Let me start by saying that I am not in the category of what I would call a “libertarian wackjob” (no offense to any of my dear readers). While I don’t particularly want the government all up in my business (don’t tell me who I can and cannot marry, and don’t take away my cloves because kids happen to like them), I get that market failures sometimes exist and there is a socially beneficial role for government to play in some forms of commerce. I am also, as you know, a big proponent of voting with one’s dollars. These two characteristics lead me to be very conflicted when I read things like this:
Governor Deval Patrick plans to direct state employees to boycott the Hyatt while conducting state business unless the hotel company rehires the housekeepers it fired, he said in a letter sent today to Hyatt chief executive Mark Hoplamazian.
Okay, since I do get that not everyone lives in the People’s Republic of Cambridge, I will give some background on the issue (which can also be found in the article). In a nutshell, the Hyatt fired all of its $15 an hour housekeepers and is now getting such services via a hospitality services company that pays its employees $8 per hour. People in Boston seem upset by this:
The firings have prompted a public outcry against the hotel company. The union that represents Boston-area hotel workers organized a rally in front of the Hyatt Regency Boston last week and several local politicans and business owners have called for a boycott. The National Employment Lawyers Association canceled its contract with the Hyatt Regency Boston after it heard the news and is searching for another Boston hotel to hold its October seminar.
There are also some hazy details about the old workers unknowingly training their replacements and such. (a douchey move for Hyatt, if true, but not illegal) So let’s think about this: Hyatt has a bunch of hotel rooms that it owns, or at the very least has long-term leases on. We’re in a recession, and people probably aren’t ponying up cash like they used to for a nice hotel, but Hyatt is still stuck with these rooms. This is going to translate into lower prices for hotel rooms, which translates to lower profit for Hyatt. Now Hyatt’s investors* are displeased and ask if there is anything that can be done to restore profitability. So the company starts poking around for cost-cutting measures since fixing the revenue side seems like a lost cause. It comes upon a services firm that says it can cut the hotel’s maintenance costs by a decent amount. What is the hotel to do?
Well, the hotel is in a tough spot- to not take the cost-saving opportunity isn’t in the best interests of shareholders, at least not directly. (Wait before you protest.) To take the opportunity is to put some people out of work, which is no good for them. The part that is being ignored, however, is the fact that the workers being brought in had jobs whereas they hadn’t had jobs before. (In other words, I’m not going to hold my breath to see rallies in support of these people’s rights to work for $8 an hour if that is what they choose to do, even though it’s the same principle as the one that the actual rallies are about.)
So let’s be clear about who wins and who loses:
Hyatt (and thus shareholders)- lower costs
The outsourcing company- they wouldn’t have offered the deal to Hyatt if it wasn’t good for them
The new employees- they weren’t employed before and now they have jobs, albeit low paying ones
The old employees- they no longer have jobs and are now on unemployment. (I am pretty sure that the unemployment benefits would give them an effective “wage” of $8 an hour, which I find to be perversely funny.) Note that if these people had been willing to work for $8 an hour, their wage would have been $8 (or could have been set to $8) and there would not have been an incentive to outsource. (In this vein, if the union wanted to make a stronger argument, it should argue that the existing employees weren’t given the first right of refusal to the $8 an hour jobs.)
Now let’s try to step away from our bias towards the status quo and reframe the situation. If the company gets strongarmed into rehiring the old employees, who wins and loses? Now the old employees win at the expense of everyone else. If the move from the $15 an hour to the $8 an hour employees is a bad thing, shouldn’t it stand to reason that a move from the $8 an hour to the $15 an hour employees should be a specifically good thing? But the logic doesn’t quite hold.
Nonetheless, if you feel like voting with your dollars and deciding that you don’t want to support organizations that don’t pay what you feel is a “living wage,” have at it. I would even commend you for voicing your opinion in this way. (I am very supportive of the lawyers’ association for sending a “you’re being a jackass” signal, for example, as long as that signal represents the underlying opinions of its members. I am also glad that the media is making this information available, since it’s hard to vote with one’s dollars when the issues at hand aren’t visible.) Furthermore, if people in general were willing to take their business to firms that paid a living wage, you can bet that Hyatt would catch on pretty quickly and pay a living wage. (In this case, paying a higher wage would in fact be maximizing shareholder value.)
The problem here is the usual one of potential coordination failure. To some degree, the lowered cost of housekeeping is going to allow Hyatt to keep prices down. If people are willing to pay for the satisfaction of knowing that they are not supporting an organization that they feel is acting improperly, then there is no coordination problem. However, if people continue with the status quo because they think “well, it’s not like Hyatt is going to change its mind if little ol’ me walks away,” then Hyatt can get away with seemingly unfair policies.
Coming back to the main matter of interest, is it then right for the government of the Commonwealth of Massachusetts to be voting with its dollars? On one hand, it can overcome the potential coordination failure because it’s large enough to have some market power. On the other hand, the government has a fiduciary duty to act on behalf ALL of its constituents, not just some. Taken this way, it seems unjustified to automatically put the welfare of the existing employees as a higher priority than that of the company, shareholders, service provider and new employees. In addition, if the Hyatt was the best deal around for state employees, then the commonwealth is using taxpayer money to fund the boycott. As such, this is not really the appropriate use of government- if Deval Patrick wants a minimum wage of $15 in Massachusetts, then he can try to pass a law to that effect. I won’t like it, but I will at least acknowledge that he went through the proper channel. This whole boycott idea just seems like a way to legislate without going through the necessary steps, which is seriously not justified. I can only hope that the people of this fine commonwealth are smart enough to see through the grandstanding.
In all of this, there is an unfortunate economic point to keep in mind: wages are determined by the supply and demand for labor, not on some inherent measure of “worth” or “value.” As such, it’s pretty arbitrary to even talk about what a “fair” wage for a job is since that is largely a subjective matter and not particularly correlated with actual market outcomes. But that’s the way the world works in a capitalistic society, for better or for worse. (If you don’t believe me, see “teachers, underpaid.”)
* Before you get all up in arms with “but Hyatt isn’t publicly traded, so you can’t talk about shareholders and investors,” please note that a. the current shareholders are in fact the Hyatt family and whether the stock is publicly traded isn’t relevant here, and b. the company is prepping for a long-awaited IPO. Not surprising then they they are trying to be on the ball regarding cost cutting.