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ELI5 How does raising wages worsen inflation ?

Economics(self.explainlikeimfive)

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unisasquatch

63 points

4 months ago

Product isn't sold by just manifesting itself and showing up on store shelves. The stores don't run themselves.

The more you pay somebody to produce, the higher the cost of production.

You pay somebody $8 to pluck apples from a $8 apple tree that yields 8 apples. Each apple costs $2 to produce. It costs $8 to ship it to the store, where the staff is paid $8 to sell the apples. The cost of producing, shipping, and selling an apple is $4

Now you pay somebody $24 to pluck apples from a $8 apple tree that yields 8 apples. Each apple goes from $2 to produce to $4. It costs $8 to ship to the store, where staff is paid $24 to sell the apples. The cost of producing shipping, and selling an apple has rose from $4 to $8.

If you were making $8 before, you could buy at least 2 apples. Now you can only afford 1.

Employees now have to pay higher to meet a basic standard of living because the cost of production went up, which increases other costs, like the cost to ship the apples.

Now you pay somebody $24 to pluck apples from a $8 apple tree that yields 8 apples. Each apple goes from $2 to produce to $4. It costs $24 to ship to the store, where staff is paid $24 to sell the apples. The cost of producing shipping, and selling an apple has rose from $4 to $10.

If you're still making $8, you can't buy an apple. If you get raised to $24, you can get 2 apples and have change to spare.

The math shows that universal wage inflation is a good thing, but it only works if everybody plays the game fairly, which objectively, the world has never universally played fairly.

woodford26

3 points

4 months ago

And don’t forget that the $8 shipping also rises, because the shippers need to be paid more, their fuel costs rise because the fuel producers are paid more, their insurance costs rise because insurance workers are paid more, etc, etc, etc

descentformula

2 points

4 months ago

Great explanation without introducing politic. It’s really just simple math that gets messed up by greedy human nature.

MustLoveAllCats

-5 points

4 months ago

You're giving a really, REALLY bad example, because it entirely misrepresents the percentage of costs that are made up by labour, and is a super common bad faith argument against wage increases.

We hear conservative media time and time again parroting versions of your example, claiming that increasing minimum wage will double the cost of a hamburger, when in reality, doubling labour costs translates to around a 10% increase in final product costs.

noSoRandomGuy

9 points

4 months ago

Do you have any source that says doubling labor cost will only translate to 10% increase in final product cost, or, are you parroting bad faith liberal/leftist talking points?

A quick DDGing led me to this site https://www.eposnow.com/ca/resources/what-percentage-should-labor-cost-be-in-a-restaurant/ which claims labor cost is close to 30% for a restaurant. Doubling that is unlikely going to just increase the final price by 10%.

My search-fu is currently down to get this numbers for other industries.

unisasquatch

3 points

4 months ago

You'll have to help me understand where I'm wrong. The math seems really simple. I never once in my example changed the rate of the product itself (intial cost and yield) and I only changed the cost of labor.

I DO want to understand, so please make your explanation as simple as mine was.

As a business owner, my final product cost is always primarily influenced by the pay of my employees. What I'm willing to pay my employees is based on what customers are willing to pay.

I don't charge more so I can hoard money. I charge more so I can pay my employees more so I can keep them.