Archives For Economics


November 13, 2015 — 3 Comments

Who teaches these kids this silliness? Where do these ideas come from? Happy Friday, everyone!

While perusing the WSJ this morning, I came across an article that stated that the unemployment rate is now down to 5.1%. Unfortunately, the labor participation rate now sits at 62.4%. When President Obama took office, that number was 65.7%. If we adjust today’s numbers using a 65.7% labor participation rate, we get an unemployment rate of 9.9%.

How so?

Let me illustrate with some numbers;

Unemployment Adjusted for LPR

To arrive at these numbers I simply took the difference in the labor participation rate and added them to the unemployed. At 9.9%, that’s nearly twice the 5.1% reported unemployment rate.

To be fair, the labor participation rate does fluctuate. Here is the history of the rate since 1948 (from the BLS):

Labor Force Participation Rate History

It peaked in the 90s, but has fallen off the cliff in recent years.

Labor Participation Rate Since Obama Took Office

Some of the drop could be due to people retiring, but certainly not all.

Dan Price, CEO of Gravity Payments, made waves when he announced back in April that his company would pay their employees a minimum of $70,000 per year phased in over two years.

The press was giddy. The DailyKos was happy.

Dan’s smiling face was all over the place (a PR stunt?)

Fast forward just a couple of months…

Gravity Payments is having troubles. Severe troubles. Some clients, fearing price increases, decided to leave. And then there was Gravity’s own employees…

…some of the most valuable employees at Gravity Payments have started to leave the company. The Times reported that two employees have left directly because of the policy. One told the paper she was initially excited about the new policy, but as she thought about the details she began to get dismayed. “He gave raises to people who have the least skills and are the least equipped to do the job, and the ones who were taking on the most didn’t get much of a bump.”

She said she presented the issue to Price along with an alternative way to raise salaries, but was met with an accusation of selfishness. So she decided to quit. Another employee, on the lower-end of the former pay range, also decided to quit after thinking through the policy. “Now the people who were just clocking in and out were making the same as me,” he told the Times. “It shackles high performers to less motivated team members.” (Source)

Bottom line: people want to be rewarded for their efforts. They want to be appreciated.

Now, some might think I’m just a tad too happy to see this company experience failure. I’m not. BUT…I am happy to see that dumb (or shortsighted) decisions have bad consequences. Had Mr. Price only thought through his decision, he might have saved himself and his company a lot of pain. I would suggest Mr. Price invest in a copy of Thomas Sowell’s Basic Economics*, which does a nice job explaining how the real world works.

Ironically, the DailyKos hasn’t followed up on the story since their original post back in April. I know, I know…it doesn’t fit their narrative.

*Affiliate Link

NOTE: Though I am referencing an article on a conservative website, this is NOT a political post. It’s an ECONOMICS post.

I read this article this morning. In case you’re not familiar, Dan Price, CEO of Gravity Payments announced recently that he was going to set his company’s minimum wage at $70,000 per year. A noble goal, according to some. The media went nuts. Everyone was singing this guy’s praises.

Well, it turns out it wasn’t such a great idea.

Actions meet (unintended) consequences:

What few outsiders realized, however, was how much turmoil all the hoopla was causing at the company itself. To begin with, Gravity was simply unprepared for the onslaught of emails, Facebook posts and phone calls. The attention was thrilling, but it was also exhausting and distracting. And with so many eyes focused on the firm, some hoping to witness failure, the pressure has been intense.

More troubling, a few customers, dismayed by what they viewed as a political statement, withdrew their business. Others, anticipating a fee increase — despite repeated assurances to the contrary — also left. While dozens of new clients, inspired by Mr. Price’s announcement, were signing up, those accounts will not start paying off for at least another year. To handle the flood, he has already had to hire a dozen additional employees — now at a significantly higher cost — and is struggling to figure out whether more are needed without knowing for certain how long the bonanza will last.

Two of Mr. Price’s most valued employees quit, spurred in part by their view that it was unfair to double the pay of some new hires while the longest-serving staff members got small or no raises. Some friends and associates in Seattle’s close-knit entrepreneurial network were also piqued that Mr. Price’s action made them look stingy in front of their own employees.

Then potentially the worst blow of all: Less than two weeks after the announcement, Mr. Price’s older brother and Gravity co-founder, Lucas Price, citing longstanding differences, filed a lawsuit that potentially threatened the company’s very existence. With legal bills quickly mounting and most of his own paycheck and last year’s $2.2 million in profits plowed into the salary increases, Dan Price said, “We don’t have a margin of error to pay those legal fees.”

The author of the article sums it up nicely:

It didn’t work for two reasons. First, a business can’t survive when employees can’t generate enough value to give you a big enough return on what you pay them. And if they can’t do that because you paid them too much, that’s not on them. It’s on you. Second, people don’t appreciate what they haven’t really earned. You think they’re going to be grateful and loyal to you because you were so good to them. It doesn’t work that way.

I like this:

I discovered Arthur Brooks back when he came out with his book, “Who Really Cares?” His latest book, The Conservative Heart: How to Build a Fairer, Happier, and More Prosperous America*,
will be out next week. It looks like an interesting read.

Mr. Brooks was interviewed in this week’s WSJ. I liked what he had to say. Here are a couple of quotes for those of you who are not WSJ subscribers:

When he was a child, Mr. Brooks notes, one of four people lived on less than a dollar a day. Today, though we still have far to go, the advance of trade and a globalized economy has shrunk that figure to one of 20.

The liberation of hundreds of millions from desperate poverty ranks among the greatest success stories in history. But it’s a story that remains largely untold and mostly unheralded. In his new book, “The Conservative Heart,” Mr. Brooks puts it this way: “Capitalism has saved a couple of billion people and we have treated this miracle like a state secret.”

AEI aims to change that. “We should be shouting it from the rooftops,” he says. “If Beethoven were alive today, he would dedicate the ‘Ode to Joy’ to this miracle. In the very first verse of that poem—which inspired Beethoven’s Ninth Symphony—we hear, ‘Beggars become Princes’ brothers’! If this is so, it is because of free enterprise.”

Few today would deny the market’s success in literally producing the goods. For some, however, this is a paradox. It’s a paradox because, in this way of thinking, socialism has the higher ideals but fails in practice, while capitalism succeeds in practice even though it is based on greed.

Mr. Brooks believes these critics are limited by materialistic assumptions about wealth and its production. Capitalism, he insists, succeeds not because it is based on greed, but because the freedom to trade and do business with others is in harmony with our God-given nature. So he has no patience for those who fear the moral argument.

I wish we could get back to a country that emphasizes education and concentrates on teaching people HOW to succeed instead of constantly telling them that they can’t succeed without the government’s (the taxpayers) help. The pessimism is rampant, thanks to social media. Flip through a Flipboard magazine on the topic of Capitalism or Income and you’ll see what I mean.

*Affiliate link

Did you hear the news?

Non-farm payrolls increased 288,000 in April and the unemployment rate “plummeted” .4% to 6.3%. See this Yahoo! story.

At the same time the employment participation rate fell .4% to 62.8%.

In case you don’t know, the participation rate “refers to the number of people who are either employed or are actively looking for work. The number of people who are no longer actively searching for work would not be included in the participation rate.” (Source).

Here is what that rate has looked like since 1990:

Labor Participation Rate History (1990 - April 2014)

It’s dropped 2.9 percentage points since President Obama took office. It had dropped 1.5 percentage points during Bush’s presidency.

I understand some of the reason for this drop could be people retiring. Regardless, it makes the unemployment rate statistic almost meaningless.

While writing this post, I happened to see an AFL-CIO blog post about this news. They failed to even mention the labor participation rate. Why does this not surprise me?

Have a good weekend, everybody.