Economic Understanding

Everyday we see on the news some reference to economic results or statistics. These should be of interest to everyone, not just those Wall Street tycoons and rich investors. Whether shopping at the grocery store, filling the car with gas or looking for a new job, economics affects our lives in so many ways.

One basic tenet of economics is the law of supply and demand. 

In a free market, the relationship between supply and demand determines the price of goods and services. Things that are scarce cost more because people who own them can wait to get the best offer from the highest bidder. Things that are common cost less because people who need them have a choice of sources; they can take their time to shop around for the best deal. As the supply of a product increases, the price goes down, simply because there is more of it. The opposite is also true.

This idea of supply and demand is behind many price changes, but it hits close to home when it affects jobs and wages. 

A couple of weeks ago the Business Insider ran a headline that made the point clearly: “The US unemployment rate fell to 3.7%, a 48-year low, in September.  What should be good news is bad news for the fast food and retail industry.” Why would it be bad news for the likes of McDonalds and Wal-Mart? The answer is supply and demand.

When the unemployment rate drops to today’s historic lows, the supply of available workers has decreased. That pushes up the cost of hiring people, that is, buying their services. Many of those jobs typically do not require a high level of education. Needed skills can be learned on the job. But with openings at many potential employers, workers would wisely look to where they could get the best deal – selling their skills to the highest bidder as fast-food locations and retail outlets compete for their time and loyalty.

But there is a downside to this as well. As I have written often before, there is no magic money tree.

The Business Insider continues: “Companies are giving workers higher pay and better benefits to compete – and trying to figure out how to cut labor hours by replacing employees with robots.” The higher wages and benefits must be paid for somehow. Do they pass along the added costs to their customers by raising prices? Do they try to absorb the added costs by making their operation more efficient? In the first case, it would be illegal to collude with their competition to get everyone to raise prices. They must continue to compete honestly. In the second case, using robots is one answer. Fast-food restaurants, grocery stores, banks and others have already increased the amount of self-service they expect from their customers.

Neither of these options is evil. People have raised prices and used automation for years. They are just trying to stay in business. Long distance phone calls used to be very expensive until they replaced operators with computers. Now distance is not even a consideration.

But what happens when the controlling factor is not supply and demand, when instead the government forces or coerces companies to pay more? For example when Senator Bernie Sanders wants McDonald's to raise its minimum wage to $15 an hour, they have the same options, raise prices or find ways to reduce overall labor costs. 

Notice that when Amazon came under the same pressure, they did promise all workers a $15 minimum wage. But according to CNBC, “the company is getting rid of incentive pay and stock option awards.” Although Amazon denies it, many workers complained that they will make less with the pay raise than they did before with the other benefits.

With a little economic understanding, none of this comes as a surprise, but people continue to act like there really is some magic money tree and that any well intentioned changes just make the world a better place with no ramifications whatsoever. Then, when the robots fire up and companies are only willing to hire people with $15-an-hour skills to fill the few jobs that are left, where do young people go for a first job experience? Where do today's fast-food workers find other employment?