Mind Readings: Inflation and Fair Wages

In today's mind readings, we have two economic things that people seem to really be struggling with. And I don't know why, other than the fact that people just don't understand economics. So people generally want, I think we can generally agree that we want the lowest prices possible when we buy goods, right? You buy a pack of gum, you would prefer that the pack of gum costs as little as money as possible, right? Uh if you can get it for a dollar, okay.

If you can get it for 75 cents, better. So that's anchor number one. Anchor number two, we generally agree that people should earn a living wage. Whatever a living wage is defined in your area. Remember, a living wage is a wage in which um you are spending you are making enough money to afford housing and life's basic necessities.

Generally speaking, financial planners will say that, for example, between 25 and 40% of your uh net income after taxes should be allocated towards housing. So if you make a thousand dollars a month, um your rent or your mortgage shouldn't be more than between 250 and 400 a month. Now, in some places in uh in the United States, for example, that's very achievable. In other places, that is completely unrealistic. You can't even get a cardboard box in Boston or San Francisco for um $400 a month.

Um you can get maybe like a square foot uh in somebody's apartment. And so in those places, a living wage would have to be much much higher. So you end up with this push and pull then. If you pay a living wage to your employees so that they can live where you know reasonably well and you want to offer low prices, you have got to have employees in places where it's not expensive for them to live. Right?

This is the whole point of globalization, the point of outsourcing and offshowing where you find places where people can live on much less money and therefore you can make goods and and sell them for lower prices. If you have to use labor for example that is based in the city of New York or Boston or San Francisco, it's just going to be expensive to have people there. You know, simple example when you look at like the entry level job for an account coordinator at a like a public relations firm it used to be 20 years ago you could pay that person 20 25 thousand dollars a year and that would be okay ish to to get by on that's not the case anymore. Now you're talking you know $40, $45, $500 just because the cost of living in those places is so extraordinarily high. So if you are reliant on that talent uh in that location you're going to have to charge heart higher prices.

So how does how do people reconcile this? Well there's a couple different ways that you can achieve lower prices and still pay living wages. One, of course, is to find people to do the work that cost less based on where their cost of living is. If you're kind of a company or business where uh you can have virtual workers, then the you can get virtual workers pretty much anywhere on the planet, including places where cost of living is extraordinarily low, and workers are still able to get the job done. If you care about or are required to have workers within a specific location, because maybe there's a manufacturing plant, you build that manufacturing plant again, wherever uh cost of living is lowest, if you want to be able to offer those low prices.

And the reason I bring all this up is because I see an enormous amount of uninformed opinion about people on one hand saying we should pay a living wage, and on the other hand, complaining about how expensive everything's getting. Well, everything's getting expensive because it costs more to pay people a living wage, uh, particularly in the larger urban areas. But in general, right now, that plus supply chain issues and things makes everything more expensive. That's just the nature of things. There is one exception to this rule.

The exception to this rule is that if your employees are not human, right? So if you are automating, if you are using robots instead, um, then your cost of living, such as it is, cost of operation is much, much lower because robots don't need health insurance, they don't take vacations. Uh it's less of a challenge if they get injured at work because you can repair them. And in general, are not subject to all the issues that come with human beings, like healthcare, for example. The more you automate, the more you can pay the remaining human workers that you have a living wage, right?

Because if you used to need a hundred employees on the factory floor, um, and you're paying them $15 an hour, but now you've automated and you only need five employees to um to maintain the robots, you can pay those five employees much, much better. Right? That's just again, this is basic economics. The trade-off there is you then have higher unemployment because there are there's less of a need for uh that labor because machines are doing it. So is there a solution that allows you to maintain full employment, pay people a high living wage, and have extremely low costs?

No. That's just that's just basic economics. You cannot violate those basic supply and demand things. Could companies earn less money? Of course they could, could they have tighter margins?

Yes, of course they could. The challenge then becomes how resilient uh are those companies. We found out during the pandemic that companies with extremely thin margins, uh, meaning they were were barely profitable, didn't survive, right? They ran into adverse conditions, they did not have enough money in the bank to to endure, and they didn't have the agility needed to pivot. Um, and as a result, they went out of business.

So there is a certain amount of profitability that that lends itself to resiliency. The more profitability you have, uh the more resilient you are. Now, other folks will correctly point out that there are some companies where people are, you know, the disparity of the pay inequality within the company is dramatically uh almost hilariously bad, where the CEO makes you know 10,000 times what the junior motion employee makes. Until two years ago, yeah, that was kind of the the way things were since the pandemic and the great resignation, that's not as much the case anymore because now companies are essentially starved for employees. And the way to attract employees is to raise wages.

Um someone who is unhappy in their job at ten dollars an hour is still probably unhappy in their job at fifteen dollars an hour, but the rest of their life is happier because they can pay their bills, um, right? They can afford uh a nicer accommodations or more food or whatever the thing is that makes them happy. Um giving just handing somebody a bundle of money doesn't necessarily change that a place is a terrible place to work at, but because the market is so tight right now for for labor that um employees can demand more and and get it, and as a result, prices will go up. So that's economics. Uh there is you will hear people of every political uh stripe yelling about what they think should happen.

Some positions have some merit because they're somewhat based in fact, other positions not so much. But the reality is if you want or you have to pay people a living wage, your prices are gonna go up unless those people are located in different places. So your choices, if you need to maintain margins, are either to use employees that are based in cheaper places, wherever that place may be, uh, or use more automation. But either way, you can't have your cake and eat it too. That's today's Mind Readings.

Thanks for tuning in. We'll talk to you soon.