Monday, November 19, 2012

Twinkies, Pizza, Health Care, Hockey, and Black Friday Economics

There has been no more divisive topic in Wisconsin over the last two years than the words "union" and "collective bargaining," which made me hesitant to write this post.  However, over the last few weeks there have been some really interesting economic events in the news surrounding labor issues.  Besides that, we are about to start a unit on monopoly in my principles of microeconomics class and a bargaining unit in my game theory class, so these topics are of particular relevance to my students right now.  Thus, I'm going to attempt to do the impossible: write a fairly balanced, informative post on labor issues that presents some interesting questions for discussion.  You can let me know whether I succeeded.

Story #1: The demise of the Twinkie.  Late last week, Hostess closed its doors and the Twinkie was no more.  Here's the basic story:
Thousands of members of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union went on strike last week after rejecting in September a contract offer that slashed wages and benefits. Hostess said Friday the company is unprofitable "under its current cost structure, much of which is determined by union wages and pension costs."
There is a bit of a he-said/she-said aspect to this as there is in many labor disputes (particularly in this case where this is a good deal of debate over CEO bonuses and the degree to which they did or didn't contribute to the problems).  Generally in a labor dispute like this, the company says it can't stay in business if it pays the workers more - the workers say they're not willing to work anymore at the wages they're being offered.  Bargaining ensues and ideally an agreement is reached and someone blinks before disaster strikes and hurts both sides.  In game theory, we call this method of negotiation "Brinksmanship" which, as the name implies, involves pushing things to the brink of disaster.  (See: Fiscal Cliff)  The problem with Brinksmanship as a strategy, is that sometimes disaster does happen as it did here.  I don't know all the details of this particular case, but I suspect both sides had some valid points ... as we're increasingly becoming worried about junk food as a society, I think it's reasonable to believe that demand for Hostess products has suffered and the company may have been struggling to remain profitable (Although skyrocketing twinkie prices on Ebay and this petition for the White House to nationalize the twinkie industry suggest that there is still a strong market for them).



A very similar scenario is playing out in the NHL at the moment as owners and players continue their standoff which is likely going to result in a cancelled season for the second time in recent years.  Last year the NBA and NFL were able to reach 11th hour agreements but also danced with the brink of canceled seasons.  These situations were disputes between millionaires and billionaires, and thus less sympathetic than the standoff with the Hostess factory workers, but the essence of the negotiation was the same:  How do we split up the pie?  This is a fundamental economic question that has been addressed by every key economic philosopher from Smith to Marx to Friedman.  Individuals come together in a market to freely exchange because there is something in it for both parties.  Value is created in transfering something (a product, a service, an idea) from someone who has it to someone who doesn't, provided the one who doesn't places a higher value on it than the person trading it.  (Again, provided we are considering free exchange and not forced slavery or other forms of coersion.)  The question is how that value will be divided between the parties in the exchange.  The punchline of hundreds of years of economic thought is: you get what you can talk the other guy into agreeing to. 

In the case of unions and workers vs. management and ownership, this often comes down to a question of monopoly vs. monopsony power.  I think most people, whether you've taken formal economics classes or not, have a sense that monopolies (a single seller in a marketplace, rather than competing sellers) have the potential to be inefficient and bad for society (although not always).  However, I doubt most people know that a monopsony (a single BUYER in a market) can be just as bad.  Often, when we see labor organizing into unions or other collective groups it is to offset the power of a large, single buyer of their services.  In a sense, this is a case of "two wrongs making a right" ... if one side has too much bargaining power, one solution to that is to break them up into smaller competing groups (like we did with AT&T) but another solution is to allow the other side to combine forces and balance out that power (like we do with labor organizations such as the NFL Players Association).  This is a balance that can swing too far in either direction, but the underlying goal of organized labor is typically to increase bargaining power to match a powerful employer and divide the fruits of the market more equitably between capital and labor, or in our modern parlance, "job creators and job do-ers." 

What constitutes a fair split between labor and capital has been hotly debated throughout history. Classical economics and supply and demand suggest that the efficient outcome occurs when the pie is split in a way that matches the scarcity of the component that person contributed.  If labor is scarce, then workers get a bigger share and if physical or financial capital is scarce, then a bigger share goes to the capital owners.  I would argue that a market based system does not inherently favor either side, although it is certainly true that history has been on the side of the capital owners in many cases, often leading to institutions and mechanisms which reinforce that outcome. 

This issue has been further blurred, however, in the modern economy as our definition of "capital" in the production process has slowly expanded beyond the traditional idea of physical or financial capital owned by a "capitalist" to include things such as human capital (knowledge, ability, and expertise) as well as social capital (our relationships with others).  I would urge everyone to consider that we need to re-think our old Adam Smith vs. Karl Marx Capitalist debates in a world where our social network of Twitter followers has actual market value and an increasing component of our labor income is based on our human capital and education.  The line between labor and capital has blended and the idea of a Robber Baron/Mr. Burns type factory tycoon employing Upton Sinclair-style sweat shop labor is less relevant as a model in the modern U.S. economy of health care professionals, internet startups, and yes, bloggers and information content creators (although still relevant for much of the world, and still not vanished from America).


One place where this model may still be apt, however, can be seen in another related big topic in the news at the moment - labor unrest at Walmart and the possibility of a widespread strike this week on Black Friday.  For years, working conditions have been questioned at Walmart, however the company has generally been able to hold firm and prevent unionization of it's employees.  Last week, workers at several Seattle Walmarts staged a one-day strike over working conditions and this has since spread to several more sites in Texas and California.  Among the complaints include lack of benefits such as health care for many workers stuck as part-time employees and a lack of advancement opportunities - (for more information on the demands and agenda of the groups leading the protests see here: OUR Walmart and here: Making Change at Walmart).  Many of these complaints were confirmed by Walmart’s official compensation policy, an internal company document obtained by The Huffington Post, titled the "Field Non-Exempt Associate Pay Plan Fiscal Year 2013." The plan details a rigid pay structure for hourly employees that many claim makes it difficult for most to rise much beyond poverty-level wages.

The most interesting thing about the Walmart case that separates it from the Hostess case is the massive scope of the company.  Hostess employes 18,000 workers.  Walmart employes about 1.4 million U.S. workers - this is almost 1% of the U.S. labor force, employed by a single firm!  Talk about "too big to fail."  Let me emphasize that - 1 out of every 100 U.S. workers is employed by Walmart.  Thus, the pay and benefits of these employees is of amazing national importance.  National questions of health care provision, the disappearance of the middle class, falling standards of living, etc are closely tied to the fates of the employees at the world's largest company.  This is entirely different from the Twinkies or the NHL players - the implications of this labor dispute go far beyond a few workers wanting a raise and improved benefits/working conditions.  This is a situation where a massive global firm with a huge amount of monopsony power is driving policy that sets the market wage for a very substantial chunk of our economy.  The scope of the business is so large that one could even begin to wonder whether a company-wide wage increase would have a similar economic impact and multiplier effect to traditional Keynesian government fiscal stimulus policy. 

This debate may be pushed to the forefront this week if there is a Black Friday strike incident - even under the best of conditions, Black Friday sales at Walmart have been a dangerous event with bargain-crazed shoppers known to trample employees and each other to grab a sale priced Elmo or Plasma TV.  Combining that environment with a tense picket line has the makings of a potential disaster that would cause us to re-think the name "black friday."  

And if these three examples aren't enough, another major story of labor vs. management has come in connection to the politics surrounding Obamacare.  The issue: the Affordable Care Act dictates that full-time employees (30 hours or more per week) at companies with more than 50 workers need to be provided health insurance.  The owners of Papa John's, Denny's, Jimmy John's, Red Lobster/Olive Garden, some Applebee's locations, and a coal company have taken or threatened actions to either lay off workers, reduce hours, or otherwise pass along the increased health care costs of the new Affordable Care Act to their workers.

The Papa John's case has recieved the most attention and careful analysis so far, including this article in Forbes magazine which calculates exactly what the increased costs for the pizza company would be - about 3 to 4 cents per pizza.    Yes, that's 3 cents on a pizza (whose prices generally range from about $10-16). 

Now, to an extent none of this is in any way surprising ... these are fairly low skill jobs ("pizza delivery boy" is a job even Philip J. Fry can do, after all!).  Thus, the labor demand for these workers will be very elastic (sensitive to price change) - and therefore we would expect firms to pass most, if not all, of the increased cost on to the workers.  And because there are lots and lots of pizza options demand for a particular brand of pizza is also very elastic and so it may be difficult for Papa's to pass the cost on to the customers.  However, if this is truly a 3 cent per-pie cost to ensure workers have health care, I personally will commit to pay 20 times that for my pizzas - raise the price 50 or 60 cents!  It's not going to affect my overall demand for pizza (for you economists out there: "pizza" is likely inelastic because there is no good substitute for it while the specific "papa john's pizza" is likely elastic because any other type of pizza is a substitute). What would be nice to see (as something of a pizza afficianodo myself) would be a movement away from the big pizza chains and back to the local chains with < 50 workers as a result of this. In the meantime, I'm definitely shifting my Papa John's business to this guy:


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PS:
One other piece of labor news this week:  IKEA says "oops, sorry" about using forced prison labor to make its furniture for two decades.  Now we know why we're forced to use those stupid allen wrenches for everything and are always missing one key part from the IKEA kit: revenge of the East German political prisoners.  Mr. Gorbachev: tear down this wall! (and embrace phillips-head screws!)

4 comments:

  1. OK, well... lots has happened in a day since I posted this - Hostess and the union have agreed to mediation:
    http://articles.chicagotribune.com/2012-11-19/business/chi-judge-hostess-union-agree-to-mediation-20121119_1_hostess-brands-grain-millers-international-union-mediation

    And thus there is still hope for the mighty twinkie. More importantly, this underlines the potential of using brinksmanship as a strategy ... it appears Hostess called the union's bluff (or vice versa) and in doing so they were able to re-open negotiation.

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  2. I was thinking a bit more about the potential multiplier effect and what a "Walmart stimulus" would look like for the economy. On the one hand, you might expect this to be a classical multiplier: Walmart gives a raise to their employees - those employees then go out and spend that money in the community at the car dealer, the dry cleaner, the sandwich shop, etc. (and at Walmart) and then consequently the sandwich shop owner and the car dealer have higher incomes and spend some of that money in the community (and at Walmart). If this multiplier effect is strong enough and enough of the spending is captured within the community, then it's theoretically possible that Walmart could actually MAKE money by paying its workers more ... unlikely but possible in a relatively small community where Walmart is one of the larger employers.

    The flipside however, is that there is some evidence that Walmart products are what economists call "inferior goods" which are goods that people would actually buy LESS of if they had more money. For instance, imagine whether you would buy more or less Ramen Noodles if you won the powerball jackpot this afternoon. Most people would respond to that income increase by switching to a slightly fancier and spendier food source and would buy FEWER Top Ramen packs. Thus, an inferior good. (Another example is the types of crappy beer you find at your average college house party compared to a nice micro-brew. As a poor college student, I drank a lot of 40's, Naty Light, Beast Ice ... etc. Now as a *rich* professor I choose to get the snooty craft beer options instead).

    This reminded me of a study I ran across several years ago:
    http://www.freakonomics.com/2008/05/29/are-wal-marts-products-normal/

    which found that Walmart was, in fact, "inferior" in the economic sense of the world. So, it's possible that by paying their employees more and raising their (and the community's) income they might actually drive their customers to Target and other retailers. Thus, it seems that Walmart might have the somewhat perverse incentive to hope the economy is doing poorly and people's incomes (including their employees) remain low.

    Food for thought.

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  3. I think the multiplier effect would be more likely to happen than not, just for the simple fact that Walmart will not be shifting their employees into a different financial zone entirely. It would just be a small shift. More importantly, many who do shop at Walmart do not believe the products they purchase there to be inferior. They would go out and spend more money on a few things perhaps (a nicer car, good beer, cable TV, maybe save for college education, etc) not typically bought at Walmart rather than buy $50 T-shirts instead of $10 ones.

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  4. 2 things Nels - I agree it might be a multiplier effect economy-wide for reasons you mention, but not necessarily from Walmart's point of view if none of that money trickles back to them (the cable TV, college Ed, etc). My original conjecture was that they might literally see profits increase in the short run even while raising their own wage costs from a pure "Walmart centric" multiplier - I think what you outline would actually work counter to that because of point two ...

    When I was talking about inferior goods, I was being a little sloppy ... In reality, most of what you'd buy at Walmart are the exact same products you'd buy at target or best buy or the grocery store (a Call of Duty video game will play exactly the same regardless of where you buy it) - so, it is more the overall shopping experience at Walmart that is "inferior" - and again this is an economic term that probably has too much baggage attached to it and is more of a technical definition that I was trying to explain in simpler way, and may have over simplified. I'd encourage anyone to read the original academic paper linked to in the freakonomics article above for better detail than I provided (God knows I've written enough in this ridiculously long post - ill trust to others to fill in those gaps)

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