Job Turnover and the Minimum Wage
Don Boudreaux criticizes an academic article that puports to tell business people that they should be able to easily absorb minimum wage hikes without consequence:
The authors are above not doing economics, properly speaking. Instead, they offer business advice – or, rather, present themselves as possessing knowledge and information that is salable as business advice. The authors write as if they are management or business-operations consultants rather than economists. Pollin and Wicks-Lim here implicitly assert that their information on the details the state of the market and their knowledge of the particulars of how to run actual, real-world businesses are so real, full, and trustworthy that we should accept their conclusion that higher minimum wages will not cause businesses to change their operations in ways that result in fewer hours of paid work for low-skilled workers.
Indeed, the trust that we are asked to put in Pollin’s and Wicks-Lim’s alleged business acumen is so high that we are supposed to accept their conclusions as justification to unleash the force of the state to alter the actual, real-world business decisions of actual, real-world people who are actually operating – with their own actual money – in actual, real-world markets.
In his comments, I focused on one issue in the academic analysis -- that pro minimum wage folks in such analyses always give businesses a big profitability boost from reduced turnover due to higher wages, and it is reduced turnover and resulting increased productivity which provides the resources to "pay" for the wage increase. I think there is something inconsistent in this thinking:
I can't see how the assumption of turnover reduction is consistent with the assumptions made by pro-minimum wage folks. There are two possibilities. First, assume the turnover is due to employees moving on at their own choice, presumably for a better deal. But how is this consistent with the frequent assumption of monopsony and that employees have no bargaining power? If employees are imposing high turnover costs on employers and frequently shifting jobs for better deals, there can't be a monopsony. It would mean that folks are taking these jobs for a short period of time to gain job skills and experience, and then moving to higher-skilled, better paying jobs, exactly how things should work in a free market without an absurdly high price floor on wages (I remember the old stat form the 80's that 10% of all Fortune 500 CEOs had their first job at McDonald's).
OK, assume the other possibility that the turnover is due to the employer choices, that all the employees they hire are unacceptable because their skills or demeanor or productivity is insufficient in some way. Well if they were unacceptable at $7, how are they suddenly going to be acceptable at $15? Proponents seem to assume some magic occurs when one raises wages, that unskilled employees who can't show up on time will suddenly become attentive and skilled. In my experience, it never happens.
For the record, given our 50% wage costs (and costs tied to wages like payroll taxes), we have had to increase prices 10% for every 20% increase in the minimum wage, and even then we have seen our profits fall, as we never see the magic productivity increase that is supposed to come with suddenly paying the same people higher wages and at the same time we do see a drop in customer demand due to the higher prices, which reduces our fixed cost coverage.
mogden:
Plutocrats should stop complaining and start paying sustainable wages out of their unjust profits. /s
June 9, 2016, 10:37 amDan Wendlick:
I wonder where they are getting their figures on the price elasticity of demand for fast food. McDonalds not too long ago created a new menu item, the McDouble, to address franchisee concerns that placing the double cheeseburger on the dollar menu was costing them their profitability. The difference between the two items was a single slice of processed American cheese. If their margins are already that slim, I don't see how doubling the direct labor component of their costs, as well as the labor portion of their materials costs (since the bakery and meat processing industries are also already highly competitive, low margin businesses). is not going to impact profitability.
June 9, 2016, 12:21 pmsean2829:
I can't find the link right now but the WSJ had an article about labor participation rates vs. educational attainment. They tracked groups from the beginning of the year who had not finished high school, had finished high school but had no additional education, had come college but did not get a bachelors or an associates degree and those who had attained a bachelor's degree. The least educated labor participation rate had dropped ~4%, the HS dimploma people were down ~1.2%, the some college degree were about even and the college folks were up. Given the rise in wages, the cost of health insurance and other factors that are driving the cost of the lowest wage workers higher at a faster clip than other workers, I suspect there will be fewer and fewer opportunities for people that are poorly prepared for the workforce. Now throw in competition from the influx of immigrants competing for the same jobs and the poorly educated and trained will likely end up wards of the state.
June 9, 2016, 1:30 pmJim Collins:
The $15 per hour minimum wage is being pushed by the unions. When I visit our corporate office, I use an office that has a window that looks down on a McDonald's. A while back I see some mini-buses from a local day labor company, pull in and about sixty people get out. A few minutes later a couple vans belonging to one of the union locals pull up. The people in the vans hand out signs, shirts and other items to the day labor people. One of the people from the vans uses a bull horn to tell the day laborers what they are to do. Fifteen minutes later vans from the local television networks pull up and the video cameras come out. Ten minutes later the television vans leave, the union people take back their signs and leave. Then the day labor buses show up and load. A half hour later on the noon news there is video pf a "massive demonstration for the $15 minimum wage".
When San Francisco and Seattle passed their minimum wage increase, workers who were union members were left exempt at the request of the unions. Why?
June 9, 2016, 1:42 pmJoshua:
Minimum wage discussions will go nowhere until allegedly progressive people admit that some people are unable to provide e.g. $15.00 of value to an employer. (much less the ancillary employment expenses). Their time is literally not worth the money they would paid at minimum wage.
June 9, 2016, 2:17 pmJoshua:
I forgot to mention the other thing - government benefits going to people who make low wages are not a subsidy to their employer. They are a gift to the employee. If you want an employee to receive more money than they are literally worth, then you should foot the bill. It is immoral and distorting to force that onto an employer.
June 9, 2016, 2:22 pmNot Sure:
"government benefits going to people who make low wages are not a subsidy to their employer."
Employing low wage workers is more of a subsidy to taxpayers, who would be on the hook for higher government benefit payments if those low wage workers were to become no wage non-workers.
June 9, 2016, 4:14 pmMaddog:
Hi Warren,
I liked this article, and it struck a cord. I posted a response, which I have attached below. If the links do not come through you can see them at my blog maddogslair.com.
Coyote finds Academic theories regarding minimum wage unpersuasive
"Don Boudreaux criticizes an academic article that purports to tell business people that they should be able to easily absorb minimum wage hikes without consequence . . ."
Academics can be pretty droll, at least I hope they are being droll.
In college during 1982, I had to read one of Noam Chomsky's books, and Eric Hoffer's, The True Believer for another. After the shock wore off, I looked at the fly leaf bio's and realized that one was a pure academic, the other had real world experiences, but was impressively well read.
It was an epiphany moment. The pure academics have no real life experiences, they live in their heads, and they are very clever. The few more like Hoffer (a longshoreman, not an academic), who have had real life experiences are completely different.
Over the years I have decided this is due to Common Sense, which isn't. The more one works with his hands in hard, dangerous, physical work, the more one realizes the real world is filled with things which look benign but which are not. Working at the paper mill, I realized that the machine rope nip was a level 7/10 danger, life threateningly serious, but the rewinder nip was a 10/10 danger, and the broke hole and repulper 11/10. Experiences like these transfer to other things. The individual views the world more carefully and is much better at sussing out the traps hiding in plain sight.
The academics are much more nescient. They have the words to sound knowledgeable but insufficient experience to keep from falling into each and every trap, or danger. These people resemble nothing so much as children, and everything interesting is in reality an attractive nuisance.
An example of this was a nice young college grad who came to work at the mill as a floor supervisor. At the time the paper machine had six "hands," a shared foreman who was a former senior machine worker, and the supervisor who was a salaried college grad, none of whom had ever worked on the machines. Our young supervisor quickly became confident in his abilities, and, frankly, began to act above his competence. One day he was unhappy with something the Front Tender had done, and walked in front of the machine (tissue paper machine) to catch the Front Tender's ear. There was a large pile of broke (waste paper cut from the reel) on the floor. This was a very bad idea. Two reels were already on the floor, and the broke made the area a dangerous mess with only the barest walk path between the live reel, and the static reels. The team had been up changing the drum blade, luckily, and I simply stood dumbfounded watching him make his precarious walk.
He fell, and nearly dropped through the broke hole (a hole in the floor about 4 feet by the length of the sheet). This hole allowed the broke to be dropped 25 feet to the room below where it would fall on conveyor belts and automatically loaded into a huge repulping tank, think huge, hot water blender.
Fall in that and die.
I grabbed him before he could drop through the broke hole. But it never left me, he knew about the broke hole but took that huge risk presumably so he would not need to walk an additional 80 feet or so. He simply did not have any common sense, no understanding of the consequences.
Today our academics often are crowned with their doctorates never having had a significant job, and especially a job difficult, and dangerous. These are incredibly clever people who would not know the difference between a bear trap and a mouse trap, for that matter between a hot fudge sundae. They say things out of ignorance, and hubris.
I do not know the solution for this problem but if unsolved it seem likely the Academe will suffer.
Having had many jobs from paper machine hand to industrial demolition crew chief, to litigation attorney trying medical issues, I can say this problem is worsening not resolving.
Thanks again,
Mark Sherman
June 9, 2016, 5:57 pmJoe_Da:
The progressives look at the margins of Corporate McDonalds instead of the margins if the individual franchises.
FWIW - mcdonalds makes a lot more money on the real estate side of the business than the do on the food portion of their business. (mcd's typically own the real estate of the franchisees and charges excessive rents to the franchisees
June 10, 2016, 5:30 ammorganovich:
there is another gaping flaw in the "pay workers more and get more profits from higher productivity and lower turnover" argument: if this works, why would an employer need a law to force them to do it?
companies are profit maximizing. the inherent assumption in this argument is that they are leaving money on the table that they could easily get through their own actions and absent any legal coercion.
this makes the whole claim incredibly suspect. it posits that employers, with direct, first hand and granular knowledge of their own business are too stupid or blind to see easy profit enhancers, yet distant bureaucrats can get them for a firm by imposing a one size fits all rule from afar.
that stretched credulity far past the breaking point.
this claim is nonsense. if it were true, companies would be doing it anyway. i'm sure many are. the fact that some have not demonstrates that it is not true in all the cases it would actually affect.
June 10, 2016, 6:13 amano333:
"For the record, given our 50% wage costs (and costs tied to wages like payroll taxes), we have had to increase prices 10% for every 20% increase in the minimum wage, and even then we have seen our profits fall, as we never see the magic productivity increase that is supposed to come with suddenly paying the same people higher wages and at the same time we do see a drop in customer demand due to the higher prices, which reduces our fixed cost coverage."
But if you are paying the same people higher wages and taking a hit on profits, isn't that kind of a confirmation of the pro-minimum wage argument that an increase will not really cause job losses (and will rather be taken out of corporate profits)? I would have figured you would have let people go, with all of your claims of job losses due to minimum wage increases...
June 10, 2016, 6:14 amano333:
"If you want an employee to receive more money than they are literally worth, then you should foot the bill. It is immoral and distorting to force that onto an employer."
I am almost 100% certain that many progressives would applaud conservatives stating that we should increase government benefits.
June 10, 2016, 6:17 amJoshua:
I'd rather have no distortions at all, but if I had to pick, I'd take an increase in the EITC or foodstamps over an increase in min wage. The biggest victims of min wage are the youngest/ least competent workers who are no longer employable and can no longer get on the bottom rung of any career ladder. https://danieljmitchell.files.wordpress.com/2011/07/minwage.jpg?w=462&h=350
June 10, 2016, 6:44 amJoshua:
Higher education in America reminds me of Herb Stein's comment "If something cannot go on forever, it will stop". The cost increases and increasing disutility of some college educations in the US can not go on forever, and they will stop. It's going to be a rough transition to what's next, but there WILL be something next.
June 10, 2016, 6:54 amAndrew_M_Garland:
My college calculus instructor John told about his consulting work on the side. Some of his clients were engineering firms designing high speed motors and turbines.
They would create a design, do the math about airflow and stresses, and the prototype would disintegrate on the test stand. They would call in John to review their math.
John found repeatedly that the engineers had applied common formulas for smooth fluid flow to situations where the flow had high energy and chaos. They knew the formulas, but forgot the limits and preconditions which allowed those formulas to be correct.
Think of an aircraft. It can be stable below the speed of sound, then have the wings tear off in the chaotic airflow above the speed of sound or in the changing airflows of a storm.
Political discussions of economics are ridiculous because the proponents present some fragment of theory, usually new theory, with no clue about the uniform, idealized conditions which support the truth of those fragments. Those fragments may be a good guide only when the supporting conditions and context are understood.
For example, The Card-Kreuger study of the minimum wage looked at employment by large franchises like McDonald's. Their employment went up slightly. But, employment by small restaurants went down by more. Classic theory was correct; overall employment went down when wages were set higher. No part of classic theory says that employment must uniformly go down, and so a study of a part of a market can be misleading about the entire market. In the case of Card-Kreuger, demand for the big franchises went up when the little guys went bust.
http://www.forbes.com/sites/timworstall/2015/08/01/why-the-card-and-krueger-paper-on-minimum-wages-rises-and-unemployment-is-wrong/
Many economists, usually pro-government, create some new equations and recommend that the government force people to do things in the new way.
Compare this to wing design. Some engineer criticizes current wings and thinks he can do better. He writes some equations and proposes changes. Beyond this, he wants the government to require these changes without clear, prior success. This is madness.
Current airplane wings, and also business practices and wages, have come about through a combination of some theory and much experimentation. It is ridiculous to demand changes because the wing is too thick in someone's opinion. Maybe it looks too thick to the theoretician, but it is built in practice to withstand an occasional storm. This result came about through much testing, experience, and prior losses.
Government imposes policy by force after presenting a story about how things could be true. Would you board an airplane built according to such stories, or would you want thorough testing. Then, would any government force be necessary?
June 10, 2016, 11:09 ammarque2:
Unfortunately when people think about minimum wage they think of McDonald's and then think - well McDonald's because it is big, must be a big evil corporation which hates people and must be punished.
What most don't realize is that the vast majority of restaurants in the USA are individually owned. Even the McDonald's are franchises, and these owners might, after all expenses take home some 70K -80K profit (the owners salary) a year if lucky and things are going well. Again most people grossly miss-estimate the profits from mom and pop restaurants. If you have even three employees, on premises at any time, and close a day a week you are paying for 15000 hours of work a year. If that doubles from $7.50 to $15, that is $112500 extra you have to pay. There goes your entire 70K profit (the owners salary) and 50K more to disappear. Can the owner raise prices to cover it - probably not completely. So the upshot is that your mom and pop taco stands are going to end up closing down. Sadly the very people folks want to hurt - the big "evil" corporations will be the only ones who can afford to take measures to alleviate the costs. This will hurt small business, and minorities - right - the small corner taco shop that we all like, for its diversity. Oh well, now we will just have to eat at The Bell.
June 10, 2016, 11:26 amJoe_Da:
Old adage - people that can do - the others teach
June 10, 2016, 1:29 pmJoe_Da:
This guys comment amount employee turnover and other comments regarding getting "better teachers" by paying higher salaries are reflection of someone that simply doesnt understand the labor market.
FWIW - compensation is 4th or 5th on the list for high turnover in the teaching profession and quite frankly a long way from being the primary reason. (the primary reason is those leaving the profession simply dont have the aptitude. money being a distant 4th or 5th reason)
June 10, 2016, 1:36 pmbut hey if, you never been an employer, your likely not going to pick up on understanding most of the nuances in the labor market.
Joe_Da:
The card-krueger study had numerous flaws. The study actually showed an increase in employment rates.
Apparently the study's authors werent bright enough to question if they had bad data. As a layman, i recognized several obvious errors in the methodology. A subsequent study using actual payroll data instead of telephone survey data showed a decrease in employment consistent by classical supply and demand.
What is surprising and/or intellectually dishonest is an unnamed "esteemed nobel economist" repeatedly citing the card krueger study as showing raising the minimum rate will have positive effects on employment rates.
June 10, 2016, 1:41 pmJohn the River:
missed the bit about raising the customers prices?
June 10, 2016, 2:24 pmJohn the River:
"we never see the magic productivity increase that is supposed to come with suddenly paying the same people higher wages"
obviously, you are doing it wrong (/sarc off)
As I sit here with a pension and full retirement in a home I paid for and with money in the bank...and getting by.
I wonder what the difference would have been if I hadn't gotten that first minimum wage job. The time factor never seems to be included in any of these scenarios.
June 10, 2016, 2:30 pmmlhouse:
I commented on the same column the idiocy of these academic claims. If there was profit to be made because of retention by raising rates these businesses would know this a million times better than some egghead sitting in an Ivory Tower who has never run a business or hired real labor.
Regardless, there is no way that retention is that valuable of a variable for a fast food business. You hire low skilled labor that can only improve so much. When you first hire them their wage is greater than their productivity and after a few months they become proficient enough to at least be worth what you pay them. So keeping them a long time doesn't make them more valuable from a productivity standpoint. This means that the other variable to look at is the training cost of the employees. But, no matter what, fast food workers are going to burn through very fast. THe bad ones just dont show up for their shifts and never call back and the good one MOVE UP THE EMPLOYMENT LADDER. Why we would want long retention for such jobs escapes me.
June 10, 2016, 6:00 pmNot Sure:
Jack In The Box was founded in 1951, if the intertubes are to be believed. An 18 year old working the drive-through would have reached retirement age in 2000. In the last 16 years, how many people do you suppose have retired from Jack In The Box after taking orders for their entire working career?
June 10, 2016, 6:34 pmScottvan949:
The government does even pay minimum wage for jury duty either.
June 11, 2016, 7:29 amNoumenon72:
+1 for "the bad ones just don't show up for their shifts". This is the option Coyote is missing as to why there is turnover, although it doesn't change the conclusion much.
June 11, 2016, 11:00 ammlhouse:
YOu just have to cycle through them. Low end labor has very limited training cost and very low ceilings. Job retention isn't that important. A retail clerk can be trained in a week or two. And once they are trained, they are at maximum production. If they leave, you just start the cycle again.
June 11, 2016, 12:43 pmMB:
Isn't that evidence that he had the wrong price before? Or was he only able to raise prices because his competitors were saddled with higher costs too? Either way kind of plays into the pro minimum wage argument, doesn't it? (And, if the latter, answers the question of why employers don't do it unilaterally now).
June 11, 2016, 4:49 pmJoe_Da:
What ever happened to the idea that you dont want to entice teens to quit school for those "good paying " dead end jobs.
June 13, 2016, 6:02 amano333:
But there is still no mention of job losses, regardless of new demand under the higher prices.
June 13, 2016, 8:37 amano333:
On the other hand, if the "mom and pop" just employ themselves and thus cannot serve as many customers, there is room for more small "mom and pop" businesses.
June 13, 2016, 8:45 amMB:
> Even the McDonald's are franchises, and these owners might, after all expenses take home some 70K-80K profit (the owners salary) a year if lucky and things are going well.
I think you're putting these McD franchisees in a little too precarious of a financial position. Not arguing the minimum wage angle at the moment, but your profit numbers are pretty reasonable for a Subway (maybe even a bit high) - but McD owners usually do a fair bit better (or they wouldn't sink the $1 million+ to get started).
As a start. most franchisees have more than one store - an average of 6 according to a 2015 article by Bloomberg[1]. Even at your $70k profit, that's a $420K "salary" which is starting to look like real money.
The same article states that "it’s not unusual for owners to make six figures", and the accompanying graphic estimates $153K. You can also "collect a manager salary of $108,000 on top of the store profit". So, we're up to $918K for 6 stores, or $261K for one franchise if you're managing it yourself. (I find the $100K salary for a manager a little hard to believe myself...though if you include employer costs, maybe it's close - either way, I'll trust Bloomberg's research for now).
A 2015 AMA[2] (NB: this was a New Zealand franchisee) claimed 15% profit margin, and $572K take home for 3 franchises. That works out to $190K per store (and $1.2 million revenues).
McD's Franchise Disclosure[3] lists between $341K and $9 million in revenues, with an average of $2.6 million. At 15% (which seems high...but maybe it's cause it's NZ) that'd be $390K profit, a more reasonable 6% would be $156K.
So, I think it's safe to say we're looking at an average case of $200K+ for a single store, or $1 million for the average of 6 stores. (At least historically, McD's real problems are the future revenues...)
[1] http://www.bloomberg.com/features/2015-mcdonalds-franchises/
June 13, 2016, 1:06 pm[2] https://www.reddit.com/r/IAmA/comments/2aks3h/i_just_sold_my_mcdonalds_that_i_build_and_owned/
[3] http://www.franchisefoundations.com/mcdonaldsfranchise.html
marque2:
Hmm, the taller you are the harder you fall. McDonald's also has much more of a labor force than the 3 people at one time that I mentioned for a typical mom and pop. If doubling 3 people's salary makes one lose 110K, having six shops and an average of 6 people, and your loss from doubling salary is 1.3 million vs the 918K million you site. Oh well, there goes the 6 store McDonald's owner. The difference is that the McDonald's owner probably has corporate support which will help him research automating the system, cutting back on some of those labor costs while the mom and pop won't. Seems like the ratio of earnings to extra employment costs is exactly the same. I am not sure what your point is, or what I said that was wrong.
June 13, 2016, 4:00 pmmarque2:
Mom and pop do plenty of work in the restaurant. Owning a restaurant isn't just hiring some folk and then kicking back at home sipping tropical drinks on the back lawn. That is another myth, usually dreamed up by the young, who don't know better, and spiteful liberals, who hate business, and hate progress.
June 13, 2016, 4:03 pmmarque2:
It won't hurt the plutocrats, it will hurt the little people and very small business owners that liberals are trying to help with these dumb policies. The plutocrats have many options to move, or automate, or reduce "motion waste" that independents don't
June 13, 2016, 4:05 pmAgammamon:
I'm not sure what you're saying here - that its because you were able to get a job under the minimum wage regime that directly lead you to financial profitability in a way that getting a *non-minimum wage* job wouldn't have? That it takes decades for the financial benefits of the minimum wage to be seen by any individual worker - long after they've left their MW job?
But what about the people who can't get *any* job because the MW prices them out of competition?
June 13, 2016, 6:21 pmMB:
> I am not sure what your point is, or what I said that was wrong.
Really? Because I quoted the part that was wrong...a McDonald's owner doesn't have a take home of $70K - $80K "if lucky and things go well". They have a take home approaching a million $ on average.
I simply have an aversion to glibly thrown out numbers not grounded in reality. While I'm at it....
> What most don't realize is that the vast majority of restaurants in the USA are individually owned.
Most don't realize that because it's not true[1][2].
[1] http://www.grubstreet.com/2015/08/chains-taking-over.html
June 14, 2016, 5:19 am[2] https://www.qsrmagazine.com/news/npd-chains-outperforming-independent-restaurants
Joe_Da:
http://www.mymoneyblog.com/mcdonalds-franchise-cost-vs-profit.html
the cited link shows average net income for a mcdonalds location is $156k. which includes approx $540k of compensation costs for non managers. (with the caveat that - I have no ability to determine the accuracy of the numbers.)
June 14, 2016, 5:52 amAssuming that an increase in minimum wage to $15 per hour results in only a 40% increase in total payroll costs ( a very low assumption), then payroll costs go up $200k and you now have a $44k operating loss.
Can prices be raised to cover that costs, - only partly, the total increase in prices will be limited by the law of supply and demand
Ike Evans:
I just walked into Taco Bell yesterday to buy myself a taco. The sign says they are willing to hire people at a rate of up to $12/hr. This begs the question: who the hell is working for $7.25?
June 14, 2016, 8:35 amJohn the River:
In regards to other commentary on the lack of jobs for the young(er)...
I started working at thirteen, at the minimum wage. Today some are entering the work force for the first time in their twenties. Mistakes (and I made some beauts) made on the job at thirteen are one thing, at twenty-five something else. I worked at least part-time every year from thirteen to twenty, when I started to 'boss' other workers and get the opportunities given to those who have proven themselves.
A $15 minimum wage is ridiculous. Very few will get a start up the ladder at that price.
Government should get the hell out of the way.
June 14, 2016, 2:16 pmNot Sure:
"As a start. most franchisees have more than one store - an average of 6 according to a 2015 article by Bloomberg"
Perhaps that's so because having fewer doesn't provide the income many people assume it does. Or maybe it's something else entirely.
June 14, 2016, 8:16 pmmarque2:
1: No I said the typical mom and pop family earns 70K a year.
June 15, 2016, 12:35 pm2: Your logic is still quite flawed since the wage increase in a much larger McDonalds will more than offset all "profit" the owner's make.
3: Your articles are laughable. They don't prove much of anything, and are best speculative, about the future. (As in read your own sources before you post, to make sure they support your thesis) But go on with your dream.