Listen to the full episode here.
John Norris (00:30):
Well, hello again everybody. This is John Norris at Trading Perspectives. As always, we have our good friend, Sam Clements. Sam, say hello.
Sam Clement (00:41):
John, how are you doing?
John Norris (00:41):
Sam, I’m doing fantastically. All the moreso because today is Halloween.
Sam Clement (00:43):
It is Halloween. It sneaks up on you.
John Norris (00:44):
I’m dressed up as a guy in his mid-fifties, works at a financial services company. That’s how I’m dressed up today.
Sam Clement (00:52):
It’s a great costume.
John Norris (00:54):
Listen, I resemble that.
Sam Clement (00:56):
You’ve perfected it.
John Norris (00:57):
You got your little girl dressed up for tonight?
Sam Clement (00:59):
She’ll be a Piglet tonight.
John Norris (01:01):
That’s awesome.
Sam Clement (01:02):
You can do that at under a year old.
John Norris (01:04):
Well, I think when Annie was your daughter’s age, we dressed her up as a pea in a pod or something like that… photo ops with grandparents and then back at the house. That’s pretty much what’s going to be.
(01:14):
In any event today I wanted to talk about something a little bit different, a lot less fun than talking about babies in Halloween costumes. And that is just something I’ve noticed on my X feed, which I don’t go to very much any longer because I was blocked years ago for saying something about Bernie Sanders ability to understand the Econ 101. They still haven’t unblocked me for that. But what I’ve noticed on Threads and other message boards and what have you is all this talk about living wages. And “it’s important for living wages,” living wage this, living wage that, minimum wages and how companies should bite the bullet and just pay their employees more. And just all this, just talk about paying workers more and the more I read it, the more I’m thinking to myself: this sounds like people’s hearts are in the right place, but it also sounds like perhaps maybe people don’t understand the way the world actually works.
Sam Clement (02:13):
Well, I think that’s the tough thing with a lot of economic issues is I mean in general, everyone paint with a broad brush here, but in general, everyone has the same large goals. I mean, we want people to be able to have a job where they’re able to afford a decent quality of life at least. I mean, who’s disagreeing with that? Right? But the problem is when you start getting into economics, a big part of what you learn in studying it is unintended consequences, and that’s where things make the issue tougher, especially when we’re dealing with a country that is so big, so vast and so different all throughout. It makes a conversation about minimum wage, tougher.
John Norris (03:00):
It makes a conversation about minimum wage, tougher. The living wage is just a nebulous term and concept. I have a difficult time wrapping my brain around. I think I know what people are meaning, but at the same time, sort of along the lines of what you were alluding to with a minimum wage of “one size fits all” for a country and economy our a size, is a fool’s errand. I mean you could have a minimum wage of 20 bucks in the Bay Area and you know what?
Sam Clement (03:26):
Probably not doing a whole lot.
John Norris (03:27):
Probably not doing anything. You’re probably setting the floor for labor below the clearing price for it. So that really doesn’t matter. However, you put the minimum wage at 20 bucks an hour in say Dallas County, Alabama, which is where Selma is, and everyone’s going to be out of a job.
Sam Clement (03:46):
As confusing as the minimum wage conversation can be as a country, the economic principle of it is pretty simple.
John Norris (03:53):
Yes.
Sam Clement (03:55):
If you’re setting the floor too high, that’s going to cause a lot of pain and if you’re setting the price too low, which would be the Bay Area in this example, it’s not doing anything, which is frankly how it’s already been in most areas. The minimum wage is already, that floor is already too low.
John Norris (04:12):
I mean, if you were to take it, the federal minimum wage, which is $7.25 / 7.50,
Sam Clement (04:16):
Hasn’t been adjusted.
John Norris (04:19):
You could probably go on there if you really wanted to go to the BLS, Bureau of Labor Statistics, or the Census Bureau, and really dive down into the data trying to find a number of American workers that are working full-time, 35 to 40 hours, a week trying to make a go of it at $7.25 an hour. The number is going to be in the hundreds. Hundreds.
Sam Clement (04:45):
Yeah.
John Norris (04:45):
Not hundreds of thousands. I mean it is just not there. But going back to the minimum wage, talking about raising it and raising it and raising it, one of the things that you remember at the beginning of the year, I think it’s out in California – I know it’s out in California – they raised the minimum wage for fast-food workers to 20 bucks an hour. There’s been scant evidence that this has led to a huge spike in loss of jobs.
(05:10):
And that’s fine. I mean, if you raise a minimum wage, that doesn’t mean a bunch of people are all of a sudden you’re going to have a huge number of job losses in that particular sector, but what it does mean is the configuration of the labor force changes. Back a couple years ago when California actually increased its minimum wage throughout the entire state, at the end of 2022, the unemployment rate for 16 to 19 year olds was around 11.3%, Sam. And when they increased it to 15.5% from something like 11 or 12 bucks an hour, you saw though the unemployment rate for 16 to 19 year olds start to shoot up and then when all of a sudden at the beginning of the year, not all of a sudden, I say that way too much. Then at the beginning of the year, they increased the minimum wage to 20 bucks an hour for fast-food restaurants, which you intuitively think might have a lot of 16 to 19 year olds, that unemployment rate for 16 to 19 year olds in California is like 22+ percent.
(06:12):
But when you take a look at the number of fast food jobs in aggregate in the state, there hasn’t been a ton of job loss. However, the people that would’ve historically have taken them are out of work. You have a surplus of workers. That’s what happens when you set the floor for labor above the clearing price. You just have a surplus of workers willing to work at that particular job. So instead of 16 to 19 year olds filling in after three o’clock or whenever they can get off work … after practice or college students working part-time, those people are now squeezed out. People that were making 15 or 16 bucks an hour in other sectors are now putting frozen potatoes in fryers.
Sam Clement (06:53):
If the fast food workers, as an example, were making $10 an hour and you’re already making $15 to 20, that’s where you’re comfortable with, and now everything or a lot more jobs are above in that $15 to 20, you have a lot more options there. So that complexity is not only just states and cities, it’s sectors, it’s age demographics. I mean all these things change and push people out or into different parts of the labor force and that’s what it makes it tricky.
John Norris (07:31):
Yeah, well, going to that labor making of making 15, 16 bucks an hour, let’s say threading bolts and screws. Making $15, 16 bucks an hour there, doing that type of stuff, not a lot of fun, complete repetition, but then there’s also possibility for bodily harm. Whenever you work in a machine shop, that’s what you’re going to find. So, when the government says, okay, now you can go make actually a little bit more money, frying burgers or working the drive-through… what are you going to do?
Sam Clement (08:05):
Yeah.
John Norris (08:06):
So that’s kind of what’s happening. That’s what happens with the minimum wage. You really are setting the floor for labor. You set it above, as Sam alluded to, the clearing place for labor. You’re just getting more people looking for work at that particular wage. If you set it below the clearing place for labor, it’s worthless. It’s meaningless. And I would tell you, I think when you take a look at California, take a look at other states that have increased their minimum wage and then you have economists from the state university say, Hey, we’re not really seeing any significant job losses, or what have you, you have to take that with a grain of salt.
Sam Clement (08:38):
Incomplete data.
John Norris (08:38):
It’s incomplete data where it’s data that they’re not willing to show because if you were to go to the Bay Area, yeah, you probably haven’t seen a whole bunch of fast food jobs lost.
(08:48):
However, if you go to Calexico down there on the border with Mexico at that wage, you’re probably seeing a lot of fast food workers out of work or a lot of McDonald’s closing, if you catch my drift. And so when you see that, it’s kind of frustrating to me because when you are raising minimum wages, when you’re talking about living wages as including them at a level that’s above the clearing price for labor, it might be well intentioned, but what you’re really doing is harming those employees that you want to help. Because sometimes, and it might sound like evil in people’s ears… because sometimes and with some workers, their comparative advantage in the workforce is their ability or willingness to work cheaper than someone else.
Sam Clement (09:36):
Yep. And this may not be the perfect example, but we’ve seen good ways for wages to go up. I mean, locally we’ve seen it when companies like Amazon come in and need thousands, literally thousands of workers and they are competing. That’s an area where they compete and that helps drive wages up. I mean the post COVID, we’ve talked about this plenty of times. The difficulty for restaurants to hire workers, and we’ve seen wages go up because people just demanded higher wages. There was a strong enough economy to where the labor force was in high demand. When you’re in high demand, you’re going to get paid more wages or higher wages.
John Norris (10:20):
I mean, you bring up Amazon, that’s a great case in point here in Western Jefferson County in a industrial former industrial city called Bessemer, Alabama. They have a distribution center, and at one point, I think it was the distribution center for Birmingham metropolitan area, which is about 1.2 million people, for those of you who aren’t familiar with us. They have now put up another one on the eastern side of the county. But in Bessemer, when they opened that thing up, I think they were paying 15 bucks an hour. That’s what I remember. Minimum wage share in our state is the mandated federal one at $7.25 and Bessemer, that whole area of our county’s is disadvantaged. Some of the poorest sections of Jefferson County and Alabama is already a poor state. So when Amazon comes in paying 15 bucks an hour, this might be hard for people listening in Los Angeles, but 15 bucks an hour was a great job or is a great job in Western Jefferson County, Alabama. People are happy to have it. So but take a look at if you’re in CAC or Seattle or some other such places where 15 bucks an hour, it gives you a shotgun shack without any hot water.
Sam Clement (11:33):
That’s $2,400 a month.
John Norris (11:34):
Yeah. So when you take a look at that, believe it or not, that’s a living wage. That’s actually a bump. That’s a raise for people in that section. So when the union came in, you remember that ?
Sam Clement (11:46):
I do.
John Norris (11:47):
The union came in trying to beef up the wages and what have you. The people in West Jefferson County shot it down because, and I remember seeing some interviews saying, “I don’t want anything to screw with a good opportunity.” And so my job here, I was making 10 bucks before, now I’m making 15. I don’t want to mess with that.
Sam Clement (12:10):
They came in, they needed a ton of workers and they had to compete for talent. And the two ways that – and this is not just an Amazon thing – I mean, we ‘see this with large companies that need large amounts of people, whether it’s a Chipotle, Starbucks, I mean Chick-fil-A, Amazon. These companies have to compete for labor and the two ways they largely do it, one are wages. That’s the easier (ish) one. The second one is opportunities for advancement. And so it seems to me the best way to, I mean if you’re just forcing companies to pay higher wages, they’re not really competing for workers. They’re not going out and saying, Hey, we have to compete with these others for these employees. We need to offer better career advancement opportunities. You get none of that. The way to do it is to, and again, COVID is not necessarily the best example, but it was a period where labor was in high demand and you forced companies to compete and offer better opportunities for labor.
John Norris (13:09):
Who can argue with that or I’m sure plenty of people would argue with you on that, but people that probably don’t have a degree in economics like you do. In talking about all this, I keep on going back to the things that I’ve seen on social media in the past, and it’s hard to tell who’s actual a real person having these kind of comments and what’s a bot. I mean, it truly is. I mean, there’s so much of this out there on my Thread that either Instagram has got some very bad algorithms about what I want to see or they just know it’s just going to cause me to have a stroke reading some of this stuff.
(13:44):
Now, a few years ago, I remember I was reading, I forget what social media platform, some guy, some virtue signal out there really was, he was patting himself on the back for being such a magnanimous guy, talking about how he had been a bookseller for years and he had been in business for 20 years and he prided himself on being able to pay his employees a living wage. Then he also commented, I had to shut down my business a few years ago due to someone else. The problem was with someone else, someone else was screwing him, all that type of thing. I’m going, man, you just are contradicting yourself. You’re paying your workers some nebulous living wage when you can’t control your revenue the way the businesses work or you have to, I mean, it is revenue and expenses. That’s it.
(14:39):
Revenue and expenses, and the bottom line profit is what’s incenting you to keep going. I mean, we could make it more complicated than that. However, with say, like a book seller, you’ve got two costs, cost of good sold. You’ve got the cost of the books that you have to sell, cost of revenue, and then you have your SG&A, what you’re paying your employees, marketing and what have you. Since you can’t control the revenue, you can’t control people coming in and buying your books, and the cost of the books from the publishers are what they are.
(15:08):
The only real lever that you can pull to ensure that you stay in business is your SG&A.
(15:13):
How much you pay your employees and other marketing, what have you. So if you were out there mandating that businesses, who can’t control their top line, increase their big lever and don’t have the ability to move that lever, it can only move in one direction. It’s anathema to profitability, which ultimately is going to be anathema for economic activity because if there’s no incentive to make a profit or it becomes more difficult to turn a profit, why would anyone out there go into business or open one up if all of a sudden, let’s say they come across Washington, says, Hey, unconscionable profitability, unconscionable profitability, you should only make 4%. But you should pay living wages, everyone, minimum wage, 30 bucks an hour, whatever it is. I’m going to say that this is all you can generate. Why would anyone go into business when if I’m maxed out at 4% or something like that, you know what I’m going to do? I’m going to go take my cash and go get 4.6% in the Treasury Bill. I mean, seriously. Why wouldn’t I take my money, or what’s left of it, and go buy the SPY exchange traded fund?
Sam Clement (16:29):
We’ve seen this in other countries. This whole, that example you’re giving, is it diminishes the reason to take risk.
John Norris (16:38):
Yes.
Sam Clement (16:38):
And we’ve seen that in other countries. I mean, Japan’s kind of, to me, the shining example for that, when there is not a lot of incentive to go out and take risk, people won’t do it, and economies don’t grow. And you mentioned this top versus bottom line thing, needing to grow. You have to grow the top line for things to work out
John Norris (16:58):
Without a doubt.
Sam Clement (16:59):
Especially if these costs are going to grow, and this isn’t unique to companies with minimum wage. It’s the conversation around the US debt. I mean nothing works long term. These artificial bumps in the costs don’t fix problems. The only way to get all this to work to get employees to start making that living wage, whatever that actually is…
John Norris (17:24):
That’s a nebulous term.
Sam Clement (17:25):
Is through growth. I mean, we’ve seen this in these periods of strong economic growth without intervention from the government, at least in wages. That’s where we see real wage growth. I mean, we’ve seen unemployment rate in the 3’s recently.
(17:42):
We’ve seen real wage growth on the bottom quintiles because of that. I mean, it is only way to have long-term sustainable impact on wages, positive long-term impact.
John Norris (17:58):
I mean, I think you’re right.
Sam Clement (18:00):
I just don’t get how that’s really debatable.
John Norris (18:03):
Well, listen, apparently it is.
Sam Clement (18:04):
It’s like these short-term stop gaps with unintended consequences happens anytime you let the government step in and mandate something, it’s either going to do nothing or cause consequences.
John Norris (18:15):
Well, let’s go back to that stat that I seemed to pull out of the ether earlier regarding the unemployment rate for 16 to 19 year olds in California. This after they’ve jacked up the statewide minimum wage, then the minimum wage for fast food workers, when all of a sudden those people that want to have a job, those 16 to 19 year olds, and they’re stopped from having the ability to do so, or a huge chunk of them – what they don’t get is that experience, and believe it or not, whatever marginal job skills they have, which will end up benefiting them in the future, you’re keeping those people from actually developing in the workforce by mandating a wage that is above the clearing price for their labor.
Sam Clement (19:01):
And there’s a part that some people I think don’t like to hear, or may sound harsh, but there are certain jobs that are not meant to be careers.
John Norris (19:11):
Yes.
Sam Clement (19:12):
And again, the government stepping into those
John Norris (19:16):
And making it a possibility, I mean, if you were to ask Ray Crock whether or not he thought that one person putting frozen potatoes and boil and grease would be able to support a family of four off of what they’re paying per hour, he probably would’ve said, no, no, that’s not what we’re intending here.
Sam Clement (19:37):
And so this artificial bump up, if that becomes, Hey, this can be a long-term kind of thing,
John Norris (19:44):
For 20 bucks an hour, it probably might be.
Sam Clement (19:47):
Yeah, this can become a long-term thing for them, then there’s no economic growth. And then because of that, there’s no advancement opportunities. Again, going back to my example of labor, when companies have to compete significantly for labor, that’s where opportunities for advancement come from. I mean, we’ve seen, Starbucks is a great example. They have tons and tons of employees. Their big focus now to compete, because they’re competing with a ton of companies, is opportunities for advancement. It’s free college if you work here long enough.
John Norris (20:20):
Same thing with Chick-fil-A.
Sam Clement (20:22):
None of that happens if you artificially force higher wages.
John Norris (20:26):
Yes. I mean, the thing is, and that’s what…
Sam Clement (20:28):
Because you have nothing to compete over anymore.
John Norris (20:30):
Well, listen. I mean that’s what happens. And if someone were to come in and mandates significantly higher minimum wages, or I’ve used the word nebulous for living wages, and I’ll explain myself in just a second. When you increase or, by law, by edict what a person gets paid in terms of salary or hourly wage, whether you realize it or not, I mean your heart can go out to these people. Those businesses that have to pay that higher hourly wage are just going to make up that cost savings someplace else or that cost someplace else.
Sam Clement (21:07):
Two ways.
John Norris (21:08):
I mean, it’s going to be, Hey, you know what? We used to have the silver plan for the health insurance. We’re going to bronze, or we used to have a 4% match. Now we have a 2% match or no match at all.
Sam Clement (21:20):
Or, Hey, we’re going to have five people typically work in the store right now. We’re going to stretch it to three of y’all and you’re just going to have to work harder. Or we’re raising prices.
John Norris (21:29):
Because that’s the way businesses work. At the beginning of the year, businesses will come out and say, this is about how much we need to earn this year. And believe it or not, for people out there thinking that billionaires are bad and corporate America sucks and all that stuff, what is the average net profit margin for companies in the S&P 500, 11%?
Sam Clement (21:47):
Something like that?
John Norris (21:48):
12% ?
Sam Clement (21:49):
You have plenty of them in the low single digits.
John Norris (21:51):
I mean Walmart’s 2? I mean, grocery stores are two stores are one, two or three? So when you take a look at it, if you were to ask the average person on the street and say, Hey, you’re a business owner, and what kind of rate of return would you want to see? People probably go, well, I don’t know, 15%, 20%, as much as I possibly can. And that’s themselves. So when you take a look at that’s what corporate America is making anywhere from 10 to 15%, it’s probably not as much as people out there yelling about the greed of corporate America, that’s probably not what they think. What they’re really thinking are is the fistful, I mean, fistful, you can write it down on two sides of a piece of legal paper. The number of publicly paid CEOs that get really frankly kind of an unconscionable amount of money, and they extrapolate that throughout the entire economy and it’s completely unfair because the best business owners are not out to screw their employees because you know why? Because they want to ensure that they have as productive of workforce as they possibly can because productive workers will generate more output, which is ultimately going to drive the bottom line.
(23:07):
Now, before we go, I’m going to tell you a little bit about the reason why I say the term living wage is nebulous is because it means different things to different people.
(23:19):
It is fine to sit there and say, I know it when I see it. However, when you’re demanding something as vague as that and you’re forcing companies to pay up, you better come up with a better definition of, “I know it when I see it,” or a family of four, all that type of what you need to do is quantify that. I think everyone say roof over their head, clothes on their back, food to eat. I think everyone would agree that that’s basic standards. However, two cars, is that part of a living wage? Vacation to the beach? Hey, that sounds fantastic. Is that part of a living wage? Four cell phones, satellite tv? I mean, what’s the living wage? What is it? If you can’t define it, don’t ask me to pay for it. I guess that’s the best way that I can kind of describe it and why I’ve called it nebulous.
(24:07):
Now guys, today we have talked about something that is getting a lot of press as we lead up to the very 11th hour on the election and just really just taking a look at everything I see out there on social media, just like I’ve kind of got to get this off my chest somewhere and Sam’s got to get it off his chest or I told Sam he needed to get it off his chest here this morning. And so that’s the reason why we chose to talk about this. Be careful with people that talk about jacking up minimum wages. Be careful with people talking about jacking or just calling out living wages, all that stuff. All that stuff is great, but there are economic consequences to everythin. Because businesses and even nonprofits are in the business of making money and anything which is anathema to that will have unintended and undesirable consequences.
(24:50):
It’s just as sure as the nose in my face and as sure as the sun will come up in the east tomorrow. Now, with that, guys, thank you all so much for listening. We always love to hear from you all. So if you have any comments or questions, please by all means, let us know. You can always reach us at Trading or you can leave us a review on the podcast outlet of your choice. If you’re interested in reading more or hearing more of what we got to say or how we think, you can always go to oak worth.com, O-A-K-W-O-R-T h.com. Take a look underneath the Thought Leadership tab and find access to all kinds of exciting information. Scot free. By the way, find access to all kinds of exciting information, including links to previous Trading Perspectives, podcasts, links to our newsletter / blog common sense links to our quarterly analysis and magazine Macro Market and define stuff there. Our advisory services group are led by Mac Frasier. All that stuff is out there as well. So with that, Sam got anything else you want to talk about this very exciting topic. That’s all I’ve got. That’s all I’ve got today too. Y’all take care.