If higher wages mean higher prices, who is better off?
When you point out the phenomenon of lots of job openings coexisting with elevated numbers of people unemployed, a common response is, “Well, they should just pay them more.”
Well, some of them are. As Kare 11 reports:
“There is right now a labor shortage across Minnesota,” Department of Employment and Economic Development (DEED) Commissioner Steve Grove says.
The latest numbers from the Bureau of Labor Statistics show nationwide there are more than 9.3 million job openings, a new record.
And with everyone looking for workers, Grove says employers have had to get creative to stand out.“The employers that are having some success are doing some unique things, whether it’s hiring bonuses, childcare support, raising wages,” Grove says.
Some of the more unique incentives include free chef knives for cooks and kitchen workers.
Free rooms for seasonal hotel employees.
And at Applebee’s they’re offering free appetizers to anyone who will just sit through a job interview.
But other companies are going much bigger, offering to pay for college.
JBS, a food processing company, started a program in March that pays for an employee and one of their kids to go to community college or technical college for free.
And a lot of companies are just offering more money.
“Some upward pressure on wages has been long needed in our economy and we are seeing for the first time in a long time wages going up,” Grove says.
This is good news, right? Well, not so fast. Remember what I call the real iron law of wages. This says that no hire will take place at a wage above the employer’s estimate of what the employee will add to revenue. If it did, the employer would be adding more to their costs than to their revenues, losing money on the hire, which is not something businesses willingly do. If this estimate is below what a worker can get on unemployment — around $26 an hour in Minnesota right now — they will not match it.
Some businesses are matching the ‘wage’ offered by ‘enhanced’ unemployment benefits by hiking their wages. But they are covering this by hiking prices. Kare 11 also reports:
Chipotle raised menu prices by 3.5% to 4% in order to cover its decision to raise wages for its employees to an average of $15 per hour, multiple reports said, citing the company.
“You take about a 4% price increase to cover the dollar cost of the extra labor,” Chipotle Chief Financial Officer John Hartung told an analyst, according to CNN.
The company announced last month it would increase the average hourly wage to $15 per hour by the end of June and that starting wages would range from $11 to $18 per hour. The company also said crew members who reach the position of Restaurateur — the highest General Manager position — can receive an average compensation of $100,000.
“We really prefer not to take pricing. But it made sense in this scenario to invest in our employees and get these restaurants staffed and make sure that we have the pipeline of people to support our growth,” CEO Brian R. Niccol said at the Baird Global Consumer, Technology & Services Conference, according to Reuters.
So the cost of this wage hike — the cost of competing with the federal government’s ‘enhanced’ unemployment benefits — is being borne not by Chipotle’s shareholders, but by its customers.
There is a world of difference between worker’s remuneration rising because employers are competing with what each other can offer — which is a good thing — and that remuneration rising because they are completing with the federal government can offer in unemployment — which is a bad thing.
The economist Milton Friedman famously said, “There’s no such thing as a free lunch.” This is a perfect example of what he meant. Too often people think that an economic problem — low wages, in this case — can be solved by some wave of a policymaker’s wand and that there will either be no cost or that the cost will be borne by some rich dude. There is no free lunch at Chipotle.
John Phelan is an economist at the Center of the American Experiment.