Second 20% | 1.9 | 9.3 | 18.8 | 32.6 | 37.4 |
| Top 20% | 0.9 | 2.8 | 10.2 | 23.6 | 62.5 |
Saturday, March 15, 2008
Evolutionary Progress
Among the first lesson I teach my money and banking class is Joseph Schumpeter's insight on economic change: creative destruction. It's a strange term but economics is strange itself and sometimes requires language that on the surface doesn't make sense.
Schumpeter understood that economies grow by creating new ideas while simultaneously destroying others. It is not a stationary process but one of constant change. Creating many ideas means society has many options and thus many good innovations. But destruction is equally important. It allows the market process to move resources from bad or obsolete ideas and move them to desirable ones. We not only get the good stuff, we get a lot of it. But that means destroying the bad--or just not as good--options.
People generally recognize the importance of creation. The role of destruction is much harder to grasp. And so it was today when Lou Dobbs once again expressed concern for a loss of manufacturing jobs. He was confused how officials from the U.S. military could defend free trade and building equipment abroad while these jobs are destroyed. But employees are fired, not murdered, and they will go on to do other things. It is from this destruction that breathes new life into the economy and allows the world reinvents itself once more, as it has done before anyone alive today walked the earth.
Schumpeter understood that economies grow by creating new ideas while simultaneously destroying others. It is not a stationary process but one of constant change. Creating many ideas means society has many options and thus many good innovations. But destruction is equally important. It allows the market process to move resources from bad or obsolete ideas and move them to desirable ones. We not only get the good stuff, we get a lot of it. But that means destroying the bad--or just not as good--options.
People generally recognize the importance of creation. The role of destruction is much harder to grasp. And so it was today when Lou Dobbs once again expressed concern for a loss of manufacturing jobs. He was confused how officials from the U.S. military could defend free trade and building equipment abroad while these jobs are destroyed. But employees are fired, not murdered, and they will go on to do other things. It is from this destruction that breathes new life into the economy and allows the world reinvents itself once more, as it has done before anyone alive today walked the earth.
Wednesday, February 13, 2008
Do You Want Morphine With That?
It's quite clear that as manufacturing jobs disappear, they are being replaced with service jobs. Really this is only a half-truth; professional and related occupations are increasing at the same rate as the service sector (17%) and each have about the same number of workers (just shy of five million).
Most people bemoan the growth of services. When they think of "service sector" they think of waiting tables and stocking shelves. And yes, in absolute terms most of the new jobs in the next ten years are likely to be in retail.
But the absolute numbers don't really matter; the growth rates do. Suppose we see 1000 jobs added in a high wage sector and 1000 added in a low wage sector. You might think the two are keeping in perfect step with each other. But suppose the former had 10,000 to begin with and the latter had 100,000. Now it's a 10% increase versus just 1%. Percents are much more useful because they show us the trend of employment. Is America heading to a high-wage service sector or a low-wage service sector. These projected numbers from the BLS (2006-2016) have the answer.
25% Health care and social assistance
23% Professional and business services
14% Financial activities
14% Leisure and hospitality
13% Other services
11% Educational services
10% Construction
9% Transportation and utilities
8% State and local government (except hospitals and education)
7% Information
5% Retail
Just because your most common exposure to the service sector is retail doesn't mean that's what is seeing the most growth. Guess we all won't work for Wal-Mart after all.
Most people bemoan the growth of services. When they think of "service sector" they think of waiting tables and stocking shelves. And yes, in absolute terms most of the new jobs in the next ten years are likely to be in retail.
But the absolute numbers don't really matter; the growth rates do. Suppose we see 1000 jobs added in a high wage sector and 1000 added in a low wage sector. You might think the two are keeping in perfect step with each other. But suppose the former had 10,000 to begin with and the latter had 100,000. Now it's a 10% increase versus just 1%. Percents are much more useful because they show us the trend of employment. Is America heading to a high-wage service sector or a low-wage service sector. These projected numbers from the BLS (2006-2016) have the answer.
25% Health care and social assistance
23% Professional and business services
14% Financial activities
14% Leisure and hospitality
13% Other services
11% Educational services
10% Construction
9% Transportation and utilities
8% State and local government (except hospitals and education)
7% Information
5% Retail
Just because your most common exposure to the service sector is retail doesn't mean that's what is seeing the most growth. Guess we all won't work for Wal-Mart after all.
Saturday, December 29, 2007
The Exaggerated Cost of Low Prices
My mom hates Wal-Mart, something we inevitably bring up whenever I come home. And because I love driving her crazy, each Christmas I buy at least one of her presents from the discount retailer.
Yesterday morning while saying goodbye to my parents to go through security, I let her know where I got that the orange chocolate she likes so much. "But David!" she said. "They treat their workers so badly." I didn't have time to go through all the reasons why that statement was wrong, so I just reminded her that they are not slaves. People choose to work at Wal-Mart.
Granted, many of them don't have much of a choice. But their situation is not the employer's fault. And when you understand that because they are "treated poorly" (as in no generous health benefits), Wal-Mart can offer more jobs to people who need them the most, it's hard to call them evil. The employer/employee relationship is one of exchange, not serfdom. The only things employers owe to employees is what they promise.
This recent article by the Economist (indirectly) notes how powerful these low wages (and thus low prices) can be to those that need the most help.
Yesterday morning while saying goodbye to my parents to go through security, I let her know where I got that the orange chocolate she likes so much. "But David!" she said. "They treat their workers so badly." I didn't have time to go through all the reasons why that statement was wrong, so I just reminded her that they are not slaves. People choose to work at Wal-Mart.
Granted, many of them don't have much of a choice. But their situation is not the employer's fault. And when you understand that because they are "treated poorly" (as in no generous health benefits), Wal-Mart can offer more jobs to people who need them the most, it's hard to call them evil. The employer/employee relationship is one of exchange, not serfdom. The only things employers owe to employees is what they promise.
This recent article by the Economist (indirectly) notes how powerful these low wages (and thus low prices) can be to those that need the most help.
Jerry Hausman of the Massachusetts Institute of Technology and Ephraim Leibtag of the United States Department of Agriculture, show that Wal-Mart's move into the grocery business has lowered food prices. Because the poorest spend the largest part of their budget on food, lower prices have benefited them most.It's not just that the costs of low prices are exaggerated; the benefits are often shunned.
Thursday, November 29, 2007
Employment Is Cooperation
The Democratic candidates refused to cross a picket line of striking writers yesterday (thus canceling their debate), affirming their general support for the guild strike. As private citizens, it is their right to support or not support whomever they wish and they were put in the position to make one decision or the other. But their actions contribute to a disturbing conclusion emerging about the strike: the writers are downtrodden workers and the studios are the greedy extortionists.
Such a story is simplistic and deceptive. Employees are not victims and employers are not slavers. They work together in mutual cooperation; a strike is not a rebellion. To my knowledge, neither party (the Writer's Guild or the studios) use the law to force one to cooperate with the other. But the studio is increasingly seen as immoral and greedy.
This is no doubt in part due to the seemingly reasonable request of the guild--compensation on new media. Yet studios shoulder most of the risk for new projects and the risk is high. Most shows fail tremendously and it makes sense that the studios are trying to shoulder against that risk with enhancing the gains from the rare success. The point is it is not at all clear what the compensation--if any--should be. There are too many factors to take into account. Outsiders should be the last people to take sides. Let the informed decide for themselves.
Such a story is simplistic and deceptive. Employees are not victims and employers are not slavers. They work together in mutual cooperation; a strike is not a rebellion. To my knowledge, neither party (the Writer's Guild or the studios) use the law to force one to cooperate with the other. But the studio is increasingly seen as immoral and greedy.
This is no doubt in part due to the seemingly reasonable request of the guild--compensation on new media. Yet studios shoulder most of the risk for new projects and the risk is high. Most shows fail tremendously and it makes sense that the studios are trying to shoulder against that risk with enhancing the gains from the rare success. The point is it is not at all clear what the compensation--if any--should be. There are too many factors to take into account. Outsiders should be the last people to take sides. Let the informed decide for themselves.
Saturday, June 30, 2007
China Heads for Europe
Firms flock to the Chinese mainland because production are so tremendously low. The astonishing growth of the world's most populous country has lifted tens of millions of people out of poverty. The Chinese government, for some reason, thinks this is a bad thing.
China is adopting new and restrictive labor laws--no doubt bowing to the communist mentality that still lingers there. The laws, among other things, requires "that employers must submit proposed workplace rules or changes concerning pay, work allotment, hours, insurance, safety and holidays to the workers' congress for discussion." In other words, companies all over the country will be forced to swap flexibility for stability. Costs could (and probably will) also rise. Naturally, some businessmen are getting concerned.
No one seriously expected that China would throw off all its communist roots. Like the US and the countries of Europe, China would transform into a mixed economy. But if there was any question if China would be more like the US, as a freer market, or Europe, as a more restrictive one, this latest development suggests it's leaning towards the Continent.
China is adopting new and restrictive labor laws--no doubt bowing to the communist mentality that still lingers there. The laws, among other things, requires "that employers must submit proposed workplace rules or changes concerning pay, work allotment, hours, insurance, safety and holidays to the workers' congress for discussion." In other words, companies all over the country will be forced to swap flexibility for stability. Costs could (and probably will) also rise. Naturally, some businessmen are getting concerned.
No one seriously expected that China would throw off all its communist roots. Like the US and the countries of Europe, China would transform into a mixed economy. But if there was any question if China would be more like the US, as a freer market, or Europe, as a more restrictive one, this latest development suggests it's leaning towards the Continent.
Thursday, June 28, 2007
Impoverished Logic
Maude Hurd, President of Acorn (an antipoverty organization), needs to check her economics. In a letter to the New York Times, she defended John Edward's work in raising the minimum wage. To her, "his efforts were both sincere and a very effective way to fight poverty."
I fail to understand how making it more expensive to hire those that have the hardest time finding employment eases their burden. For those that are good enough to not be fired, they could have gained a raise on their own. Perhaps Hurd's organization should have helped with their negotiation skills instead of raising their wages at the expense of the most downtrodden.
I fail to understand how making it more expensive to hire those that have the hardest time finding employment eases their burden. For those that are good enough to not be fired, they could have gained a raise on their own. Perhaps Hurd's organization should have helped with their negotiation skills instead of raising their wages at the expense of the most downtrodden.
Saturday, May 19, 2007
Wrongful Abandonment
Ignoring contractual obligations, a person can quit for whatever reason they wish. They can quit because they found a new job, or their commute is too long, or their boss smells funny, or they think the janitor's ugly. To my knowledge, there are no rules conducting conditions of quitting beyond the aforementioned contracts.
But there are those of firing. There's even a name for it: "wrongful termination." If you fire a janitor because they smell funny or are ugly, you can get sued. If you quit because your boss is ugly or smelly, you can't. Why does a boss get less discretion, flexibility, and freedom than their employees? If there's wrongful termination, shouldn't there be wrongful abandonment?
Last night I had a long conversation with a friend's neighbor at a party and this was one of the challenges I presented to him. He argued that an employer has more leverage than employees. I'm not sure how he reached this conclusion. If an employee suddenly quits that creates more work for the other employees, productively suffers, and the the company has to bear the costs of finding and training someone new. If this person was sufficiently specialized or quit at the right time, it could prove disastrous for the firm.
The bottom line is employers are not doing employees a favor by giving them a job. It's a mutually benefiting arrangement. Employers get some sort of productivity and employees get a paycheck. If one party can terminate this relationship for whatever (contractually viable) reason they wish, why can't the other?
But there are those of firing. There's even a name for it: "wrongful termination." If you fire a janitor because they smell funny or are ugly, you can get sued. If you quit because your boss is ugly or smelly, you can't. Why does a boss get less discretion, flexibility, and freedom than their employees? If there's wrongful termination, shouldn't there be wrongful abandonment?
Last night I had a long conversation with a friend's neighbor at a party and this was one of the challenges I presented to him. He argued that an employer has more leverage than employees. I'm not sure how he reached this conclusion. If an employee suddenly quits that creates more work for the other employees, productively suffers, and the the company has to bear the costs of finding and training someone new. If this person was sufficiently specialized or quit at the right time, it could prove disastrous for the firm.
The bottom line is employers are not doing employees a favor by giving them a job. It's a mutually benefiting arrangement. Employers get some sort of productivity and employees get a paycheck. If one party can terminate this relationship for whatever (contractually viable) reason they wish, why can't the other?
Thursday, March 01, 2007
The Economy Reorganizes
Airbus plans to slice 10,000 jobs from its payroll. Rudiger Lutien, chairman of the Worker's Council, insists the company's troubles are management in nature, not too many workers on the payroll. The truth is usually somewhere in between in cases like these but I'll bet Airbus made the right decision. If Lutien was right, firing a bunch of management looks a lot better from a public relations standpoint than firing five digits of workers.
Some of you may still be upset that these workers are being let go, as if Airbus is going to shoot them behind a chemical shed. These people won't disappear, only move onto new things. It won't be easy, but they will ultimately add more to the economy. If you don't believe me, would you shout down farmers that moved to the cities in the Industrial Revolution or buggy manufacturers when Ford perfected the assembly line? For your own sake, I hope not.
Some of you may still be upset that these workers are being let go, as if Airbus is going to shoot them behind a chemical shed. These people won't disappear, only move onto new things. It won't be easy, but they will ultimately add more to the economy. If you don't believe me, would you shout down farmers that moved to the cities in the Industrial Revolution or buggy manufacturers when Ford perfected the assembly line? For your own sake, I hope not.
Wednesday, January 24, 2007
Lawyer Up
Mike--who's in law school now--and I got in a brief debate about the economics of lawyers. I told him that as society increases its number of lawyers, that tends to encourage the existence of more lawyers. He didn't buy it and he had to go before I could explain myself.
From any one person's perspective, one lawyer is often a substitute for another, just like apples, candles, cars and trips to Japan. However, from a macro perspective, each lawyer complements at least one other. If you and I are involved in a dispute and you get a lawyer, that makes me want a lawyer, too. (This sort of feedback happens a lot in divorces.)
The market for lawyers is similar to that of advertising. When Toyota puts more ads out, Ford has a greater incentive to secure more air time. However, since lawyers work with the law--which the state uses to take capital by force--I'd argue companies are even more careful about keeping their legal budgets up (in recessions, ad budgets are the first things to go but I doubt the legal department takes a big hit). So I claim lawyers breed more like rabbits than any other occupation.
From any one person's perspective, one lawyer is often a substitute for another, just like apples, candles, cars and trips to Japan. However, from a macro perspective, each lawyer complements at least one other. If you and I are involved in a dispute and you get a lawyer, that makes me want a lawyer, too. (This sort of feedback happens a lot in divorces.)
The market for lawyers is similar to that of advertising. When Toyota puts more ads out, Ford has a greater incentive to secure more air time. However, since lawyers work with the law--which the state uses to take capital by force--I'd argue companies are even more careful about keeping their legal budgets up (in recessions, ad budgets are the first things to go but I doubt the legal department takes a big hit). So I claim lawyers breed more like rabbits than any other occupation.
Wednesday, January 17, 2007
Follow the Sandwiches
For the past few days Steven M. Warshawsky from American Thinker engaged in a minimum wage debate with Cafe Hayek's Don Boudreaux and Russ Roberts. Since Mr. Warshawsky seems to have stopped posting on Cafe Hayek (though one has to admire how long he kept commenting to people who disagreed with him), I thought I'd quickly show why the minimum wage has a negative net impact on the economy.
Warshawsky doesn't think anyone can pull this off. In his post about the minimum wage, he said:
Consider fourteen people at McDonald's working for $5.15 an hour, each making Big Macs (it's a busy McDonald's). In total, it costs McDonald's $72.10 to employ them all. Now suppose the minimum wage rises to $7.25 and management responds by firing four Big Mac makers. In this new restaurant, there are ten people pouring the secret sauce, with total costs of about the same as before: $72.50 (do me a favor and ignore the forty-cent discrepency; it is not needed to understand the point I'm making).
At a glance, Warshawsky is completely correct. Four people get fired but ten people benefit. How can one tell if society is better off from this? It's a wash--money is merely transfered from some people to others. In the big picture, the world is the same.
But now take another look. In the $5.15 world, McDonald's made fourteen Big Macs. In the $7.25 world, it makes only ten. The movement of money is ambigious, but the number of Big Macs is not. Society is strictly poorer.
Now one could claim that people earning more would be more productive--we'd get eleven or twelve sandwichs, not ten. But that's still not as much as fourteen. What if in the $7.25 world, the ten workers made fifteen? Then society has gained, but in this world, a minimum wage hike is not needed; McDonald's would have every reason to raise wages on its own. This is what Henry Ford did on his assembly line when he raised the hourly rate: the increase in worker productively more than made up the extra expense. By definition, firms which raise wages because of the law would not raise them because doing so betters productivity.
This example can be applied to all sorts of scenarios. Maybe the company didn't fire any workers and the money came from the CEOs. That means they couldn't spend those dollars on more investment in the company or a trip to Paris or a donation to cancer research. Maybe the prices rise. That means consumers spend less on many other things: a notebook here, cell phone minutes there. From person to person it is merely a transfer, but net production decreases. Society as a whole is made worse off.
Q.E.D.
Warshawsky doesn't think anyone can pull this off. In his post about the minimum wage, he said:
However, it is not obvious a priori that total welfare will go down as a result of a federal minimum wage increase from $5.15 to $7.25 per hour.In other words, one cannot intuitively demonstrate that raising the minimum wage will make society worse off. But actually this is quite easy.
Consider fourteen people at McDonald's working for $5.15 an hour, each making Big Macs (it's a busy McDonald's). In total, it costs McDonald's $72.10 to employ them all. Now suppose the minimum wage rises to $7.25 and management responds by firing four Big Mac makers. In this new restaurant, there are ten people pouring the secret sauce, with total costs of about the same as before: $72.50 (do me a favor and ignore the forty-cent discrepency; it is not needed to understand the point I'm making).
At a glance, Warshawsky is completely correct. Four people get fired but ten people benefit. How can one tell if society is better off from this? It's a wash--money is merely transfered from some people to others. In the big picture, the world is the same.
But now take another look. In the $5.15 world, McDonald's made fourteen Big Macs. In the $7.25 world, it makes only ten. The movement of money is ambigious, but the number of Big Macs is not. Society is strictly poorer.
Now one could claim that people earning more would be more productive--we'd get eleven or twelve sandwichs, not ten. But that's still not as much as fourteen. What if in the $7.25 world, the ten workers made fifteen? Then society has gained, but in this world, a minimum wage hike is not needed; McDonald's would have every reason to raise wages on its own. This is what Henry Ford did on his assembly line when he raised the hourly rate: the increase in worker productively more than made up the extra expense. By definition, firms which raise wages because of the law would not raise them because doing so betters productivity.
This example can be applied to all sorts of scenarios. Maybe the company didn't fire any workers and the money came from the CEOs. That means they couldn't spend those dollars on more investment in the company or a trip to Paris or a donation to cancer research. Maybe the prices rise. That means consumers spend less on many other things: a notebook here, cell phone minutes there. From person to person it is merely a transfer, but net production decreases. Society as a whole is made worse off.
Q.E.D.
Thursday, January 11, 2007
Minimum Stage
The new Congress is well on their way to increasing the minimum wage and Mike mentioned briefly that he's had frustrating conversations about the subject with his peers at law school. They tend to focus on the person that will benefit from the rise of wages, a common (and incomplete) argument to defend the rising wages. I argue that his peers don't care about the arts. The logic is actually pretty straight forward (and hopefully I'm not missing any bits).
1) Pay more for people to work and a firm has less money to spend on other things. (For some reason that continues to be beyond me, some people have a hard time understanding this. I wonder how they stay in their budgets.)
2) There are very few artists who are critical to the success of a company; most can be fired--or be turned down for hiring--with relativity little pain.
3) With less money in their pockets, firms will hire fewer artists and, thus, society will have less art.
This basic idea is hard to directly observe because we live in such a vast and complicated economy, hence why the "mere" story is so critical. But the logic holds. People and firms tend to buy art (everything from advertising to paintings to theater) when they have disposal income. The minimum wage diminishes that income. If the populace has a difficult time understanding why the minimum wage hurts the economy as a whole, then perhaps economists will have an easier time explaining it if people see why it hurts this one section.
(A related argument against the minimum wage is the point that the higher the wage, the fewer employees firms are willing to hire but for some reason, people have an even harder time understanding this truth.)
1) Pay more for people to work and a firm has less money to spend on other things. (For some reason that continues to be beyond me, some people have a hard time understanding this. I wonder how they stay in their budgets.)
2) There are very few artists who are critical to the success of a company; most can be fired--or be turned down for hiring--with relativity little pain.
3) With less money in their pockets, firms will hire fewer artists and, thus, society will have less art.
This basic idea is hard to directly observe because we live in such a vast and complicated economy, hence why the "mere" story is so critical. But the logic holds. People and firms tend to buy art (everything from advertising to paintings to theater) when they have disposal income. The minimum wage diminishes that income. If the populace has a difficult time understanding why the minimum wage hurts the economy as a whole, then perhaps economists will have an easier time explaining it if people see why it hurts this one section.
(A related argument against the minimum wage is the point that the higher the wage, the fewer employees firms are willing to hire but for some reason, people have an even harder time understanding this truth.)
Wednesday, June 28, 2006
Debate-Mart
Economist Jason Furman and author Barbara Ehrenreich are currently engaged in a Wal-Mart discussion at Slate. Read the entries and follow the debate; it's a solid discussion on a hot-topic, though I doubt it will change people's minds. (As those that already have an opinion are most likely to read it and least likely to be changed by it.)
I just want to quickly point out a flaw in Ehrenreich's logic after Furman discussed two very different stores: Best Buy and Stereo Exchange. Best Buy has the good prices but the less knowledgeable (and paid) staff while Stereo Exchange is the opposite. If all of the former were replaced by the latter, we would have more "good" jobs but more unempolyment. Ehrenreich responds: "If Stereo Exchange took over from Best Buy, there'd be a lot more better-paying jobs in the retail electronics business. Why wouldn't the former Best Buy workers take a lot of these new and better jobs? They're not all as clueless as you seem to think."
There's a lot of reasons why this argument is not so but let me illustrate a key idea with a story. I knew someone who used to work at Best Buy. He said one of the most annoying things about the job was when customers would ask him where stuff was. He never knew the answer so he quickly learned a fast way to handle the problem: he simply would pick the corner of the store farthest from him and confidently declare that's where the product is. (Customers, as it turns out, are incredibly gullible in this regard.)
It is not that Best Buy empolyees are all clueless: some just don't care. Some would care if they were paid more, true. But others would only care if they were paid much more and others wouldn't care at all because it's just a summer or part-time job--they have no desire to go through additional training. Both customers and the work force demand retail diversity. Why shouldn't it exist?
I just want to quickly point out a flaw in Ehrenreich's logic after Furman discussed two very different stores: Best Buy and Stereo Exchange. Best Buy has the good prices but the less knowledgeable (and paid) staff while Stereo Exchange is the opposite. If all of the former were replaced by the latter, we would have more "good" jobs but more unempolyment. Ehrenreich responds: "If Stereo Exchange took over from Best Buy, there'd be a lot more better-paying jobs in the retail electronics business. Why wouldn't the former Best Buy workers take a lot of these new and better jobs? They're not all as clueless as you seem to think."
There's a lot of reasons why this argument is not so but let me illustrate a key idea with a story. I knew someone who used to work at Best Buy. He said one of the most annoying things about the job was when customers would ask him where stuff was. He never knew the answer so he quickly learned a fast way to handle the problem: he simply would pick the corner of the store farthest from him and confidently declare that's where the product is. (Customers, as it turns out, are incredibly gullible in this regard.)
It is not that Best Buy empolyees are all clueless: some just don't care. Some would care if they were paid more, true. But others would only care if they were paid much more and others wouldn't care at all because it's just a summer or part-time job--they have no desire to go through additional training. Both customers and the work force demand retail diversity. Why shouldn't it exist?
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