, , , , , , , , , , , , , , , , , , ,

Over the last month, two noted and anything-but-radical economics commentators have voiced an idea that’s really radical. How radical? It could produce much more fundamental change in the U.S. economy than any actual or even potential effects of the CCP Virus if its policy implications (which they may not be fully aware of) are acted on.

The idea is that the pre-virus economy (they didn’t specify for how long, but there’s no reason to believe the development began recently) was highly dependent on creating huge numbers of crappy, dead end, low-wage jobs, and that a combination of labor cost-boosting factors – like worker shortages created largely by sudden economic reopening, higher minimum wage requirements, and mandates for businesses to adopt more family-friendly practices – is bringing that era to an end.

The implications: Enormous numbers of the companies and even critical masses of entire industries relying on such jobs may go under, and that nothing should be done to restore the previous status quo because in economic terms (which are also reflecting the public’s non-economic preferences) those exploitative business models are simply becoming thoroughly uncompetitive.

In other words, especially in sectors like restaurants, retail, hospitality, and elder care, where the quality of personal service is valued by customers (not that they always get the quality they want), many and even most employers simply may find significantly higher labor costs unaffordable. And many may not be able to persuade enough customers to pay the higher prices they’d need to charge to stay afloat. So they wouldn’t – and good riddance.

The analyst who first led me to these thoughts was Daniel Alpert, a Cornell University Law School fellow, economist, and Wall Street investor. In a June 1 New York Times op-ed article, he argued that:

The chronic problem we face as we put Covid-19 in the rearview mirror is that the U.S. economy before the pandemic was incredibly dependent on an abundance of low-wage, low-hours jobs. It was a combo that yielded low prices for comfortably middle-class and wealthier customers and low labor costs for bosses, but spectacularly low incomes for tens of millions of others.”

Less than two weeks later, The Times published another article, by columnist Ezra Klein, that similarly contended:

The American economy runs on poverty, or at least the constant threat of it. Americans like their goods cheap and their services plentiful and the two of them, together, require a sprawling labor force willing to work tough jobs at crummy wages….We discuss the poor as a pity or a blight, but we rarely admit that America’s high rate of poverty is a policy choice, and there are reasons we choose it over and over again.”

Klein also wrote about some of the likely tradeoffs of mandates that created higher labor costs: “[S]ome small businesses would shutter if they had to pay their workers more. There are services many of us enjoy now that would become rarer or costlier if workers had more bargaining power.” But this prediction seems greatly to low ball the downsides and the collateral damage.

For example, according to this normally reliable source, the number of restaurants in the United States numbered about 660,000 in 2018. That’s more than 18 percent of all the 3,618,550 businesses with more than five employees that the Census Bureau says existed in the United States as of 2019 (the last pre-pandemic year). Since some dining establishments are very small and employ between one and five staff, the percentage of all U.S. businesses that are restaurants is probably somewhat lower. And surely not all of these would close their doors if labor costs rose meaningfully. But it should be obvious that lots of nationwide economic disruption would surely result.

As I’ve repeatedly written, (e.g., here) there’s an alternative to employers offsetting these higher labor costs. Rather than raise their prices significantly (a tactic that may not accomplish all or most of is goal), they could increase productivity. After all, many of these labor-intensive industries are labor-intensive because they’ve been such laggards on the productivity front. For example, between 1987 (the first year such data are available) and 2019 (the last pre-pandemic year), overall labor productivity in U.S. businesses outside the financial sector grew by 71.74 percent, in non-casino hotels and motels by just 51.33 percent, and in restaurants and other eating places, a mere 18.34 percent. And as known by RealityChek regulars, this period hasn’t exactly been a bang-up time for U.S. productivity growth.

There’s no doubt that more automation in particular would wind up displacing jobs – which certainly wouldn’t leave many workers better off on net. It’s entirely possible, though, that even greater net national employment opportunities could be created by these more efficient companies’ greater ability to service more customers affordably, thereby spurring the need to hire to staff expanded operations in other capacities. And in theory, anyway, more automation and use of new technologies could create entire new industries – and impressive employment opportunities. That’s certainly been the case with the internet. But there’s a big rub: Not all the displaced workers might possess the skills or other qualifications to handle any of these new positions.

Moreover, as suggested by my reference to the quality of service, for non-economic reasons, boosting productivity may not be enough to save many of these businesses. For many customers might be turned off by the prospect of dealing with machines rather than courteous and personable human beings, and decide not to patronize these businesses even if automation etc restored affordability.

And in fields such a elder care, it’s doubtful that machines could safely replace humans in quality terms for many years – and that seniors and their family members would find them acceptable on any grounds for many more years. Given America’s aging population, that of course portends a problem transcending economics. One way out: Much greater government subsidies for elder care businesses, or even outright nationalization of this sector. But don’t expect such proposals to uncontroversial.

Another possible way out of this dilemma for business owners generally in low-pay sectors where wages are surging is to accept much lower profits. But any industries that experience such a shift seem doomed to stagnation and even gradual extinction. For how many would want to invest their capital and effort in sectors where the best or even likeliest possible return is scraping by?

The cumulative effect of all these developments on society, as opposed to the economy, wouldn’t be trivial, either. For example, before the CCP Virus’ arrival, dining out and taking out in particular had surged in popularity in the United States for decades. One indication: “In 1955, 25 cents of every $1 spent on food went to restaurants. Today, it’s more than half.” One reason of course is the rise of the two-income household, and the resulting decrease in hours available for food preparation.

In addition, though, as more Americans patronized dine-in restaurants in particular, more surely came to value their particular pleasures. Could they find an adequate substitute if they needed to? And how would such a shift change the rest of their home and work lives? As for society itself, what would the impact be of the disappearance or great scaling back of one major form of communal activity?

The situation is potentially even more dire for the nation’s bars. Between 1987 and 2019, their labor productivity actually plunged by 14.50 percent. Will elevated labor costs spell the end, at least in America, of an institution that’s been around and central to human life for…how many centuries? Millennia? Or will customers get used to robot bar-tenders?

The answers to all the questions posed here are definitely above my pay grade. But something I do know: Despite the pressing need to improve the earnings and lives of low-wage workers, some significant and possibly unprecedented tradeoffs will emerge. And it will be far from easy to make sure that a genuinely New Normal is better on net for these workers and the country at large than the Old.