Microeconomics concepts and applications

¶ … Zeynep Ton's A minimum wage hike could help employers, too, in the Harvard Business Review. This article is a speculative piece about the effects of proposed minimum wage increases at the federal level. The author takes a look at companies that superior wages and benefits for their industry. The underlying theme is that this is juxtaposed against a common argument that raising the minimum wage will be universally harmful.

The common argument takes beginner's level supply and demand graphs and uses them as the basis for the claim. The basic elastic supply and demand graph shows that as the cost of a good increases, demand for that good declines. Thus, if the minimum wage increases, businesses will face higher costs, will pass those costs onto consumers, will suffer lower profits or will reduce employment, or some combination of these negative outcomes. The author here is pointing out that the world is a heck of a lot more complex than that. Microeconomics does not end with the study of rudimentary supply and demand graphs, but incorporates a broader range of considerations into its arguments.

The author highlights a couple of those arguments. The first is the "good jobs strategy." The second is the efficiency concept. The two are at times related. First, microeconomic principles can be used to examine the good jobs strategy. The author cites four firms in particular -- Trader Joe's, Costco, Spanish supermarket chain Mercadona and convenience store chain QuikTrip. The author acknowledges that these companies do not have too many similarities, perhaps except for the nature of the goods they sell -- they are all in convenience and food retailing. This industry is characterized by a state of monopolistic competition, wherein the players must find ways to differentiate in order to earn profits, because the industry is highly competitive and customers have high bargaining power (ease of switching and substitution). All of these companies are highly successful in their industries despite their counterintuitive view of wages and benefits.

I do not know much of anything about QuikTrip and Mercadona but I do know about Costco and Trader Joe's. Of all the places to buy your food, these are two of the most differentiated. Trader Joe's has a unique buying experience, strong branding and has developed an almost cult-like following. Their customer service standards are high and the stores have a very uniform feel. This points to staff members that are engaged and knowledgeable, and managers who are well-trained in the company's store management strategies and tactics. Trader Joe's is able to accomplish these things by using pay and benefits to increase their pool of applicants -- they get better people. Then, they retain those people better. It is the same situation with Costco -- they have far fewer employees on the store floor, but every store is run very well and management in particular is skilled. Both companies see the value in having better employees and take steps to attract and retain those people.

This is textbook microeconomics, if more complex than the rote "raising the minimum wage is bad" arguments. The minimum wage argument is not a one-sided equation. There are buyers of labor, but there are also sellers of labor. Those who buy labor at the lowest possible cost cannot expect to get anything other than the lowest possible quality. A company like Wal-Mart has an extensive training and enculturation program to improve the quality of the low-end workers it hires. Other companies appear content to hire lousy workers, turn them over quickly, and otherwise put themselves in a position to be susceptible to minimum wage increases. This, however, is as much strategic choice as it is economics.

One of Ton's suppositions in this article is the efficiency argument. If a company insists on getting low end workers, then this increase in cost will force the company to become more efficient in other areas. This will a) allow it to be as productive with the lower number of workers and b) maintain its prices, giving it a competitive advantage. The latter might be important, because companies cannot always pass on cost increases to their customers -- they may lack bargaining power because of high price elasticity of demand in the industry. If every fast food joint in the food court increases its prices with a minimum wage increase, the one that finds a way to keep its prices the same will have a competitive advantage because of the price sensitivity of the buyers in that situation.

The author even argues that companies that have extra employees -- slack -- deliver better customer service, have fewer mistakes and leave time for employees to contribute to continuous improvement. Naturally, the latter is possible when better people are hired in the first place. The strategy is complex, and can be tricky to implement, but the companies complaining about a minimum wage increase are large, and their management tends to be very talented -- you don't become a national powerhouse company without having great management.