Its wrong or immoral to say America's economy rides on the premise that we must pay laborers a miserable below-poverty wage. If that were so, what an obvious truth Economists have missed all this time! All we have to do is have a sub-population we treat miserably and the rest of us can have it nice. Economics solved!
Show me the math. Not the words.
Your reply sounds good but it provides zero analytical information, even at a simple level, to support anything at all.
BTW, "free market" does not mean people make "dirt" wages. It does not work that way at all. People will accept pay in the context of their reality. People in the US can't work for Chinese wages, it's simply impossible. This doomsday scenario people like to paint isn't real.
Oh, please! If you are going to write something like that at least pull-up a recent Walmart annual report and study it. Do some research and educate yourself before forming opinions so far out of alignment with reality.
Walmart employs over TWO MILLION people in the US alone. Labor cost is, in fact, one of Walmart's largest liabilities. There is NOT WAY they could survive a 25% labor cost hike without rising retail prices AND laying off a bunch of people because nobody is going to pay tons more for their products.
Please, do yourself a favor and learn to read a financial statement and play with it in a spreadsheet in order to understand how the real world works.
I call it 'playing dot-to-dot'. You can string together a sketch that jumps from point to point and make any case you like. Let me try.
Minimum wage goes up - so folks have more money to spend, so they buy more from retailers, so profit margins rise, so the economy booms and hiring increases. Everybody wins!
That story is 'true' too. They all are. Just, its part of a bigger story. Which is called 'economics' and isn't just some madeup cherry-picked local case folks like to trot out and say "what about this!" and think they've got it all figured out.
So anyway, its immoral to freeze just the wage labor is paid, for the sole purpose of making the rest of us live better. Its simply wrong.
> Minimum wage goes up - so folks have more money to spend, so they buy more from retailers, so profit margins rise, so the economy booms and hiring increases. Everybody wins!
Fantasy.
You are missing a very important part there that should be obvious to anyone today: Competition is global, not national.
Let's take your theory up to an extreme. Let's raise minimum wage to, say, $50 an hour. Why not? Per your thinking it's simple. Everyone raises prices and all is good.
And so, you manufacture product A in the US and now have to sell it for $155 each.
I manufacture the same product. I fire everyone except for a small sales staff and take the product to China to manufacture it there. I am able to sell the same product with equal or better quality for $25.
When people have to choose between your product for $155 or mine, of equal or better quality, for $25, they will choose mine every single time over yours. Your sales plummet, you have to fire everyone and close down the company. Or you fire everyone and go to China just like I was forced to do.
At one point even importing bricks from China becomes a better financial decisions.
In other words, the scenario you painted is a fantasy.
The vast majority of products sold in the US today are NOT made in the US. We can raise our wages and prices all we want. It will only serve to create vast unemployment and further destroy us from within.
Just wait and see what will happen when $15 per hour laws ripple through the entire nation during the next few years. There are companies already leaving California because of just this.
Same recommendation as I seem to make all too often on HN: You don't understand how business works. Please do some reading and fire-up a spreadsheet and play with numbers. It isn't very complicated at a basic level.
> So anyway, its immoral to freeze just the wage labor is paid
Exactly. That's minimum wage. The free market should determine what that is. Our local and national economies will determine where the wage floor might be. In San Francisco this could be $15 per hour minimum wage due to cost of living. In other parts of the country it could be $7, $10 or $12. Government intrusion accomplishes only one thing: Job loss.
Not necessarily:
https://en.wikipedia.org/wiki/Common_law_of_business_balance
...and related with:
https://en.wikipedia.org/wiki/Veblen_good
You probably already know this, though - and I am not saying that because of these two things that your premise (or anyone else's) is wrong -or- correct.
I just wanted to inject this, as to many it may be counter-intuitive that by dropping your price (or selling at a lower price), that sometimes people won't purchase it.
I think there have been studies done where they've used the exact same product, but priced it differently, and despite the product being identical in every way, people purchased the higher-priced item more frequently.
What's going on with our economy is that people have become very used to seeing very high quality products made in China. A stroll through Walmart, Best Buy, Fry's Electronics, Home Depot, Lowe's, Sears, Kohls, Petco, etc. is all that's required to ascertain this.
Nearly everything sold at those retailers is made in China. In fact, short of things like obvious US-made products like bricks and lumber products (and I even hesitate to make that statement) everything else is made outside the US, mostly in China.
And quality is excellent.
It didn't use to be that way. China was synonymous with cheap junk. Sure, there's still cheap junk coming out of China but I think it is safe to say that most of what you can buy at the top retailers in the country is of fairly decent quality.
And so, when faced with a price difference between a high priced US-made good and a lower priced Chinese product the effects you linked to don't really apply. In fact, in some cases the Chinese product is of equal or better quality when objectively compared to the US-made product.
Here we have a case where paying a low price does, in fact, deliver a good-to-excellent quality product.
Luxury goods are a different story. They don't necessarily obey the laws of physics.
We have a problem. A really big problem. I wish I was smart enough to know what the solution might be. I don't. I know bits and pieces of it. Yet it is way too complicated. There is one thing I do know, Trump's idea of "bringing jobs back" sounds great but it is easy to see, given our discussion, that this is just-about impossible.
Can we start manufacturing excellent iPhones if we build fully automated factories? Nope. Not a chance.
Why?
Because China has reached a point where labor cost advantages are not the only advantages they enjoy. I don't have the time to get into the details so I'll be brief. Manufacturing businesses depend on efficient supply pipelines in order to produce product at the lowest possible cost. Chinese industrial cities are setup such that the supply pipelines are very short and efficient. Everything is an hour or less from the OEM. There are towns that make microwave ovens and all of the sub-contractors for the microwave oven makers surround them. Same with other product categories.
This advantage is huge and it is one we do not have. We don't make semiconductors or motors or almost anything here any more. You'd have to take the desert in Nevada and build a huge manufacturing town consisting of fully automated factories producing every component needed to make an iPhone in order to reach the point where we MIGHT be able to make iPhone on par with China.
That's what I call a "gulp" moment. When you realize just how terrible our position might be in a globally competitive marketplace.
As I said before, an artificially high forced minimum wage only exists completely disconnected from the context and the realities of what's going on in the real world. And this, precisely, is the reason it is so destructive. Companies don't need to pay lower wages because they are greedy. They need to reduce their costs because they are getting killed right and left by China, and high government-imposed minimum wages only means one thing: Our government is helping China force these companies out of business one by one. This is not what we should be doing.
The argument for protection of the poor sound interesting until you realize that the more businesses we kill off and the more jobs we export the reality of high minimum wages is that the very people the idea seeks to help will be the first to end-up on the street by the millions.
This is a math problem. And politics and politicians are fucking it all up because they do not suffer direct consequences and their lives are secure. I mean, look at the Obama's. They are getting paid SIXTY MILLION DOLLARS to write a couple of books. Their lives are completely decoupled from the policies they have forced upon us. They are set for life while everyone else will have to suffer. And that's the way it is.
> What does a business do? In a real competitive environment you can't have your expenses go up by $24K per month and simply raise your prices. It doesn't work that way at all.
> If you source materials and services from other US-based companies and all of them see their wage costs go up by 25% you can bet some of your costs will go up.
I thought companies couldn't raise their prices? So pick one, either prices go up or costs don't.
No, that makes zero sense. You are assuming the business owner is evil and rolling in cash when the case is exactly opposite.
Costs are costs. Even taxes. If a business makes $100K at the end of the year and government takes $90K of that in taxes that business has no money to hire people, expand, innovate or survive market downturns. We can't just grab money from people and expect no consequences.
I suggest to fire-up a spreadsheet and run through some calculations because, if you are serious about the above, your view of how things work is quite distorted.
> I thought companies couldn't raise their prices? So pick one, either prices go up or costs don't.
There is no universal law. It all depends on the competitive environment a particular business inhabits. Some have no way to raise prices. Others do. I think I can say that the vast majority of products you find at places like Walmart or BestBuy come from companies who have nearly no freedom to raise prices. Competitors kill each other on margin and there's no room to go up.
I'll give you an example of a company that has some room to increase pricing: Storage companies. This just happened to me. We have a 10 ft x 30 ft storage unit full of business equipment. We started a few years ago paying $285 per month. I just got a notice that it's going up to $340.
When the cost of switching suppliers (or the pain) is such that the customer is kind of stuck the supplier has some room to climb. When mobility is easy and competition is plentiful there is no flexibility.
The example I concocted in post you referred to mentioned that a business might have suppliers who raise prices. This is possible for a certain class of products within limits. For example, if one of the components being purchased to manufacture a product is single source (there are no substitutes) they have the ability to raise prices within limits because the buyer has nowhere to go.
So, yeah, it's a dynamic and variable landscape but the vast majority of businesses in reasonably competitive product segments have no freedom. In fact, in most cases they are under downward pressure.
Here's an easy exercise to confirm this: Go to Amazon and search for any household product. I don't know, forks, plates, screwdrivers, light bulbs, trash cans, toilet cleaner, etc. You will get thousands of results with products within the same price range. Anyone outside a certain range isn't selling well at all. That's just reality.
To a politician this $15 per hour battle cry is great. They have nothing whatsoever to lose. It's something they can promise and buy votes with that promise. They can even fight to get it implemented and actually have it pass. Why? Because all politicians need votes and this is an easy way to buy those votes from the masses.
But, what does this $15 per hour minimum wage do? And, please, do extrapolate past $15 per hour, because it is in the interest of politicians to keep feeding the drug, even if it kills the patient. The more miserable the masses are the better for populist politicians.
Source: No less than the entire history of every Latin American country.
A higher minimum wage is great for politicians. They keep their jobs. They might even ascend the ranks and make more money.
For workers? Bad idea. Why? Because there's a limit to COGS for a business. We are in a competitive global economy. You can't sell something for $30 when others are selling it for $15 or $20. And so, given labor cost hikes, you have very few choices on the table. Automation and offshoring are two of them.
At $15 per hour is likely to cost an employer about $18 per hour in real terms. That's $36,000 per year for someone who will work 2,000 hours per year on average (50 weeks @ 40 hours per week). If you don't understand how this works, here's a quick article by a CPA explaining the add-ons:
http://cpainerie.com/how-much-does-your-employee-actually-co...
It goes beyond that. A forced rise in minimum wage will hike all costs in an organization. Let's take a hypothetical. I'll use Oregon's current $9.75 minimum wage because I was just talking to a friend who lives there. Let's say you have a company with the following full time labor arrangement:
Total labor costs for the year, assuming 20% costs above basic wages (see article link provided above) would be: $1,137,000.Now give the first tier a raise to $15 per hour. That's a 54% raise.
The second tier won't be happy. You have to give them a raise. How much? Same percentage or same dollar amount? Let's go with same dollar amount. They go from $15 per hour to $20.25.
The other groups are affected as well, so wages go up by the same dollar amount for everyone. In other words, everyone is making $5.25 more per hour.
Total annual labor cost just went up to $1,426,800, about a 25% hike. An increase of $289,800, of which only $63K was due to the minimum wage workers getting $15 per hour.
And, BTW, as you fold Obamacare insurance into this, the numbers are significantly worst.
$289,800 is real money. It's $24,100 per month. Where is that money going to come from?
What does a business do? In a real competitive environment you can't have your expenses go up by $24K per month and simply raise your prices. It doesn't work that way at all.
Oh, yes, let's not forget the other parts of the COGS equation. I won't even try to quantify this one but I'll mention it because it is important. If you source materials and services from other US-based companies and all of them see their wage costs go up by 25% you can bet some of your costs will go up.
At this point you are faced with the two options I mentioned above: Automate if possible or Offshore. I'll add: Fire a few people to the equation.
Well, guess what? All three of those options produce the same result: People lose their jobs.
Nobody is going to go to Walmart and pay 25% more for a product when the one next to it (probably sourced from China) costs less. The same with online shopping. If your product is sold on, say, Amazon or your own website and your competition doesn't have to deal with government-imposed COGS hikes, your products will not sell. People look for good pricing. They won't pay 25% or 50% more so you can keep your employees and pay them more.
That's the heartless mathematical reality of business.
In all of this politicians lose nothing. They get the masses rattled about inequality and give them the gift of a $15 per hour minimum wage. They get the votes and continue on a sweet ride in government. In the meantime, the tsunami starts to build and millions are likely to lose their jobs.
Automation is likely to be a solution for a lot of companies. If a $40K to $100K robot can replace a $15 per hour employee, work two or three shifts and not have the management complexities of a human worker. Well, guess what, it is very likely it will happen wherever that option makes sense. Another group will ship jobs to China and a small group will hike their retail pricing because they can and keep the jobs here at a higher wage level.
The cold hard truth is that automation in business is purely about the mathematics of running a business. In a free market there would always be a push-pull where people could find jobs at lower wages if they need them. By having politicians interfere with this (mostly for their own benefit, because few others will benefit) they probably have succeeded in creating the conditions to push automation through the inflection point and what's on the other side isn't going to be pink unicorns for everybody.
Once the genie is out there is no way to stuff it back into the bottle. Even scarier than that is low wage countries adopting automation as well.
If anyone objects to my conclusion they need to fire-up Excel, go through the simple math I presented and explain why it is that what I predict is wrong. Mathematically. I don't care about feelings or theories. You have to show how this would work at the most rudimentary business level without losing any jobs.