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So the good news is that things are stating to get better. The pandemic is starting to abate now that vaccines are widely available in the United States. Hopefully they will continue to be effective against the new strains that are emerging, and all evidence suggests that they are. Hopefully things will continue to improve around the world as well.

Also equally good news is, with the pandemic abating, we can start to return to a more normal state. But many of us are emerging into a new world, one where it is basically impossible to buy a house because demand for houses is outpacing supply and where the costs of many things are going up due to scarcity.

One of the interesting things I have noticed is that some businesses, and this seems to be predominantly fast food and restaurants, are having a hard time hiring people. Some have even shut down because they can’t find employees. What is happening here?

At first glance, it’s tempting to blame this on Pandemic Unemployment Assistance or the stimulus checks. This is a very simplistic way to look at the problem, which is why it is appealing to politicians:

The reason I say that this is simplistic is because it doesn’t account for the evidence we see. If this was truly about the stimulus checks or PUA, we would be seeing these kind of staffing difficulties in a more widespread and fundamental way across many businesses. And while there have been some reports of staffing difficulties at non-food businesses, the vast majority of the staffing issues seem to be around food-service.

So what is happening here?

Free Market Economics: A Primer

Most people understand the buyers side of free market economics. Most of us had an economics class in high school and/or college, so we know all about how competition will drive the price of goods down and result in better, more efficient allocation of resources. Even if we don’t know the specifics, we can observe it in action at the supermarket. The more choice you have, the lower the prices.

What they often leave out in these explanations is that there is a flip-side to this: labor is a commodity, just like goods and services. And this may seem counterintuitive, but in a truly free market, the same forces that drive the costs of goods and services down will also drive the costs of compensation - pay - up. Because, all things being equal, employees will take the jobs that offer the best pay.

Obviously this is somewhat simplified. There are no truly free markets for labor just as there are no truly free markets for goods and services, this doesn’t account for human behavior and preferences, etc. But these are philosophical points. The key to understand is that it is natural behavior for people to want to earn the best possible financial return for their labor.

When the pandemic hit, the restaurant industry was among the hardest hit. Probably only travel was worse off. A lot of people lost their jobs during the various shutdowns.

But then, an interesting thing happened: retail jobs shot up. When people couldn’t go out to eat, they started cooking at home again. When they couldn’t travel, they decided to work on their houses or recreate some of their experiences at home. So companies like Kroger, Lowe’s, and Costco (to name a few) did what any company facing a massive increase in demand would do: they started hiring. And, they started increasing their pay to match the increase in demand.

Well, Lowe’s is starting at $12 an hour right now. Costco is starting at $16 an hour. They’re offering benefits. They’re offering signing bonuses. They’re offering predictable full-time schedules (which is a big deal if you have family or other responsibilities.) These are all things that restaurants, so far, do not seem to be willing to match and would rather complain about “no one wanting to work.”

The starting wage in retail is now close to what food service wants to pay assistant managers! Why on Earth would anyone want to work a hard job like fast food, where they’re subjected to abusive customers with appalling regularity, for $7.25 an hour? Even worse, why would they wait tables for $2.13 an hour and hope for good tips to get them to $7.25 an hour when they can go down to the grocery store and get a guaranteed $15 an hour, much better work environment and a reasonable, predictable scheduled? What would you do?

As a result, lot of people who were once waiting tables or taking your order at Taco Bell are now ringing up your grocery order at Kroger or helping you load plywood at Lowe’s. That is a very easy transition to make. Fundamentally, there is no difference between ringing up an order at Taco Bell and ringing up and order at Kroger. Even for managers, there’s not a huge difference. Not to demean them in any way, but these are not super skilled positions that require years of study. These people are super flexible and able to quickly adapt to a new employer, which makes the an ideal test case to observe this part of free market economics.

Let’s flip this around. Say you go to the store to buy some apples. There is a bin of apples that says $7/pound. There is another bin that is says $15/pound. The apples appear identical in every way. Which one are you going to choose?

The very vast majority of people will choose the $7 apples, and you probably will too. I certainly would. Would you feel sorry for the company that is now complaining loudly because no one will buy apples at $15? Would you listen to politicians complaining about how no one is buying $15 apples? Of course you wouldn’t. You would think (correctly) that they need to lower their prices and be competitive with the company selling $7 apples.

The exact same thing is happening with labor, just in reverse. This is a competitive market. The market determines what the going rate for labor is; employees sell their labor, and employers buy it. It’s exactly the same principle. No one is “selling” labor at $7.25 an hour right now because of high demand. The selling rate for labor is now higher, at least competitive with retail wages in the $12-$16 range. Businesses need to adapt to this new, competitive market for labor, and whining about it is not a good way to do that. Nor is getting politicians to whine about it for them.

In A Competitive Market, Be Competitive

The issue is not the stimulus or PUA. The issue is not that retail workers are overpaid, either, because they are still hiring at that pay level. If they were overpaid, an oversupply would result that would drive the selling price of labor back down. That isn’t happening; if anything, it’s accelerating.

This issue is that some businesses, especially in food service, have benefited from undervalued labor for many, many years. The workers who worked in these places now know the were undervalued and underpaid because they are getting paid twice as much to do the same job at a competitor, and are in no hurry to go back.

An employee who might have been working two minimum wage jobs, like in retail during the day and waiting tables at night, is now getting by on a single job that is compensating them at a higher, more fair market rate.

Right now labor is in demand and the free market is responding exactly how it is supposed to: by raising the prices on an in-demand commodity.

So what is the solution? Just like in any other competitive market, you need to match (or exceed) what your competitors are doing. And that means you need to match (or exceed) their compensation. And if you can’t, sorry if this sounds harsh, but you probably shouldn’t be in business. You are not entitled to someone’s labor at whatever price you want, any more than you are entitled to purchase a product at whatever price you want. You are entitled to what the market says that the going rate for a commodity is.

Does that suck for some local restaurant you really love? Sure it does. But businesses fail all the time for financial reasons, it’s just part of life. I’ve lost count of the number of really awesome local places I’ve liked over the years that have gone under because not enough people liked them. This is fundamentally no different.

When your competitors are paying $12-$16 an hour, it’s not hard to figure out why you can’t get people to work for $7.25.

But if you truly want evidence that the “be competitive” strategy works, I got you. Here’s a story about an ice cream parlor in Pittsburgh that was able to solve their labor problem by being competitive.

As March drew to a close, Klavon’s Ice Cream Parlor in the Strip District found itself without enough workers for the upcoming spring and summer rush, and it certainly did not have enough workers to open the shop to its desired seven days a week schedule.

Then, on March 30, the parlor announced it would more than double the starting wage for the roles, going from $7.25 an hour to $15 an hour, a scoop that seemed to captivate workers throughout the region and one that earned a significant amount of local media coverage.

“It was instant, overnight. We got thousands of applications that poured in,” Maya Johnson, general manager of Klavon’s, said. “It was very overwhelming, very. People were coming in by the next day that it broke on the news, they were coming in, filling out paper applications. I was doing on-the-spot interviews.”

Before the announcement, Johnson said the ice cream parlor would see a few applicants per position, but many wouldn’t show for the interview. Klavon’s, which has existed at its original location at 2801 Penn Ave. since 1923, now has the staffing it needs to open every day this summer, filling all of the 16 positions it needed to do so over a period of a few days.

There you have it. This is what you’re competing against now. Time to be competitive.

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