Do low wage employers get subsidized?

So claims a study from UC-Berkeley that was summarized recently by NYT.  It is true that many employees of companies such as McDonalds and Walmart receive some form of public assistance.  But when economists think of subsidies, we usually think of payments designed to encourage production of certain activities, such as higher education and corn.  In other words the more the company produces the more the government pays them!

The situation with low wage employers (large and small) is fundamentally different.  Public assistance programs are designed so that as people work more hours their assistance levels go down.  A low wage worker at McDonalds does not make enough money to be off public assistance, but the public assistance payments are LOWER than if he or she were not employed at all.  How this gets translated into a subsidy is beyond my comprehension.

Nonetheless I find the picture painted in this story very disturbing.  In a well functioning labor market, single mothers in their 30s should have better options than working in fast food or greeting shoppers at Walmart.  Part of the problem is that globalization and technological change have eliminated a lot of jobs.  Another part is that these workers do not have enough skills to qualify for whatever better paying jobs might be available.

How can we devise a way to get these workers the education or applied skill training that would open more opportunities?  I expect more creative use of online learning opportunities could make a difference.  But that does not seem to fit into the platform of either major political party; one seems to want to turn back the clock while the other is under the illusion that markets solve all ills.  

How testing is changing hiring

Companies have used personality tests to screen job applicants since the 1950s.  But now the tests have evolved and, because of advances in information technology, become cheaper to administer and more effective predictors of performance.  A recent WSJ article reports that eight of the ten largest employers in the US are using personality assessments to fill some jobs.

Employers are taking longer to fill positions, according to research done by Booth Chicago economist  Steven Davis.  They see how their best employees do on the tests and then seek applicants who give similar answers.  If companies have trouble filling a position, they simply post on more jobs boards until they find someone who is a good fit.

A key benefit of more careful selection is that turnover (both quits and layoffs) has gone down by about 25% over the last 10 years, according to Davis' research.

To tip or not to tip

Tipping is expected in restaurants, cabs, and a variety of other service industries.  At its most basic, the concept is simple -- the customer is in the best position to judge service quality, so why not have an incentive scheme where the voice of the customer speaks loudly?

Once you think more deeply about the motives associated with tipping, it starts to sound less appealing.  In many cases a customer will be at a particular establishment only once, so there is no financial penalty if the customer is a cheapskate and leaves no tip at all.  Also, service depends on a number of factors beyond the control of the person being tipped; the waiter cannot control backups in the kitchen and cabbies cannot control crosstown traffic.  Customers do not know that and penalize waiters unjustly.

A recent WP article reports that more restaurants are moving to a flat 20% service charge, and some are using this revenue stream to raise wages.  The benefit to employees is quite clear -- a steadier and larger stream of income.  Also most customers tip the same percentage (around 20% actually) all the time, so this process is not such a radical departure.

But what do customers get?  Now instead of voting with their tip dollars, customers would have to communicate directly with management about good and not so good service.  If they speak up, this would actually help management make more informed personnel decisions.  However, a customer might just as easily keep quiet about poor service and simply take his business elsewhere.

Shared tips or a flat fee also create incentives for waiters to cooperate, something management should encourage.  Finally, regardless of whether the waits get paid by tips or a percentage fee, I will still usually hear "Dr. Allen would you like to see the dessert menu?"  Restaurant owners will still have an incentive to get you to buy more.

Glaxo changes compensation plan for sales employees

Companies adopt compensation plans to better align the incentives of employees with those of the owners.  Commissions have traditionally been used in many sales jobs to encourage employees to sell as much as they can.  But that can lead the sales team to push product to every potential customer, regardless of whether the customer can use the product or not.

Bloomberg reports that GlaxoSmithKline is considering changes in its Patients First pay plan for sales employees.  The plan, launched in 2011, shifted the emphasis away from sales and toward "scientific knowledge, selling competency, customer evaluations, and overall performance of the representative's business unit."  The general idea is to reward the competencies that are believed to lead to strong customer relationships, as opposed to rewarding short-term, hardball sales tactics.  GSK is looking at making some adjustments to Patients First, including testing sales reps for product knowledge.  Looks like remembering those organic chemistry formulas has a payoff after all!

Is Uncle Sam the most predatory lender? A rant on student loans

Ran across this from a link today on the Real Clear Politics website

While our federal government continues to chase many mortgage lenders for so-called "predatory lending" practices, perhaps we should check in on the situation of far and away the biggest predatory lender of all, the federal government itself.  Its most odious practices are in the area of student loans.  I find the term "predatory" a stretch when applied to a mortgage loan for a house, given that in the worst case the borrower got to live in the house, and even if he gets foreclosed and has a deficiency balance he can normally discharge that in bankruptcy.  Not a pleasant process, but sometimes life can be tough.  Compare that to federal student loans, where the government lends inexperienced 18 - 24 year-olds open-ended amounts, often for dubious and overpriced trade schools, and then flatly forbids discharge in bankruptcy.   Many borrowers' finances are ruined for life, and they don't even have marketable job skills to show for it.  Now that's predatory!

What to make of last week's jobs report?

After months of jobs growth in the 250k range, the report for March shows a marked slowdown.  Jobs growth in March amounted to 126k and the numbers for January and February were revised downward.

Usually one bad month is not cause for alarm, but this news, combined with other recent reports of slowing economic activity, suggests that we are hitting a rough patch.  One possible reason is the stronger dollar has reduced export opportunities.

Despite recent wage increases announced by Walmart and McDonalds, wage growth continues to be slow.  This WSJ report indicates wages are growing at the top and the bottom of the distribution but not in the middle.

Should the Sysco and US Foods merger go forward?

Today's Raleigh N&O reports local restauranteurs' reaction to the proposed merger between Sysco and US Foods.  The FTC is trying to stop the merger, claiming that the combined firm would have 75% of the market.

Reaction to the merger appears to be mixed.  Some support the merger, believing that it will result in greater bargaining power for those who buy the products needed for food service operations and that the price cuts will be passed along to them.  Others are concerned that the competition between Sysco and US Foods will vanish and that prices will rise.

Much hinges (as it always does in antitrust cases) on the question of market definition.  In other words, 75% of what market?  The FTC claims the market definition should be "broadline food-service distribution;" in other words, the 18-wheelers that make the rounds every day.  Sysco says this definition vastly understates the options available to restaurants, who can deal with smaller distributors or even go to the farmers' market and Costco.

One last note: I was a bit surprised to see a number of local restaurants that pride themselves on their close relationships with local farmers on their menu, but still depend on Sysco for a good chunk of their food supplies.