Mind Readings: Inflation and Fair Wages

We generally agree that people should earn a living wage. We generally agree that we want the lowest prices possible when we buy goods. These are more or less mutually exclusive UNLESS automation is in the mix – but then you have higher unemployment. So which is more important?

Mind Readings: Inflation and Fair Wages
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Christopher Penn 0:15

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 and we buy goods, right, you buy a pack of gum, you would prefer the pack of gum cost as little money as possible, right? If you can get it for 1.

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 the wage in which 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 net income after taxes should be allocated towards housing.

So if you make1,000 a month, your rent or your mortgage shouldn’t be more than between 250 and 400 a month.

Now, in some places in, in the United States, for example, that’s very achievable.

In other places, that is completely unrealistic, you can even get a cardboard box in Boston or San Francisco for 400 a month, you can get maybe like a square foot 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’ve 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 offshoring, where you find places where people can live on much less money.

And therefore you can make goods 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 up like a public relations firm.

It used to be 20 years ago, you could pay that person 2025,000 a year.

And that would be okay, ish to get by on.

That’s not the case anymore.

Now you’re talking 4045 $50,000, just because the cost of living in those places is so extraordinarily high.

So if you are reliant on that talent in that location, you’re going to have to charge higher prices.

So how does how do people reconcile this? Well, there’s a couple of 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 costs less, based on where their cost of living is, if you’re a kind of company or business where 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 cost of living is 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, 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 the rule is that your employees are not human.

Right? So if you are automating, if you’re using robots instead then Your cost of living, such as cost of operation is much, much lower because robots don’t need health insurance, they don’t take vacations, it’s less of a challenge if they get injured at work because you can repair them.

Christopher Penn 5:15

And in general, and 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 need 100 employees on the factory floor, and you’re paying them 15 an hour, but now you’ve automated and you only need five employees to 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 that labor, because machines are doing it.

So is there a solution that allows you to maintain full employment pay people highly 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, because they have tighter margins? Yes, of course they could.

The challenge then becomes how resilient are those companies, we found out during the pandemic, that companies with extremely thin margins, meaning they 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.

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, 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, almost hilariously bad.

Where the CEO makes, you know, 10,000 times with the, the junior most employee makes until two years ago, yeah, that was kind of a the way things work.

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.

You can use someone who is unhappy in their job at10 an hour is still probably unhappy in their job $15 Now, but the rest of their life is happier, because they can pay their bills, right they can afford a nicer accommodations or more food or whatever the thing is, that makes them happy.

Giving just handing somebody a bundle of money doesn’t necessarily change that places terribly to work out but because the market is so tight right now for for labor, that employees can demand more and and get it and as a result, prices will go up.

So that’s economics, there is you will hear people of every political 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 going to 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, or use more automation.

But either way, you can’t have your cake and eat it too.

That’s today’s mine readings.

Thanks for tuning in.

We’ll talk to you soon.


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