How a 12-Year Old Canadian and U.S. Unions see Business Differently

Posted by PITHOCRATES - May 12th, 2013

Week in Review

Advancing technology has greatly increased productivity.  Allowing fewer workers to do what workers a generation earlier did.  Causing our workforce to age.  Fewer workers are entering the workforce than are leaving it.  And costly union contracts paying pensions and health care to those who have left the workforce has decimated union membership.  For the costs they place on business have made these businesses uncompetitive in the market place.  Chasing manufacturing jobs out of the country.  Leaving union membership in the private sector at its lowest rates since the heyday of the labor movement.  To understand why let’s take a business lesson from the Canadians.  Who are trying to encourage their kids to become entrepreneurs.  Unlike in America.  Where business and profits have become a 4-letter word (see Canadian entrepreneurs: Born or made? by BARRIE McKENNA posted 5/10/2013 on The Globe and Mail).

[Entrepreneurial Adventure] pairs students with local business people to create a business, design a product, sell it and then give the profits to charity.

Why?

Evidence suggests Canada suffers from a weak entrepreneurial culture. While it’s relatively easy to start a company, the record of turning start-ups into fast-growing and successful enterprises is less convincing.

A 2010 study by Industry Canada…

… found that Canada generates a lower proportion of fast-growing companies than other developed countries, that relatively few small companies export and that the age profile of business owners is getting older…

Many business schools, including McGill University and the University of Toronto, now offer special entrepreneurship programs.

This is a problem.  For the number one job creator in any free market economy are small business owners.  People who go into business for themselves.  Taking great risk.  And hiring people as they grow.  This is the entrepreneurial spirit.  People who start out small.  And become someone like Steve Jobs.  Most people don’t understand the entrepreneurial process.  And the importance of having a business-friendly environment to encourage entrepreneurialism.  To create jobs.  To grow a healthy economy.  Creating new products that make our lives better.  And to do that one of the first things an entrepreneur must learn is what this 12-year-old learned.

“Some things work and some don’t,” acknowledged Alim Dhanani, 12, who worked on project management and Web design for the company. “To sell something, you have to have the right price. Not too small, so you have a profit, but not too big, so people will buy it.”

A 12-year-old can understand this.  The role of prices in the economy.  They have to be high enough to pay the bills.  But low enough to encourage people to buy from you.  Often times it’s not a matter of a business owner determining the price he or she wishes to charge.  They have to figure out how to pay their bills (and earn a profit) at the prevailing market price.  Something labor unions don’t understand.  Or they simply don’t care (see Fast-food workers in Detroit walk off job, disrupt business by Steve Neavling and Lisa Baertlein posted 5/10/2013 on Reuters).

Hundreds of fast-food employees in Detroit walked off the job on Friday, temporarily shuttering a handful of outlets as part of a growing U.S. worker movement that is demanding higher wages for flipping burgers and operating fryers.

The protests in the Motor City – which is struggling to recover from the hollowing out of its auto manufacturing sector – marked an expansion in organized actions by fast-food workers from ubiquitous chains owned by McDonald’s Corp, Burger King Worldwide and KFC, Taco Bell and Pizza Hut parent Yum Brands Inc.

Fast-food workers, who already have taken to the streets in New York, Chicago and St. Louis, are seeking to roughly double their hourly pay to $15 per hour from around minimum wage, which in Michigan is $7.40 per hour…

“People can’t make a living at $7.40 a hour,” said Rev. Charles Williams II, a protest organizer. “Many of them have babies and children to raise, and they can’t get by with these kind of wages.”

Those workers face high hurdles in their fight for better pay. Low-wage, low-skill workers lack political clout and face significantly higher unemployment than college graduates…

The Detroit action was put together by the Michigan Workers Organizing Committee, an independent union of fast-food workers, that is supported by community, labor and faith-based groups such as the Interfaith Coalition of Pastors, UFCW Local 876, SEIU Healthcare Michigan and Good Jobs Now.

The unions want to do to fast-food what they did to the automotive industry.  In this case the union basically gave unskilled workers the wages and benefits of skilled workers.  Sounds great if you’re an unskilled worker.  But the UAW priced the U.S. auto manufacturers out of the market.  The Big Three are a shell of what they used to be.  With both General Motors and Chrysler requiring taxpayer bailouts to avoid bankruptcy.  And pay for their crushing pension and health care cost obligations.  For GM was paying for more people not working than they were paying to work.  Even a 12-year-old can understand that this is a business model that just won’t work.

So what will happen in fast-food restaurants if you raise the labor wage from $7.40 per hour to $15 per hour?  That’s a labor cost increase of 103%.  In the restaurant business the rule of thumb for calculating your selling prices is as follows.  You calculate your food cost then triple it.  For in general one third of a menu price goes to food.  One third goes to labor.  And one third goes to overhead (utilities, rent, insurance, etc.) and profit.  Now let’s take a typical combination meal (sandwich, fries and beverage) price of $7.50.  One third of this price is $2.48 which represents the labor portion of the price.  The increase in labor is 103%.  So we take 103% of the $2.48 ($2.54) and add it to $7.50 to get the new selling price of the combo meal.  Bringing it to $10.04.

What will customers do?  Now that the combo meal will cost $2.54 more will they just continue to eat fast-food like they once did?  Will they stop adding an extra item from the dollar menu?  Will they just buy a burger and eat it with a beverage from home?  Will they just buy from the dollar menu instead of buying combos?  Of course, with the increase in labor costs that dollar menu will have to become the $2.03 menu.  Will people stop going to fast-food as often as they once did?  Some may decide that if they’re paying for a $6 hamburger the may go to a diner or bar for a $6 hamburger.  Worried about the lost business would fast-food owners try to cut their costs elsewhere to try to continue to sell fast-food at the market price?  By hiring fewer people?  Pushing current workers to part-time so they don’t have to give them costly health insurance?  Or will they just close their restaurant.  As people just won’t pay fancy restaurant prices for fast-food.

That 12-year-old in Canada would understand how the higher labor costs would affect business.  Causing changes in buying habits.  And changes in business practices.  He would not start up a fast-food franchise if labor prices were 103% higher than they are now.  For he would have to raise prices high enough to pay the bills.  But when he did they might be too high to get people to come in and buy food.  Causing a fall in business.  And a loss in revenue.  Making it more difficult to pay the bills.  That 12-year-old would see this as bad business.  Because he understands that a business owner can’t charge whatever he wants to charge.  He has to figure out how to stay in business while selling at the prevailing market price.  And though he may love fast-food he knows that his allowance won’t be able to buy as much as it once did.  So he would reduce his purchases at fast-food restaurants.  Just as his father will probably take the family out less often because of the higher prices.  Just as single mothers struggling to pay their household bills will, too.  But the unions don’t understand this.  Or simply choose not to.  Instead they just tell the workers that their employers are greedy.

It’s a sad day when a 12-year-old has better business sense than our unions.  Then again if unions cared about business they wouldn’t have bankrupted two of the Big Three.

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