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Watch Out Businesses: If You Try To Operate Efficiently, The Government’s Gonna Punish You…

September 23rd, 2009 · 16 Comments
Policy

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:

Wins:
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

Loses:
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.

Tags: Policy

16 responses so far ↓

  • 1 Daniel J. Smith // Sep 23, 2009 at 4:24 pm

    Just a clarifying point on a very small part of your excellent post. It’s not that us libertarian wackjobs ( 🙂 and in my case anarchist wackjob) don’t believe that theoretically, when you hold up the competitive equilibrium model that you can find discrepancies that can be fixed. You can. Our problem is that: 1. The model assumes away all the dynamic processes of the market that lead to cooperative behavior in the real world (institutions) and has so many unrealistic assumptions that it precludes the construction of policy applications without serious reconstruction. In addition, lag effects, political processes, aggregating and analysis of data all complicate government interference in the market when it “is needed.” 2. That government doesn’t have the knowledge to know when there is a market failure ( http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1241542 ) or the best way to solve it, nor all the unintended consequences that will result from it (Hayek) 3. That interference in the market leads to further intervention (Mises) and atrophy of voluntary cooperative and altruistic behaviors (which are well established in the literature: http://www.danieljosephsmith.com/EndogenousLaws.html ). In other words, there is no historical case of a limited government remaining limited, nor a theoretical justification for why it would). 4. We apply the same behavioral assumptions to politicians that we apply to individuals, and thus are forced to recognize that politicians and bureaucrats don’t always (never?) have the incentives to do what they would need to do – given that they could overcome the above problems and actually know what they need to do (Buchanan).

    Regards and keep up the good work!

  • 2 econgirl // Sep 23, 2009 at 4:44 pm

    You’re way too coherent to be a libertarian wackjob. So there.

  • 3 Less Antman // Sep 23, 2009 at 7:03 pm

    I would add that government means whacking or threatening to whack people if they don’t go along with the solution, so I prefer to be called a libertarian non-whackjob, if you please. 😉

  • 4 econgirl // Sep 23, 2009 at 8:27 pm

    My favorite comment from the Boston Globe article:

    What a shock that a hotel chain found ways to cut costs after the state increased hotel taxes so much…Many businesses will be forced to make similar decisions in the face of government mandated expenses.

    Geez, I hadn’t even thought of that…

  • 5 econgirl // Sep 23, 2009 at 8:33 pm

    Or this one:

    I agree with this action from the governor, but where was his outrage before the story hit the news media? All employers are required to notify the State before a mass layoff. So the State ought to have known about this layoff in advance! If the State has such an interest in ensuring that laid-off employees are treated fairly, then it should have reached out to Hyatt from the beginning.

    Given the size of the Hyatt enterprise, I am unclear as to whether the layoffs qualify under the notification rule, but, if so, it’s a little more egg on the face of Mr. Patrick.

  • 6 Mitch // Sep 24, 2009 at 2:27 pm

    In the context of wal-mart, many people have argued that some labor practices have negative externalities. So there’s a (vague) argument for state intervention there. It’d be nice to see someone quantify those externalities though; I don’t know whether anyone has.

  • 7 econgirl // Sep 24, 2009 at 3:44 pm

    @ Mitch: I don’t necessarily disagree, BUT those externalities would have to actually be investigated before there is real justification for doing anything. A vague “there are externalities here” argument could be used to support almost any policy (see “people don’t want to think about gay people getting married, so that is a negative externality”). More important is the point that if the state wants to intervene, then it can intervene officially rather than having Governor Patrick taking it upon himself to unilaterally decide how things should go.

    We live in a society where laws are well-defined, which means that it is (relatively) straightfoward to figure out how to maximize your utlity given the legal confines you face. It would be very problematic to try to make good decisions when the rule in place is “if the government selectively decides to get pissed at you then you are going to be punished,” which is what is happening here.

  • 8 Mitch // Sep 24, 2009 at 4:06 pm

    Granted, those externalities would have to be investigated; I was hoping that there was already some work on exactly that that I wasn’t aware of. And your point about the state being capricious is exactly right.

    I also wanted to comment (in a similarly hand-wavy way) on your “it’s arbitrary to even talk about fairness” comment at the end. The subjectivity of fairness doesn’t seem to me to be fatal to the idea of talking about it or even modeling it quantitatively. Individual supply and demand curves are also largely subjective, and the true shape of the non-equilibrium parts of those curves is not easily measurable. But they’re bedrock econ 101 stuff.

    With all the work that the behaviorists and neuro-econ people are doing, will it be that much longer before we do actually have quantitative models of what people consider fair or not? Something like the ultimatum game seems like it’s already halfway there.

  • 9 Daniel J. Smith // Sep 24, 2009 at 5:10 pm

    Mitch, my thoughts on that is that as economists we are specially trained to address economic issues and do not have (on the most part) the training to be philosophers. I support cross-fertilization of fields, but to retain the rigor of science, economists should focus on means analysis, and not the ends. Sure, we should have opinions about the ends (I sure as heck do), and can debate them, but not in our role as economic scholars.

    Demand and supply are laws. They are theoretical concepts that are universally valid (answering an objection that I know comes up when I make that claim: giffen goods violate the ceteris paribus assumption by allowing a variable, income to change), when the cost of something goes up you engage in less of that activity. Incentives matter and people respond to them…nothing subjective about it. The subjectivity only factors in if you believe supply and demand are just empirical tendencies we observe.

    Though I certainly won’t rule out the possibility of advances in neuro analysis that allow some kind of measurement in a newfangled hedonometer contraption, human logic, and conceptions of fairness don’t seem to be of the closed form, static variety necessary for quantitative analysis or aggregation (Beinhocker, Origins of Wealth).

  • 10 Matt D. // Sep 24, 2009 at 5:34 pm

    mmm. Cloves

  • 11 Jenderson // Sep 26, 2009 at 11:38 pm

    I’m so glad I found this site.

    You are awesome!

    They need to give you an award or something.

    Thanks!

  • 12 econgirl // Oct 1, 2009 at 3:45 pm

    Update: Apparently the Mass. government isn’t actually so keen on the boycott: “Resolution for state to boycott Hyatt over firings is defeated”

    http://www.boston.com/business/ticker/2009/10/resolution_for.html

    I think that, more than anything else, I am happy to know that Deval Patrick can’t really just call for a boycott on a whim.

  • 13 Andrew Neely // Oct 1, 2009 at 6:30 pm

    Looks like boingboing.net has you covered on the cloves front:

    HOWTO flout the Obama administration’s flavored tobacco ban and make DIY homemade clove cigarettes – http://www.boingboing.net/2009/10/01/howto-flout-the-obam.html

  • 14 kcmike // Oct 12, 2009 at 4:01 pm

    Using this logic, you can rationalize paying people .10 per hour.

    My opinion is somewhere in between. If the Hyatt got into trouble with child labor laws would you have a problem with the state mandating that no employees stay there until they clean up their act? Probably not. The bottom line isn’t everything. And, for the record, i am a business owner. I don’t ALWAYS choose the cheapest. There’s a lot of factors to consider when making decisions like this. I applaud the state for standing up for Unions.

  • 15 econgirl // Oct 12, 2009 at 6:04 pm

    To play devil’s advocate, if people are willing to work for $0.10 per hour, then why not let them? There’s some interesting psychology going on here, since the idea of unpaid interns (and I don’t mean the ones getting college credit) doesn’t generate nearly the same level of outrage as underpaid employees, even though they are essentially the same thing.

    On a more objective level, there are two important differences between the examples you give and the one in the original post. 1. Breaking child labor laws is actually against the law, whereas hiring cheaper employees is merely being sort of douchey, so I would surely expect the responses to be different. 2. The state wasn’t standing up for unions, since the workers themselves were not unionized. (There were some unions protesting on their behalf, but they were not actually part of a union, at least from what I read.) Even if they were unionized, however, it’s not really the state’s place to take a side in the debate between the union and the employer unless one side clearly benefits the constituency at large.

    That said, if you want to write an angry letter to Hyatt, I’d be happy to proofread. I’d even pay for the postage. It’s not like I am pleased with Hyatt’s actions, I am just opposed to de facto ruling without proper consent or procedure.

  • 16 Kcmike // Oct 12, 2009 at 10:48 pm

    Econgirl: To play devil’s advocate, if people are willing to work for $0.10 per hour, then why not let them? There’s some interesting psychology going on here, since the idea of unpaid interns (and I don’t mean the ones getting college credit) doesn’t generate nearly the same level of outrage as underpaid employees, even though they are essentially the same thing.

    Housekeepers and college interns are hardly a fair comparison. In regards to to the .10 per hour, try reading the Grapes of Wrath. There will always be businesses who will take advantage of people and try and get them to work for .10 per hour. The almighty ‘freemarket’ will not and has not always work for the sucker making .10 per hour.

    I applaud any organization, whether it’s private or state which will take a stand against this type of behavior. It’s the negative publicity price the Hyatt will have to pay. Will it matter in the end? Probably not. The Hyatt will certainly stay in business, but in this case, being shitheads probably ended up costing them money.

    Regarding the child labor comment. I realise it’s a criminal act, I was thinking more of the Hyatt getting charged and fined. What happens after?

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