The hypocrisy of the minimum wage

coffee-drinkAn article by an anonymous industry insider was published in The Age, ‘Price to pay for maintaining Melbourne’s famous cafe scene’, and has sparked a bit of debate about the minimum wage. This post is the first in a two-part series, the next titled “The abolition of the minimum wage” to be published next week.

Readers’ comments on the post variously identify the following problems and solutions:

  • Blame the business owners (poor management, liars who skim cash and steal from employees).
  • There are too many cafes.
  • Blaming the landlord or the suppliers.
  • Consumers want more but don’t want to pay more.
  • Weekend prices must be uniformly coordinated to increase (surcharge) across all businesses in order to be able to pay penalty rates (the premise of the article).

No one talks about the sixth option – and that is:

  • Abolish penalty rates

The existence and impact of penalty rates flares up from time to time. But, while no one is addressing it right now, my prediction is that unless the officialdom resolves these issues for us, blockchain and cryptocurrency will become a boon to the dark economy in ways we can’t yet imagine.

If operators can disguise payments because ‘cash’, can you imagine what will happen when blockchain/cryptocurrency enables untraceable transactions? I am no expert, but I have imagination…

Let’s consider these ‘solutions’ offered by commentators quickly:

Blame the business owners

Of course there will be a minority of bad apples. You can’t reorganise, restructure or blame an entire industry based on those few who wilfully want to do the wrong thing, or the few who don’t have the competence to cut it.

There are too many cafes

The proponents of this view argue that there are too many cafes and that the industry will sort itself out naturally. But if you are looking to market forces to sort out the good ones from the bad and create the happy balance in supply and demand of cafes, why does the same argument (market led wages) not apply?

Blaming the landlord or the suppliers

Rent and occupancy cost are are known and relatively predictable in advance. Supplier costs will vary directly in proportion with your revenue, so this is managed relatively easily depending on your fortunes. In a free market, each party will eke out the best price they can get and that goes for landlords and suppliers too. Unless we believe a Socialist state where the government sets prices for everything, this argument holds no water.

Consumers want more but don’t want to pay more

Human nature can’t be changed, and everyone simply make the decisions they do based on their triggers, biases and preferences – and not a single person in the world wants to pay more than something is worth. When airlines asked you to tick the box to pay a couple of dollars more to offset their carbon footprint, did you pay extra? I didn’t think so.

Business owners are lying, they siphon off the cash

This description (in the comments) by another anonymous insider is an accurate representation of the industry economics, and serves to highlight a few issues:

An average cafe/bar/restaurant takes $15k per week.

Staff (very hard to get below 35 per cent) $5200

COGS (Food) 28-30 per cent $4200

Rent used to be 8 per cent, now 10-12 per cent $1500

Insurance (15k pa, elec 1k per month, license 5k pa) = $675 per week

GST $1500

Costs: $13,100 – before uber fees (35 per cent of $2000 = $700), and others like maintenance, equipment failure, = $1000

PROFIT $900 per week.

This is for the owner working 75+ hours per week.

The fact of the matter is that even if 30 per cent of the income is in cash, it must be pumped back into the business to cover expenses. The business owner may want to skim some cash, but suppliers, landlords and employees demand to be paid – funny that.

Uniform prices across all businesses

While the mathematics of this may work, I can’t see how it will work practically. Effectively you are asking the government to help set prices, for without some means of enforcing it, there will be players who won’t play along and then the exercise is moot. It will also attract new players to the market if there seems to be more  profits to be made more than previously. (The law of supply and demand.)

Abolish penalty rates

Simplifying things slightly, the three big expenses are people (payroll), product (food cost) and place (total occupancy cost). Let’s just assume those expense buckets are 30 per cent of the revenue. At various time, different people will blame greedy suppliers or landlords and there may be some merit in that but .

The ‘people’ part of the equation is the most intractable part because (a) that is really one of the few levers the owner can pull to manage a big chunk of costs, but (b) this part is the one that involves people personally and has real human impacts.

But the existence of penalty rates sounds like a good idea that has unintended consequences that, on balance, suggests that we would be better off getting rid of it. Heresy, I know, but I will lay out the case next week.

Dennis Price: Co-Founder at ganador.com.au and yearone.solutions – can be reached on 0411030436.

Comments

2 comments

  1. petrus posted on May 24, 2018

    very good and concise article reply

  2. Ranu posted on June 9, 2018

    You cant criticise the FWC. They are a protected species. reply

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