Rudolf Meidner, one of the unsung economics heroes of the last century, argued for solidarity wages on several grounds, one of which is that low wages subsidize less efficient firms.* Bring the bottom up, he said, and you will change the mix of enterprises and boost overall productivity. It’s just a hypothesis, but here’s a bit of recent evidence from a pair of researchers:
We study the impact of the minimum wage on firm exit in the restaurant industry, exploiting recent changes in the minimum wage at the city level. We find that the impact of the minimum wage depends on whether a restaurant was already close to the margin of exit. Restaurants with lower ratings are closer to the margin of exit on average, and are disproportionately driven out of business by increases to the minimum wage. Our point estimates suggest that a one dollar increase in the minimum wage leads to a 10 percent increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating on Yelp), but has no discernible impact for a 5-star restaurant (on a 1 to 5 star scale).
*Unsung in English. What are they singing these days in Sweden?
I keep asking libertarians when they argue against minimum wage hikes why do they think providing low wage workers with more capital and a higher standard of living is so bad.
They never reply. They are so set in their belief in jobs, jobs,jobs that it never occurs to them that actually eliminating some low wage jobs might be a good idea. It is the way we raise our standard of living. For example from 1990 to 2019 restaurant employment has grown from 7.1% to 9.5% of total private employment. Since restaurant employees have very low employment it is one of the reasons behind low US productivity and wages have fallen behind productivity growth. I ask them why they are opposed to restaurant employees having higher productivity and wages.
They would rather keep them barefoot and pregnant. Of course I tell my cousins back in Tenn.& Ky that this is what happens every time they vote republican. They just refuse to except my facts.
“low wages subsidize less efficient firms”
This seems like a gross oversimplification for the restaurant example, and thus perhaps for others. Except maybe in a very tendentiously and pretentiously academic technical sense completely unrelated to ordinary usage, there’s nothing more “efficient” about the five-star restaurants. They simply serve hyper-expensive gourmet meals that only the skyscraper-dwelling megacity elite can afford, and thus could afford to pay accordingly, without the slightest need for extra “efficiency”.
Decades ago, when most meals were eaten at home, when eating out was widely regarded as a luxury, that might well have been the end of the story. Some might even have just said “good riddance” to the other restaurants.
But nowadays, almost no one has time to prepare meals at home – including the hoi polloi. The “work work work” economy has seen to that. So once you have driven all the modest-priced restaurants out of business (on that weird academic notion that only the hyper-expensive gourmet ones are “efficient”), where do the hoi polloi eat? [Very possibly even more at McD’s, only to be harshly scolded by MDs (for sound reasons), and by the elite (out of snobbish virtue-signaling), for not eating “right”.]
I suppose one option might be to raise the minimum so sky-high that everyone (who is left with a job) can afford to eat out at those hyper-expensive gourmet restaurants – or can afford the time to eat at home instead of working every second of every day – or both. If that would work, why not?
But if it wouldn’t, then why wouldn’t it? I.e. how does one decide – and justify said decisions – how high is high enough, and how high is too high? (After all, even the now-famous $15 doesn’t begin to be enough to live even halfway decently in Manhattan or San Francisco.)
That’s a good point, Paul. If the only difference between restaurants with more vs fewer stars was “fanciness” I’d agree with you. What we need, however, is a better understanding of the relationship between how many stars they get and what clientele they serve. My sense, which comes from nothing more than reading online reviews periodically, is that starriness reflects many factors, including price, service, food quality, etc. You will definitely find inexpensive, everyday eateries garnering four of five stars because they’re good at what they do (or are perceived that way) and high end places getting trashed because they don’t live up to what they claim to offer.
My post was written under the assumption that stars correlate strongly with quality factors that apply at all levels of gastronomic ambition, but I could be wrong. It would be interesting to know what the ratings actually respond to.
Read the study, skipped the stats as I am tired.
“You will definitely find inexpensive, everyday eateries garnering four of five stars because they’re good at what they do (or are perceived that way) and high end places getting trashed because they don’t live up to what they claim to offer.”
My wife of 48 years and I go to restaurants because of the food, the service, the atmosphere, and whether the people are friendly frequently the place. I was visiting a plant in Zanesville, Ohio. At night time and by myself, I went to a restaurant/bar the hotel said had good steaks. As soon as my middle class self (think of another 4 letter word) entered, the bartender asked what I wanted (in a different format). I told “her” they came recommended by the hotel. Great food and the ambiance sucked.
I think quality of the food, place, and service are big factors The first two factors are where the costs are and the cost of service is less of a factor. I think this pretty well sums it up:
Scenario: Bottom 40% earners double wages (on average) through collective bargaining (some 50% more, most 100%, some 150%). Bottom 40% labor averages 15% of production costs. Doubling wages adds 15% to consumer prices – which bites off 15% of sales – before we factor in new sales from the newly flush 40%.
Common sense dictates that bottom 40ers spend proportionately more of their income buying bottom 40er made products – and (what I call) the mid 59% spend proportionately less on 40er prods. Let’s make that spread 20/10%. (We won’t concern ourselves with the top 1% here.)
85% of previous sales retained. Extra 10% sales from the doubled half of wages (with 15% fewer jobs) adds 8.5%. Sales retained = 93.5%. (Sales actually cascade up a bit from there as added jobs add jobs – but just a bit of eighth-grade math mind candy.)
To make sure we are not picking a sweet spot scenario:
— 10% sales lost to higher prices – 20/10% spending spread – 90% + 9% = 99% sales retained.
— 15% sales lost to higher prices – 40/20% spending spread – 85% + 17% = 102% sales retained.
— 10% sales lost to higher prices – 40/20% spending spread – 90% + 18% = 108% sales retained. (Thinking Card and Krueger anyone?)
We don’t have to test minimum wages for labor’s sweet spot. We can rely on the market — that is, once labor is able to hold out it’s input for the best price …
… that means once American labor union density reaches, say, German level.
Nothing could be easier to bring about. I’m leaving the following on the end of almost everything I write lately:
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Why Not Hold Union Representation Elections on a Regular Schedule? Andrew Strom — November 1st, 2017
“Republicans in Congress have already proposed a bill that would require a new election in each [private] unionized bargaining unit whenever, through turnover, expansion, or merger, a unit experiences at least 50 percent turnover. While no union would be happy about expending limited resources on regular retention elections, I think it would be hard to turn down a trade that would allow the 93% of workers who are unrepresented to have a chance to opt for unionization on a regular schedule.”
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We don’t need a few percent a year increase in labor’s price — we need to double (!) lower 40% wages from about 10% of overall income to 20%. Never do that playing with minimum wages. If fast food can pay $15/hr with 25% labor costs, then, Walgreen’s and Target can pay $20/hr with 15% labor costs, and, Walmart can pay $25/hr with 7% labor costs. Any two people can $1600/wk and we are on our way back.
Regularly scheduled cert elections at private workplaces would be such a great political draw in the Midwest’s so called battleground states that I can’t imagine why Democrats haven’t pick it up and run with it long ago.
These blue collar folks are not stooges just because they voted for you-know-who last time. According to NYTimes numbers guy Nate Cohn, in 2008 and 2012, we could have sliced off Cleveland, Detroit and Milwaukee and “cast them adrift in the Great Lakes” and Obama still would have won there. In 1988 Jesse Jackson won Michigan with 54%. These folks are rightfully mad at Dems because they never do anything realistic for them. Giving these folks their power back (to union power era levels) is exactly what the political and economic doctor calls for.
You are learning a little bit here.
In multi-star restaurants you don’t get the spending propensity switch you see in my scenario above: lower income earners spending more of their income in lower wage places (on average). You get the opposite: upper income earners spending less money in highest consumer price places. What you don’t seen in the multi-star example is a bigger chunk of overall income going to low wage earners boosting jobs at lower wage places.