3 ms·
What is there always this assumption in wage law debates that employers have unilateral ability to “just raise their prices” and “pass costs on to the consumer”
by massysett 6y ago
What is there always this assumption in wage law debates that employers have unilateral ability to “just raise their prices” and “pass costs on to the consumer”? There are plenty of other possibilities. It is also possible that the company will suffer reduced profits. Indeed, if the marketplace truly is competitive, the employer takes the price the marketplace offers. The employer can’t simply arbitrarily set prices any more than a corn farmer can show up at the grain elevator and demand a price for his corn. Economists like to talk about the invisible hand of the free market setting prices, but somehow when the minimum wage is being debated many economists toss the invisible hand into the trash heap and start saying that businesses can set whatever price they want and for some reason the market will simply bear it.
I’m not saying minimum wage laws are a good idea, but economists have no credibility when they won’t even allow for the possibility that wage laws might reduce corporate profits rather than leading to increased prices.
- qwytw 6y agoCompanies which employ large numbers of unqualified/minimum wage workers are usually in industries which are highly competitive. Walmart’s profit margin is less than 3%, most fast food restaurant franchisees probably don’t have margins much above 5% and Uber is yet to have any profits... So there isn’t much room for them there. They either can increase their prices or increase their worker productivity by hiring less people and investing more into increasing efficiency/automation. Both of which would not be beneficial to consumers and unqualified workers in the short term. And this is not something that hasn't been tried in practice yet. Just look at European countries like the Netherlands, Belgium, Germany, France, Spain etc. They have significantly higher minimum wages (relatively to their GDP or median household income) than the US and consumer goods and services are in general much more expensive (relatively) there than in the US.
- Closi 6y ago> Most fast food restaurant franchisees probably don’t have margins much above 5% If we follow your train of thought, we shouldn't see employers paying minimum wage with higher margins because those higher margins would have transpired to lower prices for consumers. McDonalds corporate profit margin is 20%! People might say, "Well most margin comes from franchise fees and McDonalds doesn't directly own most restaurants or own that cost base" - but while some franchisees earn 12%+ profit, they don't even have a mechanism where they are even ALLOWED to reduce prices so how exactly are higher profits supposed to get passed back as lower prices? The reality is that if a companies goal is to profit-maximise, "cost plus margin" is not a particularly effective strategy. From an economics perspective, you would work out what your demand curve is, plot that against your cost base to produce a profit figure for each point on the demand curve, and pick where maximises profit. In reality this will be less of a formal process, but this is the microeconomic theory.
- erik_seaberg 6y agoI've seen claims that McDonald's makes more on owning prime real estate than on selling food for pennies.
- deleted 6y ago[deleted]
- savanaly 6y agoThe economist you're responding to specified a competitive market, which is practically definitionally a market where there are no profits to reduce. Remember, since they're an economist they almost certainly meant "economic profit", not the "accounting profit" that everyone is generally familiar with from balance sheets, earnings reports, and playing lemonade tycoon.
- jeegsy 6y agoI mean the article literally says Uber is raising prices so...