Impending Minimum Wage hike causing restaurants to close

[Cow Poke]

You are looking at this from an individual standpoint. I've already cited why this will be a disaster. The impact will not only be on their trip to McDonalds, but on their visit to the gas station, their shopping at Wal-Mart, their entertainment expenses, etc. By shifting the minimum wage for one, you shift it for all, and there goes that perceived increase in purchasing power eaten up in price hikes. And the unintended result is on those that make JUST OVER minimum wage. Their purchasing power suddenly decreased by 20% at a minimum, pushing them further into debt.

It also destroys managerial discretion in recognizing employee performance via merit raises -- in many cases, an employer will be forced to raise wages for his most unqualified or newest employees above what he may have been paying his employees to whom he had given raises.

[Cow Poke]

if a person gets a 75% increase in their paycheck, how is going to hurt them if the trade off is a 20% increase in the cost of their trip to McDonalds?

What percentage of controllable operating expenses do you think "labor" is for a business like McDondalds?

[Bill the Cat]

What percentage of controllable operating expenses do you think "labor" is for a business like McDondalds?

Store-level payroll costs run around 25-30% of the operating budget of McDonalds.

[Littlejoe]

So, it sounds like we need to abolish the minimum wage and allow all those places to pay workers 1.50 / hour and our economy will boom!

[jordanriver]

What percentage of controllable operating expenses do you think "labor" is for a business like McDondalds?

heres the graph again from POST 43 from Heritage Foundation (conservative think tank)

Average Fast Food Costs Percentages.jpg

[jordanriver]

It also destroys managerial discretion in recognizing employee performance via merit raises -- in many cases, an employer will be forced to raise wages for his most unqualified or newest employees above what he may have been paying his employees to whom he had given raises.

actually in this case, it forces the customers to raise the wages.

Management can still do what it wants , if it wants to promote an individual laborer.

[jordanriver]

You are looking at this from an individual standpoint. I've already cited why this will be a disaster. The impact will not only be on their trip to McDonalds, but on their visit to the gas station, their shopping at Wal-Mart, their entertainment expenses, etc. By shifting the minimum wage for one, you shift it for all, and there goes that perceived increase in purchasing power eaten up in price hikes. And the unintended result is on those that make JUST OVER minimum wage. Their purchasing power suddenly decreased by 20% at a minimum, pushing them further into debt.

did you notice , in my POST 43 that the 20% increase in the cost of service was not to GO ONLY to the minimum wage employes, it was added to the money that goes to labor in general
....from the Averages based on financial statements according to Heritage Foundation, the CASH that went to labor was $217,484.
With a 20% increase in the price, that added $164,251 to the CASH that would go to the laborers.

even the cooks who make more than the dishwashers, for example

[jordanriver]

and unemployed people?

their income comes from taxes

If laborers get a 75% increase in their paychecks, they're going to be adding more CASH to the tax coffers.

[Bill the Cat]

did you notice , in my POST 43 that the 20% increase in the cost of service was not to GO ONLY to the minimum wage employes, it was added to the money that goes to labor in general
....from the Averages based on financial statements according to Heritage Foundation, the CASH that went to labor was $217,484.
With a 20% increase in the price, that added $164,251 to the CASH that would go to the laborers.

even the cooks who make more than the dishwashers, for example

But that assumes sales would remain flat, which they simply don't. Most studies find that a 1 percent increase in prices causes sales to fall by almost 1 percent. Larger price increases cause sales to fall by proportionally larger amounts. For example, Abigail Okrent’s and Aylin Kumcu’s estimate implies that a 10 percent increase in fast-food prices would cause fast-food sales to fall by 9 percent (from your Heritage Foundation article).

So a 20% increase would arithmetically cause roughly an 18% drop in revenue, or approximately $150,000 in lost revenues, which basically cancels out the available funds to give the employees raises.

[Darth Executor]

Modern technological development has lead to productivity increases at a fairly steady rate of about 1% per year over the last 150 year period.

Which doesn't come all at once. In many sectors upgrades would probably come in bulk during, say, an economic crisis when management would decide to review everything and see where they can improve effectiveness to survive.

So if the part of your explanation about efficient technology were correct, wouldn't we have seen a fairly steady rise in income inequality over that 150 year period, rather than seeing it very high in the pre-industrial period, then very low in the 40s-60s, and then rapidly increasing since the 80s?

Nope. The rise of technology also produced new industries. But that has its limits. When was the last time a whole new industry popped up? The Internet is the last I can think of and so far it's been doing a good job of decimating other traditional retail outfits. The only plausible thing I can think of that may change this is space colonization, but that's pretty far off.

I agree that a larger labor pool competing for a fixed amount of jobs would cause inequality. So yes: At times where unemployment is high, I think we are likely to see inequality go up, because competition for jobs lowers wages. However, there aren't a fixed number of jobs. A higher population simply results in more total jobs. So immigration increasing the size of the labor market is not going to be a particularly great explanation because it also increases the size of the job market.

There's a reason why I didn't say anything about a fixed number of jobs. Increasing the size of the labor market will be much faster than the size of the job market, and this gulf will continue to widen as tech gets more efficient.

So looking at US unemployment rates:

The period 1940 to 1980 is not hugely different to the period 1980 to the present, and so can't really explain why income inequality has been increasing since 1980 but not prior to that.

Unemployment isn't necessarily a consequence. They could just pay you less than they would have otherwise (IE: more inequality). The rich had more money so they hired more people instead of substantially raising the wages of existing workers.

Inequality has risen throughout the Western world in recent decades, but the US is an extreme case. So I grant you that it's plausible that whatever factors are causing inequality in the rest of the Western world are being made worse by large scale immigration in the US. Piketty in his book suggests that the reason for the US being different is that highly paid managers in the US (CEOs especially) are paid an order or magnitude more than in other Western nations, and he thinks the reasons for this are cultural and circumstantial - a lot of CEOs in the US essentially set their own salaries by themselves appointing people to a salary review board to set their salary for them, and they experience little to no cultural push-back for choosing to set their salaries ridiculously high.

That might be one reason. I haven't checked CEO compensation prior to the 40s.

Let's use the UK instead then. Their income inequality spiked massively in the period 1985-1990 and has remained high but fairly level ever since:
[ATTACH=CONFIG]4645[/ATTACH]
Their net migration was zero or close to it until 1994 when it shot up and has remained high since. So that's not a great explanation: The migration post-dates the massive spike in income inequality. What was happening in the UK in the 1980s that might be able to explain changes in wealth distribution? Answer: Thatcherism, the single biggest change in UK government economic policy from WWII until now (exactly like Reaganomics in the US, or Rogernomics in NZ) implementing neo-liberal economic policy in the UK.

Thus we see that in the US, NZ and the UK, a massive spike in wealth inequality correlates chronologically with the deliberate introduction of neo-liberal government policies designed to tax the rich less, globalize, deregulate, reduce union influence, open up the labor market etc, that were labelled Reaganomics / Rogernomics / Thatcherism after their instigators due to the fact that they were parallel contemporary movements all doing roughly the same things. Essentially, the deliberate introduction of neo-liberal economic policies in a systematic way to these Western countries as part of deliberate government policy is exactly the point at which wealth inequality suddenly spiked in those countries.

Again, the US rise in inequality pre-dates Reagan by a few years, so it's unlikely that his policies are directly responsible for it. Even with Thatcher there was a sudden shift in trends before she took office:



Reagan and Thatcher's reforms did not come out of the blue, they were the products of an economic crisis. The economy started working better (for most people) after their adjustments because their adjustments reflected the actual situation.

I totally agree that it is very reasonable to discuss which of the economic policies (eg globalization vs lower taxes on the wealthy vs undermining of unions) contributed the most to the rise of inequality. They are potentially hard effects to disentangle because they happened simultaneously in most western countries as part of the massive switch to neo-liberal economics.

He says there are two relatively equal sources of super-richness currently in play in the Western world: (1) Capital gains from inherited assets, (2) Super-highly paid CEOs and upper-managers.

Capital gains taxes address the first. Income taxes on wages address the second. I would personally tend to count capital gains taxes as a type of "income tax" more generally, since capital gains are a type of income, so if "income tax" includes capital gains tax then 'income tax' addresses both concerns. (I take it for granted that the tax rate on capital gains ought to be at least as high as the tax rate on wages.)[/quote[

I separated them because they are separate in the US tax code, so whether you consider them income taxes isn't relevant as they are not taxed under income tax.

Capital gains taxes have slightly decreased over time. There was significant reduction of capital gains taxes in the 80s, and another significant reduction in the 2000s. So I don't think lower capital gains taxes are totally off the hook in terms of explaining increasing wealth inequality (blue line):

I think you're reading it backwards, the reduction was in the 70s. It then went up during Reagan's term. So not only are they off the hook, they would have reduced inequality (though evidently not by much).

Piketty discusses also how various government interventions during and between the two world wars basically annihilated nearly all the super-rich dynasties: Basically the governments just said "we need lots of money for the war effort and recovery, all your money is ours now" to all the upper-class. Those series of extra-ordinary government asset seizures is not reflected by any background graphs about capital gains tax rates. So by 1950, the super-rich dynasties of the upper class basically didn't exist in the same way as they had existed pre-WWI, so at that point there was no longer any need for huge capital gains taxes to keep the super-rich in check. However, the 90% income tax rates on the top tax brackets would certainly have stopped any Bill Gates types from zooming to super-duper-richness.

Umm, what do you think the government did with that money? Wars are very profitable for industrial giants (IE: Lockheed Corporation). And Bill Gates made most of his money by growing Microsoft. The income tax might have badly hurt his disposable income but not his overall net worth (not that inequality measures net worth in the first place).

Quite a few laws have been passed which make this very difficult. Even if in future there was strong demand for them, it would be a big uphill battle against various laws and judicial decisions to bring them back.

It wouldn't. Politicians ultimately need votes, not campaign contributions. The latter are just a means to the former. If something is genuinely popular it'll get passed in no time. Also, I worked for a carpenters union one summer. They did not rely on laws to survive, nor did they extract union dues out of members' paychecks, you went to the union hall to pay them yourself or they threw you out. They thrived on providing high level service to government and corporations and the pay for a good carpenter went into six digits.

[Cow Poke]

Store-level payroll costs run around 25-30% of the operating budget of McDonalds.

Yes, and they're about the only controllable costs a McDonalds franchisee has --- franchise fees are set, cost of goods are what they are, utilities are what they are.... about the only manageable expense they have is labor.

[Cow Poke]

So, it sounds like we need to abolish the minimum wage and allow all those places to pay workers 1.50 / hour and our economy will boom!

OR, let the market drive the numbers.

[Cow Poke]

heres the graph again from POST 43 from Heritage Foundation (conservative think tank)

[ATTACH=CONFIG]4669[/ATTACH]

That has absolutely NOTHING to do with my question, which was... "What percentage of controllable operating expenses do you think "labor" is for a business like McDondalds?"

I'm thinking you know nothing about how a business actually operates, if you post that kind of graph in response to a question about CONTROLLABLE operating expenses.

In your graph, note the profit margin of about 3% --- about the ONLY way the franchisee can affect that profit margin is by managing his labor --- either paying less per worker, or using less workers per shift.

[Littlejoe]

But that assumes sales would remain flat, which they simply don't. Most studies find that a 1 percent increase in prices causes sales to fall by almost 1 percent. Larger price increases cause sales to fall by proportionally larger amounts. For example, Abigail Okrent’s and Aylin Kumcu’s estimate implies that a 10 percent increase in fast-food prices would cause fast-food sales to fall by 9 percent (from your Heritage Foundation article).

So a 20% increase would arithmetically cause roughly an 18% drop in revenue, or approximately $150,000 in lost revenues, which basically cancels out the available funds to give the employees raises.

That can't logically be true or every business in Americas would have closed long ago. Prices go up everyday for a variety of reasons.

[Cow Poke]

So a 20% increase would arithmetically cause roughly an 18% drop in revenue, or approximately $150,000 in lost revenues, which basically cancels out the available funds to give the employees raises.

Not to mention the fact that the franchisee (employer) will probably reduce the number of hours worked, or number of employees, because he's fighting for a profit margin of about 3%, according to Jordan's graph.