5.8.15

THE IMMEDIATE AND THE INDIRECT CONSEQUENCES.

In economics, the immediate effect of an incentive is generally straightforward (often, a "no effect" response that correctly invokes a tight constraint of some kind is good enough.)  It's what comes later that gets interesting.  Consider all the ways in which workers and entrepreneurs are responding to mandated increases in the minimum wage.In Seattle, there's a curious twist on the backward-bending supply curve.
Many companies raised their employees’ wages beyond the $11 an hour mandated by the law, which has led to some curious results. Employees are begging their bosses to cut their hours so they can keep their food stamps, housing assistance, and other welfare benefits.
That's perhaps the best argument for a carefully tapered earned income tax credit or a negative income tax, as the current jumble of provisions by which workers and employers are covered by various welfare state measures make workers sensitive to the conditions under which they lose benefits, and employers sensitive to the conditions under which they are subject to additional requirements.  And thus we might see a lot of 24-employee businesses on 30-hour workweeks, whether that's even close to first- or second-best efficient or not.
Despite a booming economy throughout western Washington, the state’s welfare caseload has dropped very little since the higher wage phase began in Seattle in April. In March 130,851 people were enrolled in the Basic Food program. In April, the caseload dropped to 130,376.

At the same time, prices appear to be going up on just about everything.

Some restaurants have tacked on a 15 percent surcharge to cover the higher wages. And some managers are no longer encouraging customers to tip, leading to a redistribution of income. Workers in the back of the kitchen, such as dishwashers and cooks, are getting paid more, but servers who rely on tips are seeing a pay cut.

Some long-time Seattle restaurants have closed altogether, though none of the owners publicly blamed the minimum wage law.

“It’s what happens when the government imposes a restriction on the labor market that normally wouldn’t be there, and marginal businesses get hit the hardest, and usually those are small, neighborhood businesses,” said Paul Guppy, of the Washington Policy Center.
But the transaction costs that accompany scheduling workers who like the idea of working and like the idea of public assistance can induce a different kind of substitution.


Diffusion is well under way.
I ordered my lunch yesterday on my computer and picked it up from Panera Bread without ever talking to a person. Last night, I picked up a couple groceries and paid through the self-checkout lane. This morning, I ordered a latte on my Starbucks app, and it was waiting for me when I walked into the store. I'm thinking of going to a burger joint later, where I’ll tap out my order on a kiosk.

Of course, it’s not fair to blame the minimum wage exclusively for the increasingly widespread automation of service jobs. Ordering kiosks and mobile apps are becoming more popular as the technology becomes better, cheaper, and more popular. That will probably happen no matter what the price of labor is.

But the fact that the cost of not using technology — that is, an employee — is about to cost 70% more will give the entire New York fast-food industry a great big shove away from labor and towards machines. And since chain restaurants don’t just operate in New York, the investment in automation will spill into stores everywhere.
Yes, and the kiosks reduce the opportunity for the staff to ignore customers (I'm looking at you, Starbucks) or mess up the orders, which popular perspective has McDonald's as the most egregious offender -- I could count on the morning radio talkers out of Milwaukee to gripe regularly about fouled up orders until they apparently took their business elsewhere.  It's interesting how the Arches intend to respond to that shortcoming.
McDonald’s has begun rolling out a new initiative called "Ask, Ask, Tell," as a way to cut down on order mistakes, according to a report from CNBC. The new attempt to increase accuracy will ensure that drive-thru employees repeatedly verify the customer’s correct order at three separate times during the ordering process: when a customer orders, pays and receives a meal.
A lot of that might be easier to put right using a large enough touch screen in the drive through, no more attempting to explain or correct via a scratchy intercom. There's something similar at each parking spot in a Sonic drive-in, but don't expect to pay cash.


What's funny is the way the retail trade association reacts to the Arches going for reliability.
While customers will likely reap the benefits of this new quality assurance plan, getting more consistently correct orders, it does not come without cost for the fast-food giant. McDonald's generates more than 60% of U.S. sales at the drive-thru. But because the new policy takes up crucial time at the drive-thru – where customer experience is often measured in seconds, not minutes – McDonald's will be cutting back on “upselling” or “suggestive selling” of additional items.
I sometimes wonder how many orders get messed up because the clerk is devoting more brain cells to recalling the latest set of requests from headquarters -- the suggestive selling -- and the rewards cards and all the other impedimenta, rather than to working with the customer.  But the trade association people must not have spent much time recently pumping gas, where there's a point of sale television with some fuel hoses attached.  It's got to be a lot easier to program those kiosks to do the suggestive selling and everything else -- it's getting that one has to go through four to twenty screens of crap just to check out at some place -- than it is to ask minimum wage help to do that work.

Direct consequences: minimum wage workers suffer, customer good will suffers, and there's no way to say "shut up and sell me my stuff."  (And get the order right.)

John Palmer's Eclect Econ thinks more carefully about the follow-on consequences.
When the minimum wage is raised above the equilibrium wage rate, employers look for ways to substitute capital for labour. In the fast-food industry, there have been loads of substitutions over the past 50+ years that I'm aware of since I worked at a McDonalds.

The fries are prepared offsite now, the cheese is sliced offsite, the burgers are pre-formed offsite, the milkshakes are made differently, computers are used to record the orders and calculate the amount due, etc.
But wait, there's more ...
As the wages for unskilled and semi-skilled labour go up and the costs of production go up, the prices of food at fast-food restaurants goes up. Consequently, over time, people begin to buy less fast food than they otherwise would from fast-food outlets and more from the freezer sections of their supermarkets.

The capital-labour substitution that takes place doesn't occur just at the fast-food outlets. It occurs in people's homes as they acquire bigger freezers and more microwave ovens to quickly prepare frozen dinners and snacks. And it occurs in food-preparation factories where zillions of dollars worth of capital are used with very little labour to prepare all the frozen dinners, frozen snacks, etc. that are now available.
Yes, and the managers and workers on the shop floor are going to see opportunities that go beyond the imaginations of economists.  The best we can do is make our students and lay readers aware that indirect consequences are out there and policies, even well-intentioned ones, will induce them.

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