Friday, April 19, 2024

On Raising Wages And Departing Employees

 In what is going to be a real life test of an Ayn Randian principle, California has recently decided to up the minimum wage of fast food workers.

For the purposes of this exercise, I am setting aside the arguments about what a minimum wage is and why it is and who gets it.  That is not the crux of the issue - but there is an underlying issue I think bears careful watching.

The issue is simply the breaking point of the average consumer.

One of the things that remains relevant even in my own industry is the idea of COGS, or Cost of Goods Sold - that is, the sum total that one sells a good for.  In theory, COGS is supposed to include all the things which go into the manufacture of that good, including materials and labor (but excluding things like overhead, which falls into administrative expenses).  Nor does this include some level of profit for the company manufacturing the product (Useful description here.)

When labor goes up - just like materials go up - the COGS goes up.  But COGS is not necessarily the same as "price sold at".  This becomes a balancing act of all of the things - COGS, Administrative expense, profit.

When California raised the minimum wage to $20 an hour, it increased the COGS.  Unfortunately for fast food (and all of us), the cost of goods in general (in this case, food) has also gone up.  Which leaves the business owner three choices:  lower profits, raise prices, or cut costs.

From the view of the government, I am reasonably sure that the most desirable outcome is "lower profits".  Profits are, after all, generally evil except above some small socially acceptable norm which is never quite defined but everyone knows what it is (ignoring, of course, the fact that lowered profits equal lower tax receipts.  But more on that shortly.).

From the business owner's point of view, the most desired outcome is "cut costs".  Cutting costs reduced (or at least mediates) COGS.  And, sadly for everyone else, labor is usually the greatest cost any business has.

The option that is overall least desirable is "Raise prices".  From the government's point of view, although likely it generates more sales tax it also hikes overall prices.  From the business owner's point of view, the more prices rise the more likely it is that you will begin to price out certain portions of your market and thus lower overall revenue.

And so - even before this started - business owners started cutting staff.

In at least one example, it started with pizza delivery drivers.  There is a certain cold logic to it - in an age of apps that handle delivery of food, why would one keep a staff to deliver food?  Yes, it means that you do not have direct control over that part of the supply chain, but you are also not paying people who may or may not have deliveries.  And now that overhead and administrative expense falls on someone else, not you, reducing your cost. 

From the government's point of view, this is a bit of a catastrophe.  Less payroll taxes, less income taxes, likely more drain on the social welfare systems as these people look for work.  By "increasing" income, they have decreased their own revenues and increased their own spending.

The other element, of course, is simply the price hike.

As prices increase due to inflation and material costs, people start making choices.  People start realizing what is important and what is not.  And in times of tightened budgets, fast food and restaurants in general are likely some of the first things to go.  

The problem for Our Political And Social Betters (OPASB) is that although they can control owners indirectly, they cannot control consumers.  And consumers will respond to the market in a realistic fashion based on their experience, not on what good intentions would mandate.

By (in theory) trying to do the "right" thing in increasing people's salaries, they have likely ensured that more people will not have jobs.  Which seems like a bit of a reverse outcome. 

Contrast this mandate with at least one restaurant here in New Home 2.0, where they notify you up front (literally up front as you enter the restaurant) that they charge a 3% "living wage" fee as part of the check.  If you do not care to pay it, you can have it removed.  This, to me, makes more sense:  I am informed, I have the ability to opt out, and the company is able to do something to mitigate costs (likely most people do not refuse the additional amount).

My prediction?  Layoffs will skyrocket. Businesses will fold.  Where businesses do not fold, automation will not just become an interesting idea or unique selling point, but critical to the businesses ability to survive.   It will not impact OPASB of course; they eat at locations where none of these things will be an issue.  But almost everyone else will see some kind of effect.

Atlas may not be shrugging, but he may be limbering up his shoulders.


  1. To me, the logic of what you observe is obvious and spot on. It makes sense. What's puzzling is that the decision, policy, and law makers don't seem to understand all this. I can't figure out why.
    1) They don't understand cause and effect (?)
    2) They don't know how to analyze for all possible outcomes to their proposed actions (?)
    3) Because government has the ability to print money, it's an eternal resource for them. They don't get that for average citizens, income is limited in numerous ways. (?)
    4) They think their decisions manipulate voters into re-electing them (?) (vote buying)
    5) It's deliberate. Just like the kid on the beach who knocks down everybody's sand castles, they want to destroy the current system just because it exists. (?)
    6) They've been so completely politicized that everything is "us against them." No matter what the other side comes up with, we're against it. Winning at politics (power) is the only thing that matters. (?) (game playing)
    7) There's a personal financial benefit for enacting rules like this. (?)
    8) To collapse the current system to usher in an economic reset (?) (conspiracy theory)
    9) They don't care and personally just love lording it over people (?)

    Like I say, I don't get it.

    1. Leigh - I cannot disagree with any of your points.

      That said, I think the most ready explanation is a combination of
      1) Operating from feelings rather than fact.
      2) A failure of understanding basic economics.
      3) The aspect of power (They can because they are the "Lords of the Earth".
      4) They truly believe that everyone else (owners, customers) will not act in an economically rational fashion and find ways to reduce expenses.
      5) It makes them feel good about themselves because all the "right" people praise them.

      One wonders if those soon to be unemployed workers will see things the same way.

  2. I think your observations are spot on too and I have been reading the news seeing what is the future of fast food in California to see if there is something to learn about our future.

    Regardless of the consequences, I think it had to be done. I hate to see more people without jobs but markets always seem to adapt to job losses with creation of jobs in new sectors where none existed. I also think it is probably cheaper in the long run paying people more to perhaps keep them out of poverty than to pay then in poverty trying to get them out of poverty.

    1. I should add that I'm okay with this at a state level, not the federal level.

    2. Jebus Ed... I like enthusiasm and optimism but hell's bells... stuff like this is why the kids hate Boomers with the heat of 1000 suns and talk about smothering their elders with pillows in the night. Not everyone lives in an affluent retirement community anymore. Not to pick on you; my mother is the same way. To her it is still 1978 and the only people without jobs are a few people with disabilities and you could still make a decent living with elementary skills and experience.

      My business metrics were actually marvelously simple. I had to make 25~35% profit margin to keep the lights on and pay people. If you crank up my costs I just pass them on to the customer. I can do nothing else. At the end of the day everyone has to make a buck; what is the point of creating new industries if people can't profit? Would you do it?

      I am no fan of the fast food/restaurant industry or the way it treats its people... but we will be approaching TB's breaking point sooner rather than later if this silliness continues.

    3. I'm in agreement with you Glen. You need to make a profit and I'm all for that. I guess my thought is that by not paying a wage that people can survive on, we the tax payer end up on the hook for all the government programs for low incomes to keep these people afloat. If we force employers to pay them a living wage, and as a result you have to raise prices or trim workforces to maintain profit, as is reasonably expected, then perhaps the end result will be less people on the government (i.e. my) dime as they are either making a livable wage or working elsewhere in another industry. Of course you could then reasonably say that could for the fast food industry, or at least parts of it, will now be driven out of business. That is a fair point. But then look to TB's latest post about industries that don't change with the times. I think it is just the circle of life.

      I know I'm treading a fine line and goes against my dislike of government subsidizing people, but I guess low income support programs are so woven into our nation's fabric at this point I don't see them every being unraveled again and thus am looking for the best way to relieve the tax burdens on the citizens who support them.

    4. Ed and Glen (Hi Glen!), you both make good points. There does have to be a profit for businesses to stay in business and it can vary between industries, but it has to be enough to encourage businesses to stay in business. Raise expenses enough or reduce profitability enough and people will simply stop doing it. This simple fact often escapes Our Political And Social Betters (OPASB), but we are seeing this play out in chains large and small (largely in urban centers).

      To Ed's point, people working are better than people not working - but we have created a system where people not work can make things work "okay". What is worse is that we are breaking (or have broken) the old social mores that people need to work at all. That said, does raising wages pull people up? Possibly - but only in an economy that can support it. At least from where I sit, we are not in that economy right now. We are in the economy of hard choices, where there is neither the ability to raise wages or raise prices - so that raising one or the other results in unfortunate consequences.

  3. The OPASB very largely hate the idea of free enterprise and a capitalist economy, because so much of it is outside their control. However, they are only too happy to leech off that economy through punitive tax regimes to fund their socialist games.
    Consequently, they will see only a positive outcome from raising the living/minimum wage, and cannot understand the many potential downsides that anyone from a capitalist viewpoint can immediately recognise.
    I suspect that the minimum wage probably follows something like a Laffer curve, too low is not efficient at getting people into well-enough paid employment, too high and it starts to destroy jobs

    1. Will - Oh, how it thrills me to see OPASB used by someone else. Maybe I finally have made my mark on the InterWeb.

      The OPASB does hate capitalism and free enterprise. If allowed to exist at all, it is only to fund their programs. To that end, they will see it as a positive outcome to the point that things will collapse before they get an inkling that things are not going the way they would like.

      There probably is a point for the "right" minimum wage. But there is also the concept that once upon a time - in my life time - minimum wages were for jobs that were starter jobs; the idea is that one would move up in one's career. I do not believe the idea of making a career of fast food, for example, was pictured at the time.


Comments are welcome (and necessary, for good conversation). If you could take the time to be kind and not practice profanity, it would be appreciated. Thanks for posting!