I learned in microeconomics class some time ago about the ‘law of unintended consequences.’ Like most things in the economist’s lexicon, it’s pretty stilted and impersonal. The rest of us might be more formally acquainted with the simple phrase ‘the road to hell is paved with good intentions.’ I would like to try to translate ‘economist’ to ‘normal speak’, and explain why the minimum wage policies of the Australian Government are making it difficult for social enterprises, like the one that I own, to employ some of the most marginalized people out there. In my turn of the phrase, ‘the road to unemployment is paved with good intentions’. We are acutely aware of how many people we are not able to reach, and how many we have to turn away because we can’t afford the wage bill. When learning about production in microeconomics, it’s easy to see things as pretty impersonal, when you are living it, it’s another matter entirely.
Let’s start out with some basic facts:
- In economist speak: Capital*Labor*Technology=Output
- In normal speak: Machines*People*Knowledge=Output
Don’t worry, I’m not actually going to break these equations out, or even rearrange them algebraically, but it’s important to realize that we can reach the same output in a few different ways. We can improve or add more machines (aka industrialization, or mechanization), we can add more people to the same machines, or we can train the people that we have to use their machines more effectively (little time-savers like keyboard shortcuts, or training actually go a long way). Each of these has a limit. Elon Musk hasn’t been able to create a machine-only factory for cars, no matter how much money he throws at it. Likewise, if you add a lot of people to the same machine, eventually, they end up getting in each other’s way. There is also only so much you can do with antiquated machines. There were undoubtedly ancient Sumerians who were as smart as anyone alive today, but the tools of the day, clay tablets, chisels, and limited characters were not amenable to them ‘spreading their wings’ (that said, no one ever asked them update, patch, or reboot a that kind of tablet–pun intended).
Back to the realities of a social enterprise. As a brief reminder, our mission is to provide the first, and most importantly a pathway to the second job in Australia for some of its most overlooked people, veterans, refugees, and asylum seekers. Like all companies, we need to sell our products, in our case paper tubes, in the commercial marketplace, and we need to ensure that all of our revenues exceed our costs. We would love to increase our output, not to maximize our profit (which is split 50/50 between the guys on the line and buying the next enterprise), but because, as with the equation above, all other things being equal, more output means more people employed. That is, adding more people would add to productive output as those people would make more.
Doug, why don’t you just employ more people to raise output? Well, that’s a reasonable question. The people we are working with are some of the most industrious people I have ever meet, and they have been through hell to get here. We would love to employ more of them. The trouble is that in Australia, the minimum wage for a ‘casual employee’ is $23.66/hour. This is the classification where we need to start everyone to ensure that they do indeed like the work that we are doing (about half find it too physically demanding), otherwise trying to terminate people is exceptionally difficult. On top of this, we need to pay $2.37/hr for retirement (‘super’ as it is called). A total of of $26.03/hr. The truth is that when someone, no matter how motivated, starts with us, on average, by month six, they are only covering about half of their wage cost (or a bit over $10/hr). When they start, they don’t know what each customer wants, they don’t know how to drive a forklift, wrap an order, load a truck, or put reels onto a creel. While all of these things can be learned, they take more time, and time costs $26.03/hr. Even more costly are mistakes which waste material which inevitably happen when there are language barriers, and low literacy levels. This doesn’t have anything to do with them being refugees, it has everything to do with them not having knowledge. If I grabbed ‘average Joe’ off the street, and asked him to come work for us, then he too would have trouble making the nearly 200 meters (600 ft) per hour of tube required to cover the cost of his wage. By setting an artificially high cost for labor, we assume that people much have the knowledge (‘technology’ in economese) to do the job productively.
Technology in economist speak is a bit strange, it’s really the ‘know how’ to get things done. The Greeks called this metis, all the small bits of implied knowledge that save you a bit of time. The place you store your keys, the fastest route from your desk to the coffee pot, etc. In the case of our guys, part of the reason that I loved this business was that it required no literacy, numeracy, or trade certification. That certainly does not mean that it requires no skill. Getting the most out of a machine is a combination of a lot of little tricks, setting up the rolls ahead of time to minimize changeover time, ensuring that your pallets are perfectly set up to stack the tubes as they come off, setting the saw at the perfect angle to make sure your tube is cut squarely. Our guys just don’t know these tricks when they start. This makes achieving our mission of getting people into their second jobs extremely difficult. People’s knowledge grows in value as time goes on. They learn more and more tricks. Well, if we are achieving our mission and moving people through just as fast as we can, then we will, at best perpetually be at a state where the people who are most experienced are subsidizing those who don’t have enough experience to cover their wage, and the enterprise just breaks even. There are some government schemes to help subsidize the long-term unemployed, as an employer, it’s possible to get up to $10K for the most chronically unemployed and low-skilled people. Unfortunately, this doesn’t apply to asylum seekers, and many of the refugees we have worked with have been classified as so skilled that they are not eligible. I talk a bit more about this here. There are also some official traineeships, but you need to be a much larger employer to be able to handle them in-house (though we are exploring one with a local non-profit which will lower our wage cost by ~5% from the casual rate-though it is higher than the regular wage by ~20%). Doug, are there any other things you can do? Well, yes, I am glad you asked. We can try to change the capital stock.
Capital, in this context, is simply the machines that we use in the facility. Part of the reason that I loved this facility was that was almost every machine was mechanical. Sophisticated machines like this are not ideal for the bulk of refugees and asylum seekers who do not speak English as their first language. Even if you do speak English as a first language, you are unlikely to know enough programming to be able to service some of the modern computer network controlled machines. We are far from the manufacturers of the machines that we use. There are none in Australia. We depend on manufacturers in America and the United Kingdom, so leaning on them to do a quick service callout for day can cost us $1000/hr for them to remote into our computer controlled machine, or $10,000 for a site visit. There are thus two barriers to adding new machine, first, the people operating them will not know how to service them, and second those who do know how to service them are very far away, and costly. We could hire highly-educated Australians to do this, but then, we are not meeting our mission of employing marginalized groups of people. The irony here is that all other things being equal, if the aggregate demand for a product doesn’t increase, then improving the capital will force the equation to remain in balance through reducing labor or technology. This is where people talk about ‘high-tech jobs of the future.’ This is great for those few people who are able to work in these roles, but it does not help someone who has been driven around the world by ISIS or Bashar Al Assad find a first role. That person, in most instances, simply does not get a job, or starts their own business (refugees do this at 4X the rate of locals). If you are your own boss, or live on the edges of the legal economy in a massage parlor, restaurant, etc, you don’t need to be paid minimum wage. Again, many of the retraining schemes are not geared toward asylum seekers or refugees, but towards those who have been in the workforce and unemployed.
These factors combined, I was a little vexed by this article in the ABC we few months ago, especially this line by Justice Ross:
We remain of the view that modest and regular minimum wage increases do not result in disemployment effects or inhibit workforce participation
I don’t doubt the intention or belief here, but in our experience, it isn’t reality. I’d like to hire a lot more people, but I can’t, not because people don’t want my jobs, not because they don’t work hard, and not because I don’t want them, but because I can’t legally afford them. At best, this policy is going to slow the number of people I am able to move through because we have to internally subsidize less experienced people with more experienced people (e.g. 12 mo of paying someone for more than they produce will need to be balanced with 12 mo of productive work vs 9 mo and 9 mo, meaning we need to have each person in for 6 more months, slowing ability to graduate people to new employment by 25%).
I would invite anyone to go to a foreign country, try an esoteric trade that you had never done before on machinery that you’ve never seen before, and see if can clear some arbitrary-but-high bar for how much you should produce in an hour. Now imagine the same picture with that machinery programmed in a written and computer language that you don’t understand. I certainly doubt that I could hold down a legal job in that environment.
Help spread the word about the work that we are doing for vets, refugees, and asylum seekers at bit.ly/pandgsocial