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this post was submitted on 14 Mar 2024
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Imagine I manage a business where my employees earn $1000 a week, working five 8-hour days. Suppose my profit margin per employee is 10%, resulting in a $1100 return for each one.
Now, if a new law mandates that I pay my employees $1000 for a 4-day workweek, my operation could start incurring losses. The question then arises: where would the necessary additional funds come from? Likely, I'd have to increase my prices. I'm open to considering this arrangement, but I seek clarity on the strategies to mitigate such financial gaps. Should a 4-day workweek lead to a 20% hike in prices, I'm uncertain about the benefits of this change...
I'm all for a more healthy work/life balances, but typically businesses don't like to incur extra expenses, so I would predict if workers are present 20% less, businesses would charge 20% more to make up the gap, which means workers would end up needing to earn more money, which may lead them to work more hours, making this change pointless.
If this came with some consideration from the federal government, like "we will give a 20% tax break to businesses that do this" I would consider the idea funded and I think it may work. Otherwise, this just feels like voting our way into price increases.
Do you think your overhead would also decrease if you only had a 4-day work week?
Look at it this way. Let's say I run a widget factory. I have a worker, Joe, that I pay $1000/week to. Each day, Joe creates me a widget that I can sell for $220. That means at the end of the week, I have 5 widgets I can sell for $1100, yielding me $100 profit.
Now, we move to a 4 day work week. I pay Joe $1000. He creates me 4 widgets, still worth $220 each. I sell them for $880 total. I now lose $120 each week.
Under the current plan, it seems the guidance is that Joe will magically start working faster and produce more than 1 widget per day. If he does not, my other option is to increase the price of widgets or to decrease the amount of money I pay Joe.
I think if widget factories could have that tight of margins, the issues would be totally different.
No competent business owner would employ someone whose value could become non-viable with a fluctuation in fuel cost.
The average profit margin in the US is approximately 7%... a 10% margin is considered healthy. Fluctuations in fuel prices DO threaten businesses. That's why you see fuel/transportation surcharges and price increases.
Edit: you said "but nobody's explaining the economics to me", here you go, here's the basics of corporate financial management with real numbers and a tiny bit of macroeconomics at the end.
Wait, I don't get it. You're saying if you pay a worker 1000$ a week and get revenue of 1100$, then you have a profit margin of 10%. But that's NOT profit margin (at least not the one one would use for analysis). Not to mention that those numbers are unrealistic because you'd be working at a loss for a very long time, almost guarantee.
You can't just pull numbers like that and say, "unprofitable!". Of course it isn't. You made it that way.
Besides, you're ignoring the rest of the expenses that often outweigh the payroll fund.
Back to what you called "profit margin," I'd call it "Return on Payroll Fund." It's weird, I don't like it, it ignores all of the other costs that go into creating a product, don't use it. In financial management, we use RoS, which is EBIT/Revenue. That's probably what you were thinking of. Another name for it would be "operating profit margin," likewise net profit margin would account for ALL of the expenses and not just operating ones.
Now, let's look at real numbers. I'll take Nutrien's 2023 audited financial statement as an example. (Numbers in brackets are what's deducted to get what's not in brackets) Sales - 29056 Freight, transportation, distribution - (974) Cost of goods sold - (19608) EBIT - 8474 EBT - 1952 Taxes - (670) Net earning - 1282
Out of cost of goods sold (2858) is cost of labour, let's also add (626) from general administrative expenses, and just say it's all wages.
Effective tax rate - 670/1952*100% = 34,3% (wow, that's a lot for where I live, also ignoring mining tax for simplicity)
Let's see what happens to our efficiency once the changes take effect.
All of costs can be divided into Fixed and Variable ones. Labour, in this case, is Variable because we can manipulate it by employing more staff to compensate for reduction in working hours and keep the sales at the same rate. (Contract workers are usually Fixed Cost, but it's all relative, as no Fixed Cost is ever truly fixed.)
Going from 40 => 32, we have a 20% reduction in working hours. Mind you, this doesn't mean there will be a 20% hit in productivity. It may be more, it may be less (most likely less), for simplicity let's say it's 20%. So, we need 20% more workers to compensate. (2858+626)*120%=4180.8
New EBT = 1952 + 2858 + 626 - 4180.8 = 1255.2 New net profit = 1255.2*(1-34.3%) = 824.7. Mind you, the effective tax rate will probably be lower if employment affects deductibles.
So, our net profit margin went from 1282/29056 = 4.4% to 2.8%. Looks bad at first glance, but it's also a bad year. A year prior net profit margin was at whopping 20,3%, so a decrease from 4.4% to 2.8% would be nothing in comparison.
Will it result in increased prices? Yes, but it will also lead to economic growth, because more free time = people spend more money = companies earn more = companies grow faster, but so does inflation.
Awesome, this is the exact point I was trying to make. You can add further arguments that there will be mitigating factors to this, but my reflex was that if this legislation passes, consumers will see price increases.
The real question isn't if it will or not, but by how much. If I were to guess, not a whole lot.
You could probably find some research done on this topic already.
So in this example, the revenue is $1100 a week per worker. If the worker does make $1000 for that time, that does spell doom.
Let's work it the other way. A typical business allocates 15-30% of its revenue to payroll. If an employee is making $1,000 a week, that means that if this widget factory was making enough to be a reasonably successful business in the US today, their revenue per worker would range from $3,333 to $6,667. This means the company would be "losing" somewhere between $667 to $1,333 a week by paying the same wages but losing 1 widget.
Overhead is not exclusively the $1,000 you pay Joe. It is also whatever else you pay to keep the factory in business and Joe working. Some of this, like electricity, will decrease when Joe is at work less.
Now if you consider that for decades the widget factories have been making more widgets, but paying the workers lower wages, we have a healthy widget empire more than capable of supporting a 4 day work week.
Examples like these are only helpful if we use realistic numbers. $1,000 a week for a worker's wages is plausible. $1,100 in revenue from that work is not.
I used those figures for ease of understanding and easy math. At no point did I believe there was a factory somewhere selling widgets, or that a person named Joe was salaried as he built them. My overall point is that for all economics to remain the same, average productivity per worker per hour must remain the same, otherwise there will be price increases or other economic effects.
I used those figures for ease of understanding and easy math.
Easy, but not accurate and therefore misleading.
At no point did I believe there was a factory somewhere selling widgets, or that a person named Joe was salaried as he built them.
No one thought you did.. until now.
My overall point is that for all economics to remain the same, average productivity per worker per hour must remain the same, otherwise there will be price increases or other economic effects.
Correct, things will change. The point is that the system can handle those changes. Price increases will happen, sure. But if we take a look at the year prior to [current year], prices tend to go up. Rather than use this as an argument against working fewer hours, or not paying employees more, we should be using the systems we have in place to provide as much benefit to people as is reasonable. Since the 4 day work week does work, (many examples of companies increasing productivity this way) this is a reasonable benefit to push for.
Interesting, although none of this has to do with overhead, and by extension, my question...
"overhead" is that $1000/week I pay Joe. I'd love to understand this plan a little more, but so far no one is explaining the economics of it to me.
You are right in saying you have two option, pay Joe based on work output (i.e. decrease his pay for the 4 widgets he now produces or take less profit.).
But there's more to you then just Joe and the widgets. There's the market buying the widgets, now everyone is working four days, has the demand for widgets changed? If this is a market where the demand is increased, you need more widgets, you can sell them at a higher price and hire more workers to increase output. If the market has now shrunk, Joe's reduced output is fine.
It took a lot of effort to reduce the work week down from around 80 where it was at the beginning of the century and from the purely economic perspective of "we will have less output and the country will fail" it didn't. Businesses did and guess what, it's likely because they weren't viable to begin with. Most workers on minimum wage currently can't survive an unexpected expense, the current system isn't paying enough to begin with. I'd argue lots of business right now should fail, because they aren't being run for those actually making the widgets. Joe is burning his labour for cash and the output is widgets. In this scenario, what are you doing to earn the $20? Supplying Joe the chance to make widgets? Is that worth $20 from Joe's labour?
Joe now has 72 hours off to rest and use his time more wisely. Joe uses this time to further his education follow a career in a different field other than making widgets. This may not make him more productive but he is happier. Eventually he will leave with his further education and move onto something more fulfilling, or just using the extra day to spend more time with his kids or doing whatever recreation he really loves. He will work on having a fulfilling life. You will move production to Bangladesh and bunch of people you are paying $5 a hour will die in a widget factory fire.
I own the equipment that produces the widgets. I pay the insurance policy that covers Joe getting injured at work. I pay for distribution and marketing of the widgets. If Joe feels like taking on all these responsibilities, he is free to quit his job and start a competing widget manufacturer.
What happens if Joe doesn't show up for work?
No... $1000/week is Joe's salary. That's payroll. Overhead is things like utilities at your workshop/factory.
So you won't be able to steal as much of the value Joe creates from him and instead have to pay him a fairer share? Oh darn. You mean you won't be able to live in luxury while others do the work for you?
Fuck off lmao
"Life of luxury" and "fair share" isn't the defining situation for tens of thousands of small businesses across the USA.
or you can go get a real job, admit that private property is theft, and let joe sell his own widgets.
I don't have to "let" Joe sell his own widgets. He'd be free to do that regardless. I guess your guidance is that the business should just die under this new model.
my guidance is that you don't need to be profiting off of the labor of other people.
It's typically my experience that a great number of people are not entrepreneurial. They just want to show up to work, do their job, get paid and go home. I'm not talking about coercion of anyone to be FORCED to work for a business. I am just trying to understand how this new legislation would work. My hunch that is if this was passed, consumer prices would increase 20%. If you believe otherwise I would like to understand more.
i'm just here to rail against the capitalist system. you can argue with someone else about the minutia of reformist policies.
If you reject capitalism, I can see why this bill would be highly uninteresting to you.