Wednesday, July 31, 2019

With technology that can more closely monitor worker activity, will wages fall or not rise as much?

The Keynesians have come up with theories to explain why wages might be slow to fall in a recession. Here is one of them:

Efficiency Wage Theory-Companies set wages above competitive (that is, market determined) levels to increase labor productivity. This does two things:

1. It reduces worker turnover, since workers will want to keep this high paying job. This in turn reduces training and hiring costs. When that happens, productivity rises.

2. It reduces slacking since no worker will want to get caught not putting forth their best effort because the job pays so well. They would not want to get fired from a job that pays so well. The company cannot constantly monitor its employees, so the high wage prevents slacking.

The idea is that it was too costly to constantly monitor what all the workers were doing. But maybe things are changing now.

See Three Hours of Work a Day? You’re Not Fooling Anyone: Employers are arming themselves with new, more aggressive technology to measure how workers spend their time by Te-Ping Chen of The WSJ. Excerpts:
"It tracks the websites employees visit minute-by-minute, and has the ability to take remote screenshots of workers’ computers."

Hospitals are installing sensors to detect nurses’ handwashing practices and their location on the floor at all times. At AdventHealth Celebration in Florida, for example, more than 200 nurses’ whereabouts are tracked to gain a better idea of how to improve productivity and workflow.
“It’s just like a GPS where they can see where everyone is at any time,” says Patty Jo Toor, vice president of nursing and hospital operations. She says the technology can help coach nurses and isn’t used for punitive purposes.

Restaurants are using software to observe each of their waitstaff’s sales in real time. Drivers who work for United Parcel Service Inc. and Uber Technologies Inc. have their speed patterns tracked to boost efficiency and safety."

"Of companies based in the U.S., Europe and Canada, 22% of employers surveyed say they collect employee-movement data, 17% collect work-computer usage data, 13% collect employee fitness data and 7% keep tabs on the text in employee emails"

"Mr. Kropp thinks that so-called “nudge” technology, using data to gauge things such as time spent on tasks and encouraging workers to take breaks, can help boost productivity. But reliable conclusions can be hard to derive from the data, he says. For example, if office sensors detect that someone isn’t sitting in their desk chair, the takeaway might not be so clear: perhaps they have a standing desk, or are engaging with colleagues."

[at one company] "the amount of time employees spend on websites and apps classified as “productive”—have risen from about 60% to north of 85%."

"it lets managers spot patterns and praise employees who go above and beyond by detecting, for example, workers who take their laptops home and work after hours."

"When Sagar Gupta, executive vice president at Dallas-based Biorev, a 3D-visualization company, introduced the ActivTrak monitoring software in 2016, he was fed up with low work output. The software quickly revealed employees typically worked just three hours out of each eight-hour day. Since employees became aware their activities were being tracked, he says, statistics have dramatically improved."

"To encourage productivity, employees can log on to see their own productivity levels as well as that of their coworkers"

Tuesday, July 30, 2019

Many college dropouts are worse off economically than if they hadn’t started college

See ‘The College Dropout Scandal’ Review: A Matter of Degree. Naomi Schaefer Riley reviews The College Dropout Scandal by David Kirp in The WSJ.

It seems that part of the problem is that a little bit of college is no help on the job market. The big payoff is getting a degree since that is a signal to employers that you are smart, hard working and finish what you start. So if you paid to go to college and it does not lead to a better job, you will be worse off. I also like that it mentions the opportunity cost of going to college, that you don't get paid for any job you can't take.

The book covers what some schools are doing to help students. But the results are mixed.

“the contention that college is the engine of social mobility is false advertising for the 34 million Americans over twenty-five . . . who have some college credits but dropped out before receiving a diploma.” What is more, many such students “are worse off economically than if they hadn’t started college,” thanks to the money they’ve spent on tuition, not to mention the opportunity cost of the wages they’ve foregone.

When it comes to the “dropout scandal” there is plenty of blame to go around. One can start with high schools that don’t teach the skills children need to get a good job but instead encourage all students to go to college—even if they don’t have the ability or inclination. There is the federally funded financial-aid system that encourages colleges to keep raising prices—making higher education ever more out of reach for poor or working-class kids. And there are the colleges themselves—particularly the larger public schools: They don’t offer students much guidance about which courses to take or how to finish a degree in a reasonable amount of time."
Here are some earlier posts on related topics:

Maybe That College Degree Is Not As Valuable As You Thought

As college costs rise, sticker shock eased by student aid

Does It Pay To Go To College?

Who Is Most Likely To Default On Their Student Loans?

Student loan delinquency is higher than for other borrowing

The Diminishing Returns of a College Degree: In the mid-1970s, far less than 1% of taxi drivers were graduates. By 2010 more than 15% were

Student-Debt Forgiveness Is a Wonderful Boon, Until the IRS Comes Calling: Education analysts, student advocates warn of impending crisis from one-time tax bills individuals may not be prepared to pay off

The Diminishing Returns of a College Degree

For Some Grads, College Isn't Worth Debt

Is It Getting Too Expensive To Go College?

Is the U.S. student loan system broken?

Is College Still A Good Investment?

Why do employers pay extra money to people who study a bunch of subjects in college that they don’t actually need you to know? Signaling

Monday, July 29, 2019

Is the Phillips curve affected by prices that are acyclical?

The Phillips curve says that there is an inverse, and probably non-linear, relationship between the inflation rate and the unemployment rate. The inflation rate is expected to rise more and more as the unemployment rate falls (assuming demand increases past full-employment). Some of my links below to previous posts go into more detail and use graphs. If what this article says is true, unemployment might be able to go lower than previously thought before we get high inflation.

See A Key Reason the Fed Struggles to Hit 2% Inflation: Uncooperative Prices Recent studies show that a large segment of the economy, from health care to durable goods, appears insensitive to rising or falling demand by Paul Kiernan of The WSJ. Excerpt:
"Many of the prices consumers pay don’t respond to the strength or weakness of the economy.

For decades, mainstream economists have seen inflation as determined by slack—that is, spare capacity—in labor markets and the broader economy. Too much slack should cause lower inflation; too little should drive up prices. This is captured in the Phillips curve, which shows an inverse relationship between unemployment and inflation.

Recent studies have shown prices in some sectors—such as housing—do indeed rise faster when growth is in full swing, unemployment low and markets frothy. But a large chunk of the economy, from health care to durable goods, appears insensitive to rising or falling demand.

A paper published last month by economists James Stock of Harvard University and Mark Watson of Princeton University found prices accounting for nearly half of the Fed’s preferred inflation gauge, the personal-consumption-expenditures price index, don’t respond to changes in economic activity."

"The new research suggests that to lift overall inflation the Fed may have to stimulate larger price increases in sectors where the Phillips curve still exists to compensate for subdued inflation in those where it doesn’t.

Lately, it’s been a losing battle.

The cyclically sensitive components of core inflation, which excludes food and energy, have accelerated to 2.33% in the 12 months through May from 0.41% in mid-2010, according to the San Francisco Fed, just as falling unemployment would predict. But that has been offset by falling inflation in acyclical categories—such as health care, financial services and most goods—which has slowed to 1.04% from 2.26% in the same period."

Federal policies such as restraint on Medicare and Medicaid payments to hospitals and doctors and increased approvals of generic drugs have ended a decadeslong trend of rapid health-care inflation.

Growth in the power and speed of computer processors has pushed down prices for most electronics and slowed inflation in services like telecommunications and photo processing. The fracking revolution, enabled by sensors and software that allow energy companies to better locate hydrocarbons, has kept oil and natural-gas prices in check throughout the expansion.

Global factors may also play a bigger role than traditional inflation models assume. As emerging markets like China have expanded their share of the world economy, they influence commodity prices more, according to Massachusetts Institute of Technology economist Kristin Forbes. Her study also says transnational supply chains have more closely linked firms’ pricing to global demand and slack."

"The U.S. is now in its longest expansion on record and unemployment is near a half-century low, yet inflation, at 1.5% in May, remains stuck below the Fed’s 2% target.

Fed policy makers fear if consumers and businesses expect such low inflation to persist, they may adjust their own price and wage-setting behavior accordingly. That could cause low inflation to become entrenched"
Related posts:

The Fed chairman says the relationship between inflation and unemployment is gone

Unemployment Isn’t What It Used to Be: The low rate doesn’t take account of low labor-force participation. Wages are a better indication of slack
The Phillips curve is alive and well (unless it's dead)

Fed officials disagree on how much inflation the current low unemployment rate might cause 

Fed Looks for Goldilocks Path as Jobless Rate Drops  

Sunday, July 28, 2019

Farmers might be reducing supply of corn now in expectation of higher prices this fall

One of the shift factors we cover in supply and demand is expectation of future price. If buyers expect higher prices in the near future, they will try to buy more today to beat those higher prices, causing an increase or rightward shift in demand.

It is the opposite for supply. If you are a seller, you will reduce supply today if you expect higher prices in the near future.

See Farmers Stockpiling Corn in Response to Tough Growing Conditions by Kirk Maltais and Jacob Bunge of The WSJ. The article shows what is happening to supply and demand right now in the corn market (big companies are offering farmers more now for corn, indicating demand is increasing in addition to supply decreasing).

Also, the article mentions that meat prices might go up. This is because supply of meat will decrease since corn, a resource used to make meat, is increasing in price. Livestock need to eat corn.

Excerpts from the article:
"Agribusiness companies, including Cargill Inc., Archer Daniels Midland Co. ADM -0.22% and Smithfield Foods Inc. are dangling hefty premiums to buy bushels of corn in places where unrelenting rain this spring prevented farmers from planting millions of acres.

Some farmers, though, are opting to sit on their unsold grain, banking it in case of a diminished harvest this fall—and the potential for still-higher prices ahead.

“For now, we’re waiting,” said Ben Klick, whose family raises corn, soybeans and wheat near Navarre, Ohio. “You don’t want to be greedy, but guys don’t know what to do.”

The persistent wet weather that swamped U.S. farmers’ fields this spring is now upsetting U.S. grain markets. Corn futures contracts traded at the Chicago Board of Trade have climbed by more than 22% over the past three months on fears that poor planting conditions would cut the U.S. corn harvest to the lowest level in years.

The U.S. Department of Agriculture on Thursday projected 2019 corn production at 13.88 billion bushels, an 8% drop from the agency’s estimate in May.

Higher prices for grain—the main cost of raising livestock and poultry—could help propel meat prices, which are already increasing after a fast-spreading hog disease in Asia led to the deaths of hundreds of millions of pigs, according to industry estimates. Supermarket data compiled by the USDA showed retail pork prices are more than 9% higher versus this time last year, while beef prices are up 2%.

In a normal year, farmers haul the prior year’s crop to grain elevators and to buyers throughout the winter, spring and summer to make room in their storage bins for corn, soybeans and other crops planted in the spring.

This year is different. The wettest 12 months on record in the continental U.S. put many farmers far behind on planting, giving corn plants less time to reach full maturity and upping the risk that an early frost could kill off crops."

"In a normal year, farmers haul the prior year’s crop to grain elevators and to buyers throughout the winter, spring and summer to make room in their storage bins for corn, soybeans and other crops planted in the spring.

This year is different. The wettest 12 months on record in the continental U.S. put many farmers far behind on planting, giving corn plants less time to reach full maturity and upping the risk that an early frost could kill off crops.

The USDA this week estimated that only 57% of the U.S. corn crop is in good or excellent condition, down from 75% at this time last year.

“One thing a farmer learns is that if you can’t grow a crop in the new year, you hold on to your old crop to tide you over,” said Dave Marshall, a farm-marketing adviser with Nashville-based brokerage First Choice Commodities.

In response, grain buyers are boosting offers to entice farmers to open up their bins."

"“End users are in a panic,” said Tanner Ehmke, industry research manager for agricultural lender CoBank. Crop traders, ethanol plants and livestock producers “want corn now because of the unknowns on this crop.”

The rain and flooding is making farmers “tighter-fisted,” according to Jason Britt, president of Central States Commodities Inc."

Saturday, July 27, 2019

The Average Profit Margin for a Restaurant

By Patrick Gleeson, Ph. D.,; Reviewed by Michelle Seidel, B.Sc., LL.B., MBA. According to a frequently cited study by Ohio State University on failed restaurants, 60% do not make it past the first year, and 80% go under in five years.
"There are two profit margins widely used by accounting professionals: gross profit margin and net profit margin. Confusingly, some restaurant journalists write about profit margins without specifying which. Worse, when you read these articles carefully, you see that some use "profit margin" to refer to the gross profit margin and some use the same phrase to refer to net profit margin. There's a huge difference!

Gross Profit Margin

Gross profit, is what is left after you deduct the direct costs of goods sold – such as food costs and labor costs directly associated with preparation and serving. It's a useful statistic for professionals evaluating a restaurant's efficiency and profitability, but it's not at all the same thing as net profit – which includes all costs – among them are administrative expenses, building costs, taxes and interest. Net profit is what you put in your pocket.

Difference Between Gross Profit Margin and Net Profit Margin

Gross profit margin equals the revenue minus the cost of goods sold divided by revenue. Net profit margin equals revenue minus all costs, direct and indirect, divided by revenue.

When you want to know whether a restaurant is likely to succeed or go under, the best first place to look is at its net profit margin. If the net profit margin is 10 percent – this means that out of every dollar the customer spends – the restaurant pays 90 cents for all expenses, and retains ten cents in profit – which, incidentally, isn't at all bad. The average net profit margin for all S&P 500 companies is a little over 8 percent.

Fast Food Margins

The range of net margins in the fast food industry are quite wide. A few chains, especially McDonald's, have very healthy net margins. In 2017 , the average net profit margin for all McDonald's restaurants was over 22 percent. Among all franchises, however, net margins are drastically lower.

In 2012, for example, when McDonald's had a net profit margin of just under 20 percent; Burger King's net margin was less than a third of that and another big chain; Wendy's, had a scary thin 0.3 percent. This is very bad, but the fast food industry average for 2012 was only somewhat better, at 2.4 percent, a very thin margin that leaves little room for error.

Fast Casual and Casual

Casual dining, as it used to be called, is now commonly divided into two categories: fast casual and casual, sometimes called "family style."

Fast Casual restaurants include Chipotle, Shake Shack and similar chains where you order at the counter, sometimes having the food brought to the table, sometimes carrying at least part of your meal to the table yourself. It's often said that fast casual restaurants are distinguished from fast food chains by their healthier menus, but that may be more an aspiration than an actual difference.
In 2013, the fast casual segment of the restaurant industry had an average net profit margin of 6 percent. Overall, the fast-casual and casual segments together also averaged 6 percent net profit margins. To put this in context, this is a little more than 2 percent worse than the average of all S&P 500 companies, but nearly three times better than the fast food segment.

Full-Service Margins

Full-service restaurants are basically what's left after you subtract fast food, fast casual and casual restaurants. This market segment includes fine-dining restaurants, but it also includes less elegant places where, as in the fine dining segment of the industry, you're ushered to a table and handed a menu. The difference between fine-dining and other full-service restaurants isn't that the approaches are entirely different – both are "full-service" – but in the degree of refinement and, yes, how much it costs. The Houston's restaurant chain is probably right at about the dividing line between "full-service" and "fine-dining.

In 2017, full-service restaurants had average profit margins of 6.1 percent, essentially the same margin as fast-casual and casual restaurants."