Many of my friends work in the service industry. Some either currently own or have owned their own joint. Many have managed one. When discussing politics or economics with the more liberal of them, I often get push back on my thoughts and ideas. The concept that a free’er market would help everyone is foreign to them. The idea that reducing or eliminating the minimum wage is a horror story; they run away screaming.
But I just go back to the bar room. And I ask 1 simple question:
“How do you sell more beer?”
I get lot’s of answers:
- Hire good employees
- Cool music/bands
- Dart/pool leagues
All kinds of things that dance on the edge of the thing but don’t really get to the meat of it. See, they are trying to come up with ideas that both sell more beer AND allow them to stay in business. See, the answer is remarkably easy:
“Sell it for a quarter. $0.25 a pint. It’ll fly out of the keg.”
They just look at me like I’m stupid.
“And then,” I say, “all you have to do to sell less of it? Sell it for 10 bucks a bottle. You’ll never have to order another shipment again.”
But we’re not finished. They contend that they DO lower the price at times. They have specials and Happy Hours. “THERE! See, I already do increase demand by lowering price.”
“Okay,” I say again, “but how would you react to a beer distributor who would only sell you his beer if, IF, you signed a contract that didn’t allow you to put it on special or Happy Hour. In fact, it would lock you into a price, a premium price, and further, the only thing that price could do is go UP. And, in fact, it would. Each week you would have to sell that bottle of beer for a quarter more than last week.”
“Would you buy more or less of that beer than you might otherwise buy?”
“Less, of course,” they answer.
Alright, so the examples are simple and contrived. But it represents what goes on in the world too. Employers are ALWAYS looking at the bigger picture. They demand flexibility as well. Without it, and their business could shrivel and die, maybe not even come into being in the first place. In the end, labor is no different than beer.
- When it costs more, people buy less of it
- When it is cheaper, people will buy more of it.
- When it becomes harder and harder to shed, they again, buy less of it.
So how is it that entire countries get it wrong, and for so long?
Spain has a rigid system for setting wages…
The wage system demands it most urgently. Pay is set centrally through a complex system of agreements across regions and industries. That means wages adjust only slowly to changes in business conditions. Despite a deep recession and zero inflation, pay growth averaged 3% last year, according to the OECD. That helps explain why Spain’s jobless rate shot up so quickly; it now stands at 19.5%. In Britain, by contrast, though the recession was equally savage, firms could limit pay; they therefore did not have to shed as many jobs, and unemployment rose less steeply.
Rigid wage-setting alone cannot account for Spain’s poor productivity growth. In the euro’s first ten years, output per worker rose by an average of 0.2% a year. In some years it fell even as wages grew quickly, which chipped away at Spain’s cost competitiveness (see chart). Part of the blame lies with Spain’s “two-tier” jobs market. In the top tier around two-thirds of the workforce are permanent employees who are costly to fire. When firms cannot shed workers easily, they become reluctant to hire them at all, which pushes up unemployment.
Employees are expensive to buy and hard to shed. Both conditions cause downward pressure on employment.
Is it fair? Ahh, yup; there is nothing more fair. The alternative is to go back to building your own house, planting your own food and stitching your own clothes.
In a free market, there would be zero involuntary unemployment.