The Labor Market Part II – “It takes a Village”

Recall the simple job characteristic paradigm I suggested last time. Unfortunately, the real world seems to be bearing this out. You have likely read that, during the current anemic economic recovery, middle wage to higher wage jobs have apparently been lost (interpret that as jobs that have a moderate to high price, but involve little creativity while they may be complex or routine—thus they are vulnerable to replacement by a machine or software). The fastest growing sector in new jobs by far is the fast food industry.

 

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The Fast Food Industry

Here again is a sector of the economy that is currently fairly labor-intensive, but in which jobs are simple, lacking in creativity, and low price. Thus, it might seem a fairly low risk alternative for technological substitution of capital for labor. The fact that this is where the greatest number of jobs are being currently created is not lost on politicians. To them, it appears a good place to cultivate and capture voters by over-riding the market and offering rewards. That is the essence of “public choice theory.” The idea that politicians will tend to steal or expropriate from those who voted against them in order to reward those who voted for them. The problem is that when the market is subverted by politics, the consequences are often not what the political architects intended.

Currently, the Obama administration has attempted to attract attention by announcing its support for a minimum wage of $15/hour for fast food workers. At first glance, those of us with a weak foundation in the working of the marketplace, may applaud the idea of a guaranteed higher living-wage for fast food workers. Employers might look at it a little differently. With new health care mandates, higher cost unemployment insurance and, now, higher hourly wage costs for their employees as well, they may see the attraction of a new, alternative production technique. There are many ways to skin the cat of producing a burger and fries. Which one is preferred in a competitive marketplace? The one that minimizes total costs of production while making final consumers happy. Put bluntly, fast-food employers only chose a low-skilled, labor-intensive technique because the cost of labor was less than the cost of automating. Now, as a result of higher costs mandated by government or bureaucrats, that may have changed.

 

“We can substitute capital to achieve automated food preparation, increase touch screens for customers, and meet customers’ human interaction preferences with cheerful host/managers. These higher-skilled employees can then deal with any software and hardware problems that may arise. Moreover, they will be far friendlier and easier for customers to deal with than the mix of surly teenagers, early parolees, or inarticulate speakers we used to employ. Individually they will cost more,but we can get by with fewer of them. As a result, we can produce an improved product and experience for a customers with 1 or 2 employees per franchise, rather than the 8-12 lesser skilled employees we used to depend on.” Hence, an unintended consequence of $15/hour minimum wage in the fast food industry could be to sharply reduce jobs in that sector. Once again evidence that politicians don’t understand economics.

The more cynical amongst us may be forgiven for believing that politicians do understand the economic consequences of their policies, but they simply don’t care—the legislated minimum wage was just done for political effect – “window dressing” for the uninformed.

This outcome is kind of sad because many, if not most, fast-food workers were likely not planning on a long-term career in the industry. Rather, it was viewed as the available first rung of job experience. A chance to develop for low-skilled, entry level employees or teenagers, on their way to more lucrative careers. Consider the substitution of capital for labor in another low-skilled food sector.

 

Farm Workers

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