Friday, March 03, 2006

Part 15 - Hyperwage Theory:

Hyperwage Theory Part 15

Hyperwage Theory Part 15

Hyperwage Theory Part 15

The Hyperwage Theory is very controversial in the sense that it offends sacred economic thoughts such as hyperinflation, unemployment, and affordability of its hyperwage scheme. The ordinary intelligent discussion on economics gives us a standard set of reactions to any proposal involving wage increases.

On the other hand, Hyperwage Theory mandates that economists should take a leap beyond the intelligent discussions and on to the twilight zone of economics where asymptotic hyperinflation prevails, full employments in possible, and the government and businesses can afford hyperwages.

Economists: critical key
The economists are the key to the success of the Hyperwage Theory. The overseas contract workers perfectly understand Hyperwage because on a day-to-day basis they feel and experience the economics of Hyperwage.

The economists are harder to convince because they have no practical experience of straddling both First and Third World countries like the overseas workers, and more importantly, they are brainwashed with inflation-centric economics. Yet, the economists in their ivory towers are the ones recommending and setting economic policies to uneducated political leaders.

I have already discussed that asymptotic hyperinflation is non-linear. In other words, a 1,000% increase in wages does not automatically result in 1,000% increase in prices. For all we know, the prices of rice and vegetables will increase only by 50%, while the durables such as computers, cars, appliances will lower by 15% because more volume of sales will tend to drive prices down.

Non-linear formula
Is this non-linear formula for asymptotic hyperinflation anti-economics? No. This is perfectly normal economics, yet it is perfectly Hyperwage economics. In fact, the “runaway hyperinflation” feared by the economists is in reality abnormal economics, while the “asymptotic hyperinflation” envisioned by the Street Strategist is normal economics. But you can only appreciate this difference if you refuse to be stopped by ordinary economic thinking.

Can you imagine that? What you originally thought as normal economics (runaway hyperinflation) has been exposed by the Street Strategist as actually abnormal economics, while what you thought as abnormal economics (asymptotic hyperinflation) is in espoused by the Hyperwage Theory as the logical and normal economics.

What does this mean? Hyperwage economics is all about a shift in paradigm from inflation-centric policies to purchasing-power policies. All the economics principles still work under Hyperwage.

In summary, Hyperwage Economics is actually normal economics. it’s just that we have been taught the abnormal economics for 1,000 years that we were brainwashed into thinking it was the normal way to think.

Guys, remember I promised that after reading about Hyperwage Theory you will never look at economics the same way again.

Thus, Hyperwage is a product of the mind, not a product of the body. Hyperwage still follows the physical rules of economics but the mindset is different. Hyperwage Theory simply says that First World countries who are already at hyperwage levels should adopt inflation-centric economics but Third World countries must first adopt purchasing power-centric policies to bring them to First World status; only after having attained such status should the latter shift their focus to inflation-centric policies.

Sounds Utopian? Of course not. I have live empirical evidence of how hyperwage creates a larger middle-class, induces productivity, enhances efficiency, and stimulates research and development of new products and technologies because there is a market that afford them.

Look no further. Some hyperwage countries are USA, Japan, Germany, France, Canada, Singapore, and Hong Kong. Do these countries ever advertise, “Come to us with your foreign investment because our labor is cheap?”

No. Instead, they tacitly advertise, “If you don’t come to our country, you will lose out on the strong domestic market brought about by the purchasing power of even the minimum wage workers.”

Lesson: Having the cheapest labor in the world is the wrong battle to win.

Will Hyperwage result in unemployment? Yes and no, and I’ll explain why. Don’t worry.

There are many angles to analyze in the effect of Hyperwage on employment levels. The law of supply and demand is one of them. We are overpopulated therefore there are more workers than jobs.

Another factor is affordability. Small businesses can longer afford its payroll and have to close down.

That’s what economists say. The anti-economist does not follow this line of thinking.

The government cannot afford hyperwage, and being the biggest employer in our economy it will retrench a huge number of workers and this will result in poor delivery of government services.

Even big businesses will suffer too. Their payroll will increase, their profits will be reduced, and they will retrench workers.

At any rate, whatever the angle, I have given it a decade of thought, and given the trade-offs, I think
Hyperwage is the best alternative to the current useless economic strategy we have been pursuing for a hundred years.

Supply and demand
A few years ago, I was in town conducting a series of interviews for a banking report. Some things just leap at you when you’re jetsetting. I was coming in from a jurisdiction where the salary of the receptionist was higher than the salary of an AIM MBA graduate. Then upon touchdown I was swallowed by the poverty of a Third World nation. Rushing to the interview, during a lull, I asked a director of the influential business club in our central business district: “Why don’t we increase wages so the poverty of the people will be reduced?”

It was a very innocent question, in fact, if you took up college economics, it could be classified as a stupid question. Yet, I was testing my theory on real businessmen.

His reply was automatic and simple: “There are more workers than jobs. Besides, the companies will lay-off workers if the payroll will increase.”

Well, it was the perfect standard reply. And I became aware of the mindset of the businessmen. If Hyperwage is to be accepted, I would have to convince the businessmen that their way of thinking is not correct.

I thought about the irony. Here’s a guy with no business attempting to convince businessmen their way of thinking is wrong. Furthermore, here’s a guy with no economics degree attempting to tell economists their economic theory is wrong.

At that moment, I knew I had a tough road ahead.

And, after a decade, I came up with a few thoughts on unemployment under a Hyperwage regime.

Repeal the law
Minister: “Sir, the prices of goods have gone up due to the law of supply and demand.”
President: “Then, repeal that law!”

This was a very condescending intelligentsia joke perpetrated on our former president. This is the thinking of the intelligent. But then, there’s a difference between the intelligent and the genius. What does genius have to say about this joke?

Hmmm, seeing what everybody else has seen. Thinking what nobody else has thought.

When I heard that joke, I laughed so hard. Then, after the echoes of laughter died down, there was some remnant of intellectual reverberation that swirled around my mind. Repeal the law. Repeal the law of demand and supply. Repeal, repeal, repeal. Repeal! Yes, repeal!

Eureka! I found it! I must repeal the law of supply and demand. For Hyperwage Theory to succeed, it must call for a repeal of the law of supply and demand.

“Ah, great. This is great,” I shouted, silently.

More workers than jobs
Let me explain my eureka.

The mindset of the businessmen and the government officials that there will be unemployment due to the specific ground that there are more jobless people than there are jobs will not hold true because under Hyperwage Theory, the law on supply and demand of jobs will be repealed but only for the minimum wage workers. It will be a partial repeal, specifically for the lowest of the low, the poorest of the poor.

In fact, this is not new. We already have a minimum wage law. Hyperwage Theory merely sets the suggested level above the current level. Therefore, Hyperwage is normal economics but with a wage level set using a different objective and a different paradigm.

In short, even if the minimum wage will be set to P20,000, the demand for the workers will still be the same under the ceteris paribus assumption.

Take it or leave it. If you can’t afford the new wage for domestic helpers, then don’t hire one.

Use washing machines, use external dry cleaners, use day care centers which should flourish, first class day cares, mind you, if there’s a market for it. Can you imagine the demand for more washing machines?

Or, hire one, because this time, as middle level supervisor, you will have a high salary anyway.

For example, if a company needs a secretary, then even if the salary of the secretary is P6,000 or P20,000, it does not matter, the company will still hire that secretary. Therefore, the law of supply and demand for this worker at this level of job is repealed.

Ah, you will ask, the company will fold down because it cannot afford a secretary. Of course this is another our-brains-stop-working syndrome. That simply is not true because it assumes that the company will not raise its selling price to cover for such increase in payroll. If the company freezes its price despite increases in payroll, that is not logical.

If the company sells computers, it cannot raise its price way above the world market, however, it can sell more computers to compensate the payroll increase. And since even domestic helpers can now afford computers, the company will hire even more salesmen. Hey, there will be more jobs created. Did you ever think of this possibility?

Sales volume or price increase, these are the options to counteract a payroll increase.

But I’ll discuss these issues in depth. But for the moment, let’s focus on the law of supply and demand of jobs. Under Hyperwage Theory, it is possible to repeal this law partially, and the number of jobless will still be the same as a result of this factor.

Will there be more jobless workers as a result of other factors? Yes, but we will discuss that separately.

Isn’t it cool? We have repealed the law of supply and demand, and there seems to be no problem with it.

In fact, this repeals validates, not excludes, Hyperwage Theory.

“Are you saying that under Hyperwage, there will be no retrenchment? That’s crazy.”

No, no, I’m not saying that. There will be retrenchment, yes, but that kind of retrenchment is not a result of the law of supply and demand of labor. No, not that at all.

Let’s imagine a scenario. A large department store currently is paying P6,000 for its sales clerks, cashiers, and low-level staff. Will it retrench these employees given that the new minimum wage will be P20,000?

No, it will not retrench them for the specific reason that labor has become expensive.

But the department store will retrench them for the specific reason that because of the new cost of labor, the management will be forced to recognize inefficiencies in the operations of the store. It will then calculate whether computerization or automation or time and motion study will reduce their need for labor.

The store will never remove the position of cashier or salesclerk. It’s just that this time, only the necessary personnel needed to preserve the kind of service and quality that the store desires are retained.

As a result, there will be retrenchment but it is one that is caused by efficiency and productivity measures not by the law of supply and demand, not because of affordability.

Ah, this is great. By merely tweaking a single variable – the minimum wage – all enterprises, both government and private will be forced to adopt efficiency and productivity measures. These benefits (efficiency and productivity) are both non-economic benefits.

Did I remind you enough that Hyperwage induces many non-economic benefits that are not found in other economic theories?

What will happen to those retrenched? We shall discuss that separately, and its part of the implementation phase of Hyperwage.

Productivity vs. wage hike
Now I’m ready to discuss what I consider is an economic fallacy. Under the normal economic and business mindset, we hear of policy makers and businessmen insist that the workers are not entitled to wage increases unless they improve their productivity, otherwise we cannot compete with other Third World countries with cheap labor.

This is wrong. Well, I think this an economic fallacy. They insist that a wage hike is a reward for productivity.

No, no, guys. Your PhDs in economics have turned your minds upside down.

Listen to my logic. Productivity is a result of a hyperwage hike, and not the other way around.

We will never achieve high productivity levels by simply motivating the people with lollipops. The greatest jump in productivity lies in the hands of management thinkers who are faced with a hyperwage payroll.

The difference in impetus is huge.

Have you ever considered by why all the automation of processes and machines that we are buying are developed in high wage countries like Germany or the US? Have you ever noticed why high quality items are made by them? It’s all because of high labor cost. Instead of spending time to repair, the companies in their hyperwage countries make better products to reduce repair manpower costs.

If the department store will refuse to pay hyperwage and closes its operations, then the foreign stores from from France or the US will come here. Guys, have you forgotten that maid can now buy more things from your departments stores?

They will be buying in bulk. It’s funny, but in Singapore or Hong Kong, our Asian neighbors, you cannot buy a single tablet of paracetamol. You have to buy a sheet of blister packs. Result? Volumes purchase outweighs payroll costs. The people have purchasing power.

In summary, we should stop this economic fallacy that a wage hike is the effect while productivity is the cause.

Under Hyperwage, the wage hike is the cause and productivity is the effect. Before you get lost in the arguments, remember that ordinary wage increases do not work because they only seek to recover lost purchasing power. Hyperwage increases will give a positive net effect on purchasing power, not merely redeem lost ones.

What will happen to small businesses? I will discuss that later. But my answer is simple: Why, are there no small businesses in First World countries?

(Thads Bentulan, Aug 11, 2005)
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1 comment:

Anonymous said...

I haven't finished reading though but if I may comment- retrenchments in companies due to high wages will not really have a direct negative effect to the economy. With the higher wages, people can now afford even if only the father in the family is working and the working mother before will now be a housewife and can spend more time for the kids. Besides, if there were 3 maids in a family before hyperwager, the barrio folks might now only have one of their children as maids because of the higher wage. Perhaps now, the former two maids can go back and continue their studies which again will solve a non-economic issue-education