The Minimum wage

Kennyboy66

jamesmorgan wrote: »

Tesco's profits of £2.5b equate to a net profit margin of only 4.6%. This is pretty poor for a commercial organisation and is borderline acceptable for any shareholder. It is not surprising that their share price has fallen by around 30% in the past year. To suggest that they should pay their employees higher salaries is somewhat naive. I suspect that Tesco's problems are the opposite. Labour costs are a huge issue to them as they employ around 500,000 employees. They need to look at ways of reducing their wage bill - or try to improve productivity from their current employees.


.

This is the purest nonsense. Companies are concerned with return on equity and shareholders are concerned about total return on investment.

Saying that 4.6% margin is poor is plain rubbish, margins are only really useful in comparing how they are against competitors and perhaps internationally.

UK supermarket margins have been around 5% for the last 30 years, although this is a little higher than USA, or Germany for example, it has proved very hard to increase margins despite the huge economies of scale that have developed.

Tesco's problems are little to do with unit labour costs, but more to do with fact that they have acknowledged that they have gouged UK profits to invest internationally. Some maybe sucessful (eastern Europe and Asia), some seems deemed to fail like so many UK companies before (USA). They have also failed to invest in UK stores, in service and logistics.

The share price fall is more to do with the fact that it is difficult to fathom where UK sales growth is going to come from, either as market share or non food market and shareholders have realised that the UK still provides the vast majority of profits and the USA still looks like a black hole of investment.

Kennyboy66

jamesmorgan wrote: »

It is certainly true that unemployment has risen during the recession, but there is still a finite amount of labour and this still means that it is a scarce resource. In a recession, demand for goods/services declines which in turn lowers employee productivity. This means that employers can afford to pay less for each employee. Employees either accept this and employment remains stable, or they don't and unemployment rises.

Take the example of a pub providing meals. They employ a chef to cook the meals and pay him £10/hr. They have calculated this figure based on the maximum they can afford to pay him and still generate a profit assuming he cooks 10 meals per day. Now assume we enter a recession and the pub only sells 7 meals per day. The productivity of the chef has fallen by 30%. On this basis, the maximum the pub can afford to pay him is £7/hr. If the chef accepts this, the demand for labour remains the same, the pub still makes the same profit margins and customers still pay the same for meals. However, if the chef refuses to accept this (which is clearly within his right) a number of outcomes are possible;

a) The pub still pays him £10/hr but starts to make a loss. If this carries on long enough the pub goes out of business and he loses his job.

b) The pub still pays him £10/hr but puts up the cost of meals to retain profit margins. Remaining customers have to pay more for their meals. This is unlikely to be sustainable.

c) The pub decide they can no longer afford to provide meals. The lay off the chef. Customers no longer have access to this service.

As long as employees accept that in a recession, everyone's standard of living goes down, then demand for labour remains stable. It is only when this doesn't happen that unemployment rises.

Where to begin ????

Ahhh - the old "lump of labour" fallacy.

You ignore in your somewhat daft example the first things the mythical pub might do.

1) They would get rid of the kitchen hand who does some prep and clearing up.

2) They would reduce the chefs hours.

3) They may accept that a recession means reduced profits.

You seem fixated in trying to apply simple economics to real life situations, where in fact what businesses do in a recession, is do things like;

reduce sub contract work
reduce overtime
get rid of least productive staff (which is why in certain sectors productivity increases during a recession).
reduce real wages through below inflation increases.

gingeralan

oldtractor wrote: »

The minimum wage is a disgrace. It should be at least £8.50 an hour for all ages. People are being used as slave labour .

If this happens then rapid inflation will ensue. Raising minimum wage would just make everything more expensive

Nine_Lives

StevieJ wrote: »

You forgot d) Employer pays £6.30 and says to the worker 'don't worry the social will top it up with benefits' Subsidy for working people corrupts wage levels because the employer is under no pressure to pay the employees optimum wage rate, I don't understand why you can't see that?

Or e) Worker decides that the only way they're going to earn anything half decent is to get qualified. They take the risk, maybe leave their job & go to college full time or night classes if they're so lucky & try & get a decent paying job that way, hoping that at the end of it all, they'll be able to get into the position they're aiming for & not just another statistic of another qualified unemployed person.

jamesmorgan

StevieJ wrote: »

Absolutely nothing to do with that, your view is based on the perfect market which is merely a hypothesis, whereas mine is based the on the reality of govt intereference in the bargaining process i.e. removing the incentive from the employee to secure the best possible rate of pay and thus corrupting the free market.

This is where we have some convergence of agreement then. In pure free market economics, unemployment rarely exists. The fact that we have relatively high levels of unemployment suggest that there is corruption of free markets. The most likely source is through government intervention. This takes place in a number of ways - examples include setting NMW and providing relatively high levels of benefits to those not in work. I am in favour of reducing/abolishing both of these to allow free markets to work more efficiently.

ukcarper

jamesmorgan wrote: »

This is where we have some convergence of agreement then. In pure free market economics, unemployment rarely exists. The fact that we have relatively high levels of unemployment suggest that there is corruption of free markets. The most likely source is through government intervention. This takes place in a number of ways - examples include setting NMW and providing relatively high levels of benefits to those not in work. I am in favour of reducing/abolishing both of these to allow free markets to work more efficiently.

No minimum wage and tax credits in the 80s & 90s but higher unemployment .

jamesmorgan

Kennyboy66 wrote: »

This is the purest nonsense. Companies are concerned with return on equity and shareholders are concerned about total return on investment.

Saying that 4.6% margin is poor is plain rubbish, margins are only really useful in comparing how they are against competitors and perhaps internationally.

UK supermarket margins have been around 5% for the last 30 years, although this is a little higher than USA, or Germany for example, it has proved very hard to increase margins despite the huge economies of scale that have developed.

Tesco's problems are little to do with unit labour costs, but more to do with fact that they have acknowledged that they have gouged UK profits to invest internationally. Some maybe sucessful (eastern Europe and Asia), some seems deemed to fail like so many UK companies before (USA). They have also failed to invest in UK stores, in service and logistics.

The share price fall is more to do with the fact that it is difficult to fathom where UK sales growth is going to come from, either as market share or non food market and shareholders have realised that the UK still provides the vast majority of profits and the USA still looks like a black hole of investment.

There are lots of different ways of valuing shares, but most essentially boil down to a dividend discount model. This effectively calculates the value of all future dividends discounted back to current values. As dividends come out of profits, any factor that affects future profitability of a company will effect its share price. Tesco's share price has declined because investors are concerned about slowing sales growth and declining profit margins. The solutions to this are pretty simple - either put in place new strategies to improve sales and/or reduce costs to improve margins. With total salary costs of £6.8b this is clearly one area that will get looked at.

CLAPTON

jamesmorgan wrote: »

This is where we have some convergence of agreement then. In pure free market economics, unemployment rarely exists. The fact that we have relatively high levels of unemployment suggest that there is corruption of free markets. The most likely source is through government intervention. This takes place in a number of ways - examples include setting NMW and providing relatively high levels of benefits to those not in work. I am in favour of reducing/abolishing both of these to allow free markets to work more efficiently.

what evidence do you have or theoretical justification that free markets naturally lead to full employment?
Keynes spend some time showing that stability could be achieved at virtually any level of unemployment

ash28

jamesmorgan wrote: »

This is where we have some convergence of agreement then. In pure free market economics, unemployment rarely exists. The fact that we have relatively high levels of unemployment suggest that there is corruption of free markets. The most likely source is through government intervention. This takes place in a number of ways - examples include setting NMW and providing relatively high levels of benefits to those not in work. I am in favour of reducing/abolishing both of these to allow free markets to work more efficiently.

Doesn't capatilism need unemployment to work? A pool of labour made up of people with a just about adequate education, low personal expectations and few legal rights.

The "flexible" workforce helps the business outcomes of driving costs down and employer obligations down to what ever the bare minimum they (employers) can get away with.

Thrugelmir

ash28 wrote: »

The "flexible" workforce helps the business outcomes of driving costs down and employer obligations down to what ever the bare minimum they (employers) can get away with.

If business was all about the cost of employees maybe so, it isn't.

Employees, at least good ones, add considerable value to a business. All successful businesses now value their employees. As without them there is no business.