Living Wages are not only affordable -- they help businesses

    It is often said by spokespeople for businesses that "we cannot afford to pay our workers living wages". However, there seems to be no difficulty in paying for increased costs for materials, or energy, or advertising, or increased costs of real estate, or any other such item. As I discussed in my blog about "supersizing", there are a number of things that go into the cost of an item versus its price.

    The composition, or gathering of different parts, of the cost of an item will vary depending on the item. Some things are "labor intensive" which means that labor costs are a higher percentage of the cost. Others are based on scarcity -- or an aspect of "we have what you want -- who is willing, and able, to pay the most for it". In general, for many items, the amount of labor cost within the total cost for things that are actively made by people is a minority of the cost -- call it 30%. For stores that have high "turnover" (things sold quickly and new, replacement, items put on the shelves for sale again), labor costs are much less (such as for mass merchandizing stores) -- perhaps 10%.

    For our discussion, let's just say that labor costs are 25% of the cost of the item.  Doubling the labor costs would NOT double the base cost of the item to sell. It just adds an extra 25% -- so the base cost is now 125% of the former price. Let's say that the retail price (price charged to a general customer) was twice that of the base cost -- or an extra 100%. This means that the price is 112.5% of the original price (100% original cost + 100% original profit + 25% extra labor costs gives 225% which is "normalized" (brought down to a comparison against 100%) to 112.5%.

    Now it is possible (even likely) that the merchant might want to keep their percentage profit rather than the actual amount. So, in the above comparison, the merchant got the same amount of profit as base cost. If we increase the base cost by 25%, the total amount doubled ends up at 125% of the original price (100% of original cost + 25% extra labor costs is equal to 125%; doubled gives us 250% and normalized brings it back to 125%).

    We can see that even doubling the labor costs does not add a huge percentage to either the base cost or a retail price without penalizing the retailer. It can be argued that a 25% increase is still something that people are not willing to pay. After all, people do comparison shopping and retailers have sales, and price cuts (temporary or permanent). If Item X is sold at one store for $1.25 and the very same item X is sold at another store is sold for $1 then many people will choose to buy for $1. What would make people able, or willing, to pay more for products?

    The first reason is that the above analysis is a simplification. Labor costs are NOT the same as wages. Although the blog on "supersizing" uses labor costs as a lump sum, labor costs are actually a combination of wages, benefits, the cost to find someone to work at the job, training, and other matters. Thus, doubling wages does not double labor costs. In reality, it will reduce "turnover" within the workplace and reduce the amount needed to find people to do the job and the training. So, a doubling of wages may actually only cause an increase of 20% overall (these numbers are all examples but probably in a reasonable range) so the product would only cost $1.20.

    The second reason is what do people do when they make more money? Well, hopefully they will save some more. But almost everyone would also spend more. The products may cost a bit more but the business is also creating more customers and a percentage will buy from their store.

    A third reason is that it creates a positive image. I am sure you can think of a company who does not treat their employees well and relies on charities and the benefits paid by taxpayers to subsidize the wages of their employees. Similarly, we can also think of companies who pay their people more than what is "required" and are known for treating their employees fairly and well. Because of these three reasons (and other reasons) these "good neighbor" companies often make a better profit than the ones who sponge off of the taxpayers to increase the owners' wealth.

    The last reason leads into a future blog (maybe the next one). And that is -- it isn't always a matter of "nice people finish last". The above three reasons come into play to help people who do the good, proper, thing benefit financially. Regulations also help -- because the companies who care about people (and environment, and health, and ...) are not penalized because they operate "on a level playing field". That is, if everyone is required to do something good then no company is at a financial disadvantage for doing what is good. Everyone has the same requirements.

    Can you think of other benefits to a company for paying living wages?