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A lot of people assume that without a minimum wage law, businesses will give their employees pennies, because they’re looking to increase their profits. I’m going to present a case using a slightly different scenario, involving a character we all know and love: pizza. This is Pizzanomics.
Are there price controls on pizza in your town? A maximum pizza price mandate? No? The last time you bought a pizza, did it cost one million dollars? Two million, three million? Even if you didn’t pay a million, you must have seen an ad for a pizzeria charging that much – right? The business owner has a profit motive. Why doesn’t he charge a cool milly for a pizza?
Instead of paying a milly, you probably paid a price that was more or less consistent with the quality and convenience of the pizza. You probably paid a little more if you got it after 10pm, and you probably paid a little more if it was a gourmet pizza.
Let’s say you find a pizza place, and it’s the only one open. They have a pizza for $30 delivered. If you really want a pizza, maybe you buy it. What if the price is $50? You know an Indian place where you can get two curries and coconut rice delivered for $25, so you call them up instead. Maybe the price of the pizza is so high that everyone ordering in decides they will opt for Indian or Thai instead. In the coming weeks or months, will the pizzeria change their prices? What will happen to them if they don’t change their prices?
The next weekend it’s 2 a.m. and you’re feeling in the mood for a pineapple eggplant supreme. You call up the pizzeria and they say their price is still $50. Then you check your mail and realise there is a place that will deliver a supreme for $20. Assuming the quality of the pizza is similar, how do you think the first pizzeria will react when they find out their prices are being undercut? Maybe they will match the price if you mention it. Maybe they will beat it. Maybe they will bring their advertised price down to $25, considering they still have an established name. One thing they will most likely not do, is keep their prices the same and refuse to negotiate.
Why is this important? Are there price controls on labour where you live? A mandatory minimum wage statute, or a union agreement which is backed up by the force of law? The last time you started a job, or in your current employment, did you or do you get paid minimum wage? Most likely you get paid more than minimum wage. Only 2.5% of workers in the USA earn the minimum wage or less. Why do businesses pay more, even though they’re not forced to? The same reason a pizzeria won’t charge a million dollars for a pizza.
Instead of being paid a dollar a day, or being paid the minimum wage, you’re probably paid something that’s consistent with your skill level and convenience of your job. If you do something that requires little training, you probably get paid minimum wage. If you have more experience at it, you probably get paid more than minimum wage. If you do something that requires a lot of training or many years of practice, or if you do shift work, if your work is dangerous or you work away from home, you probably get paid significantly more.
There are less people who are willing to work a dangerous job, willing to do shift work, less people who have certain specialised skills. The decreased supply means the price must increase to match it. All of the employers are competing for the labour, just as the pizzeria is competing for your custom.
And that is Pizzanomics.