I spent part of this afternoon at my neighborhood Starbucks, where I was working on a project. As I finished up, I saw that I had a message from my wife asking me to swing by the store to pick up half a gallon of skim milk. No problem. I generally use self-checkout, but sometimes it’s a roll of the dice. This evening, I rolled the dice and lost: one of the checkout lanes malfunctioned as the person in front of me was using it, and the customers at the other self-checkout for which I was in line were having trouble with the bill acceptor. I ended up in a brief conversation with the gentlemen behind me. They were students at some of the local universities. I turned the direction toward economics and asked if they could explain our plight as a response to increases in the minimum wage.
The logic is as follows. When the price of anything rises, people search for substitutes. When governments pass laws that make low-skill labor more expensive, firms search for substitutes for low-skill labor. Some of these little bits and pieces of added cost include minimum wages, regulations on the hours that people can work, health care mandates, workplace safety regulations, and a ton of others. Firms search for substitutes, like self-checkout lanes (bonus: here’s Doug French on shadow labor).
What would the world look like if hiring low-skill labor were easier? First, people would have more and better service across the board, perhaps most especially at grocery stores and restaurants. Second, more people at the bottom of the skill distribution would be able to get their foot in the labor market door. As it stands, regulations on the low-skill labor market mean that the least of these among us have the door of opportunity slammed in their faces. Advocates of these interventions think they are redistributing resources from faceless “big business” to downtrodden workers. That isn’t what’s happening. Resources are being redistributed from some downtrodden workers to others.
Would easing the burden on the low-skill labor market mean an economic renaissance? Probably not. In aggregate, burdensome regulations on the low-skill labor market are paper cuts in the world’s largest economy. First, this doesn’t mean we should overlook the burden on the poor. Second, if you give a man enough paper cuts, he’ll bleed to death.
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These self-checkout lanes are appearing even where minimum wage has not risen in years, and in companies that are not known for their high pay to begin with.
Using these self-checkouts to argue against minimum wage is like using them to argue against workplace safety rules. There may be some relationship, but it is certainly not the controlling relationship in the matter. In an economy where individuals wishing to improve their compensation have to contend with corporations and their compensation policies, the primary issue at stake is the corporations’ market power to set rates and terms in the transaction. This is not a “free market” in any sensible use of the term, when only the people on one side of the transaction are “price takers” while the other side exercises market power.
The self-checkouts are a tactic used when the corporation can no longer unilaterally cram wages any lower. Removing the pay floor (minimum wage) can only worsen service levels as already stressed employees find themselves struggling even more to provide for themselves and their families. As such, the checkouts are a symptom of imbalanced labor markets (“we’ll cut back on service, save ourselves some money, and make the customers do your job”), rather than a symptom that minimum wage needs to go away.
If we would like to eliminate minimum wage, we have to start by breaking up the cartels (which is all a corporation is: a group that pools its resources in order to gain market power) that have distorted the market so fundamentally.
Marx, is that you?
W^L+,
if what you are saying were true, then all wages would have been crammed down to subsistence levels and there would be no wage higher than minimum wage, given that businesses had all of the market power, as you say. The facts say that there are many occupations (union and non-union) which pay a wage much higher than minimum, meaning that those employees have what you call market power. In fact, every employee has market power according to the value of the skills which they possess and are willing to trade in the market place. Every employer has market power when he can offer a wage higher than other companies who are competing for the same employees. Market power means only that someone is willing to do business with you for the price you are offering.
The implication is that those potential employees who haven’t had the opportunity to build a valuable skill set have a low market power and have to compete for jobs against those employees with higher market power. When the minimum wage is set above the amount of money that they are able to generate for an employer, those employees will be without a job, even though they have some marginal skill which someone would be willing to pay something for.
There have been stories similar to the checkout machines for as long as there have been minimum wages. In the 1930s, elevator operators lost their jobs when minimum wages priced those low-skill workers out of the market and they were replaced with automatic elevators. When I was young (younger), every filling station had attendants who would wash your window and check your oil. Those high school boys and retired men who wanted to earn a few extra bucks were also priced out of the market by minimum wages.
You should examine your theory of market power a bit further. It has been shown to be vastly wrong, as average real wages have increased even as the number of employees competing for jobs has increased. Employers, in their efforts to earn profits, compete against other organizations for employees even more than employees compete against each other for the jobs. The standard of living for the average worker has improved tremendously over the last 50 or 100 years, and indeed, since the beginning of the industrial Revolution.
The “theory of market power” is part and parcel of economic theory. Take a few business classes and a few economics classes and you’ll begin to understand it. The invisible hand of markets that brings about the benefits which we seek depends upon a situation in which no party has enough clout in the market to unilaterally set prices. At its core, the very reason for creating a corporation (like the reason for creating a union) is to gain some measure of this forbidden power.
Filling station attendants were not priced out by minimum wage, but by the oil embargo and its related increase in the price of motor fuel. Gasoline went from $0.20 to $1.00+ in under a year, shocking vehicle owners right in the wallet. When some stations offered self-service at a discount, we took to it wholeheartedly. Within a short time, the full-service stations were almost all gone.
A few consecutive read-throughs of “The Wealth of Nations” does a wonderful job of clearing ones mind of politically-inspired dogmas masquerading as capitalist (and marxist, socialist, anti-capitalist, and so on) ideals. No one else seems to understand economics as well as Adam Smith did in 1776.
Mises? Or how about Hayek? Have you read their books? Where is your explanation for the elevator operators? Did elevators all of sudden become to expensive to use?
Also get your facts straight. Here is the actual historical information on gas prices.
http://inflationdata.com/inflation/inflation_rate/gasoline_inflation.asp
It wasn’t till the 1980′s that the gas hit 1.00+.
The few classes that schools offer are bunk. They don’t teach economics or business. I have recently graduated from college. I can assure you, what you learned, isn’t real life.
If you offer a service that is in high enough demand you will have the power to uni-latterly set prices. That is until competitors that can perform or provide cheaper enter the market. The only thing a corporation provides is legal protections. It doesn’t grant you the power to force others to work for you for less than the market is willing to pay. It grants you protection in case you are sued.
I just love guys who come on a blog like this and start suggesting people take some economics classes. Maybe you should investigate things a little beyond the tripe dictated to you during your indoctrination before you start advising others to follow your path to ignorance. It’s all here for anybody capable of thinking for themselves.
The only “cartel” that “we” need to break up is the State. If you disagree with the practices of a firm you should encourage others to form a consumer or labor union which, upon gaining enough supporters, can use it’s market power to encourage the firm to change. Although ideally you should just start your own firm to compete against the disfavored firm.
Sounds like a guy who taught economics to Obama at Havard.
And where are the teenagers, bagging our groceries for tips? Where I shop, they’ve been replaced by middle agers.
The teens are at home in all probability, watching television or playing video games. It is probably not a coincidence that screen-time leisure activities have exploded. Labor laws have strictly limited the number of hours teens can work both after school and on weekends. These laws were supposed to improve academic performance of students, freeing up students to do homework. However, instead, most have seemingly just increased leisure time. I’m not bashing the youth. The kids are alright—the adults are acting insolent.
This is exactly the same in Australia! Over a year-and-a-half ago, A Federal Minister put a stop to some kids working after hours, though it was because the shop wasn’t hiring them for long enough- this contravened some minimum hours law, apparently. the shop couldn’t afford the extra wages that this would have meant, so the kids lost their jobs. The unions were happy, and the Minister later became our Prime Minister, Julia Gillard. (Except for the red hair, she is almost a complete reversal of John Galt- and what is worse, she is real!)
Just spoke to one of them kid and it seems his game taught him that inflation comes from money printing or importing gold from overseas by galleon.
” Would easing the burden on the low-skill labor market mean an economic renaissance? Probably not. In aggregate, burdensome regulations on the low-skill labor market are paper cuts in the world’s largest economy. ”
Given the level of youth and minority unemployment, that seems like a surprising thing to say.
Even more basic is the simple fact that any workers wages can not exceed (for long) the “value” that they bring to the business. Most importantly this is an education, skill set or license that lets them perform some task that will make the company more money or improve their product or service (so they can make more money). Grocery checkers, elevator operators and service station attendants all have one thing in common, they bring a small and common skill set to the job. They can be replaced by virtually anyone with minimal training or even by a simple customer driven machine. They have very little leverage to hold or increase their wages because of this. It’s like the law of gravity you can defy it for a while but only with the enormous expenditure of energy.
In California, the minimum wage is not really the problem (other than that it acts as base for all other wages). The union contract wages at Ralph’s and Safeway in LA are at least double the minimum wage.
I notice that if the wage gets higher the prices of commodities also gets higher. If you look at it, there’s no difference with your wage before and your wage after. Useless wage hike.
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http://jobswa.org
“If you look at it, there’s no difference with your wage before and your wage after. Useless wage hike.”
Even that is a Herculean assumption, of the same magnitude as the “perfectly spherical chickens in a vacuum”-assumption from a certain popular physics joke. In reality, all wages do not rise proportionally to one another, and not simultaneously. And even disregarding that, you’re ignoring the effects on previously accumulated savings and, therefore, on interest rates and the intertemporal structure of production.
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