Where You Can Make $56,000 a Year Delivering Pizzas

Few statistics are more debated than unemployment numbers. The former head of the Bureau of Labor Statistics (BLS), the agency publishing unemployment numbers, estimates the figures are probably 3% too low. The unemployment numbers are based on people actively looking for work. The first figure shows the percentage of labor force participation. Each horizontal line on this chart represents 2 million people. Since the official start of the 2008 recession, 6 million fewer people are labor participants. Four million fewer participate since the recession officially ended in mid-2009. Think that a Bachelor’s degree protected a labor participant? The second figure shows an even smaller percentage of college graduates in the labor force though the phenomenon started before the official end of the 2008/2009 recession.

Even considering the economic recovery, college grads are not participating in the labor force as expected. What group increased their participation in the labor force through the recession? Why none other than those 55 and older (third figure). In fact their participation rate has been on the increase since the mid-1990s and has remained at least flat during the “recovery”. This should temper the comment about labor force participation being lower due to the retirement of Baby Boomers. They’re baaack.

There are several implications for business. First, there is an ample pool of labor. There are instances of specialized positions in short supply but in general there are plenty of workers on the “sidelines”. Those sidelines are no doubt made more comfortable with extended unemployment insurance though even 99 weeks arrives eventually. Troubling for college grads is their decreasing participation in the labor force given exploding college debt now north of $1 trillion.

This condition amplifies the number of workers available for business that are trained beyond a high school diploma. The greater participation rate of those 55 and older indicates additional competition for positions where a young person or college grad may vie for the same job.

Even apparently glowing job reports merit scrutiny. For example, a press release [Jan 2014] of a net 236,000 increase in the employment number did not publicize the fact 400,000 positions were part-time. Part-time usually implies lower total income and reduced, if any benefits. The increase in part-time employment is no doubt contributing to stagnant median household income and a new high of 50 million participants in SNAP (Supplemental Nutrition Assistance Program)…aka food stamps.

The combination of workers on the sidelines, the entry of those who may be in “retirement”, and stagnant household income translates into flat to downward wage pressure. Not only is there an ample supply, but labor has a strong chance of being seasoned, trained academically or both. With such a broad choice, the cost of labor should remain steady to lower on a unit cost basis. There will certainly be specific skill sets in short supply but in general, labor availability is ample.

Given the aforementioned labor conditions, what effect will proposed minimum wage changes have on the overall employment numbers? First, I ask you to consider the following question. What should the minimum wage be? The federal government thinks it should be $7.25/hr. Among the 50 states, there is little agreement surrounding the minimum wage. South Carolina does not have a state minimum wage while the State of Wyoming thinks it should be $5.15. Several jurisdictions including California, the District of Columbia, Oregon and Washington believe it should be $9.00 or higher.

In the 10-year period from 1998 to 2008 the federal minimum wage grew from $5.15 to $5.85. The civilian labor participation rate contracted from 67% to 66%. From 2008 to the present, the minimum wage grew from $5.85 to $7.25. The corresponding labor participation rate fell to 63%. I am not suggesting a perfect correlation between minimum wage and labor force participation. In fact, the minimum wage increased from 1978 to 2000 while labor force participation grew along with it. There have been other in-depth studies on the relationship between employment and minimum wage and they are not always in agreement. But the question remains. What should the minimum wage be and who should determine it?

Stanley, North Dakota is a town of roughly 2,000 people situated in the northwest corner of the state. Recently an ad appeared in Craigslist soliciting for a pizza delivery/pizza maker. Nothing unusual there. What is unusual was the $56,000 salary they projected for a 49-hour work week (along with paid vacation bonuses and matching contributions to a savings account).

In a similar vein, Walmart offered jobs for $17/hr, well above the state minimum wage of $7.25. Why the largesse? Stanley sits on the Bakken oil formation. The boom times are in play for the Dakotas who are benefiting from new technologies that unlock vast oil reserves. The pizza retailer is willing to project $56,000/year earnings ($36k salary and $20k in tips and delivery charges) because they are confident in being profitable and not due to a government mandate.

Each individual employer has the best ability to diagnose the wage they are able to pay and still make a profit. The pizza retailer could advertise the position for the state minimum wage rate and estimate a yearly salary of about $18,000. Instead, they know they can make a profit with a salary of twice that figure.

If government mandates a wage for a minimum skill level, what might the options be for the employer? The employer could raise the price of their goods and services. Unfortunately, there is little pricing power in the market. As noted in The Sentinel Financial Report, the Fed’s favorite price index, the Personal Consumption Expenditure (PCE) has been trending down during the economic recovery. This downward trend reflects depressed consumer demand and with it, decreased pricing power. In France, where the minimum wage is an equivalent $12.12/hr, McDonald’s replaced some of their workforce with kiosks. Visitors to retailers like Walmart, Lowes, or perhaps your local grocery store can attest to self-checkout lanes where one employee oversees up to four registers.

The use of automation is primarily to increase output per unit of input. If human labor (unit of input) was less expensive for the same output as the automation, the business owner likely selects human labor. Some retailers have concluded that automation is a less expensive option in the face of a mandated wage rate.

If the goal of mandating a minimum wage is to derive an acceptable standard of living, perhaps it should be $20 or $30/hr. If you were a business owner and government forced you to pay your least skilled employees $30/hr when they are now paid $7.25/hr, how would you react? How would organized labor respond if a wave of lower skilled jobs emerged paying wages similar to their own membership?

Left unfettered, a market wage rate is the point where those willing to work make their labor available to those willing to employ. One thing is certain. A minimum wage can deprive people of their right to earn a living commensurate with their skill. If government mandates a minimum wage that is higher relative to the amount of goods or services produced, businesses will seek alternative sources of labor inputs. In Stanley, North Dakota pizza makers are going to be making serious dough (pun intended) but only because they can be employed profitably. If government policy aims to increase the country’s labor force participation rate, a higher minimum wage is unlikely to be the solution.

Regards,

Jim Mosquera
for The Daily Reckoning

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