As Wendy’s Is Proving, Target Has Shown, Higher Minimum Wages Lead To Job Losses

We people who know our economics keep insisting that raising the minimum wage will lead to people employing less labour. That’s just what people do when the price of something rises, they buy less of it. The other name for people using less labour is that we will lose jobs, there will be unemployment. A number of theories are put forward for why this won’t happen but happen it still does. As the twin stories of Target and Wendy’s show us.

For example:

Wendy’s Chief Operating Officer, Bob Wright, stated the company experienced a five percent wage inflation and they expect wages to rise at least four percent in 2017. He addressed possible options to accommodate the rising costs of business and inflation, and the unfortunate answer was to eliminate 31 hours of labor each week.

Wages, the price of an hour of labour, go up, the number of hours of labour purchased goes down. That’s just what people do:

 

Last year, the kiosks were coming. It didn’t take them long to get here.

Wendy’s plans to install self-ordering kiosks in 1,000 of its stores — about 16 percent of its locations — by the end of the year.

Kiosks are capital expenditure rather than labour. And when you change the relative price of labour to capital then you’ll change the decision people make about how much to use of either. This isn’t a tough thing to understand despite the manner in which it befuddles all too many:

 

Who could have seen that coming? As we noted previously, minimum wage laws – while advertised under the banner of social justice – do not live up to the claims made by those who tout them. They do not lift low wage earners to a so-called “social minimum”. Indeed, minimum wage laws — imposed at the levels employed in Europe — push a considerable number of people into unemployment.

There are really only three possible reactions to a rise in labour costs. One is to cut the profit margin. Wendy’s seems to make about 8% on sales as net margin. Not a lot of room there to cut that. The stockholders are going to want something back for providing their capital to the company after all. Another possible move is to increase prices, or perhaps not be quite as cheap as everyone else. This doesn’t seem to work very well as Target has just found out:

Target to cut prices, update stores amid ‘seismic shift’ in retail industry

Cutting prices now being an obvious sign that trying to raise them isn’t going to work. Consumers just aren’t in the mood to pay more. At which point there’s only one possible tactic left to deal with wage rises. Use less labour. Which is exactly what Wendy’s is trying by automating the ordering process with those kiosks. Do note that this is exactly the same thing as raising productivity. For those fewer workers left will have the same old sales as the old larger workforce. That is, output per hour per worker will be higher with the kiosks, that is a rise in productivity.

As I’ve been saying all along here a rise in the minimum wage is going to mean a fall in the demand for labour, to mean unemployment for some unfortunates.

Source:

https://www.forbes.com/sites/timworstall/2017/03/01/as-wendys-is-proving-target-has-shown-higher-minimum-wages-lead-to-job-losses/#371c814c6ea2

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