Why are weddings so expensive? This question is confronted on a certain wedding planners website I ran across recently. With scientific precision, the voice over explains: asymmetric information.
Weddings are not something you shop for regularly and there are literally dozens of options with just as many prices points. It’s nearly impossible to do comparative shopping.
Let’s not forget the element of emotion involved in weddings. Good wedding planners with the right customer service people are in a special spot. For these folks asymmetric information is gold.
What Does Wedding Planning Have To Do With Wages
For sometime now we have witnessed the loss of US jobs to low labor cost areas in Asia and elsewhere. Before their 2008 bankruptcy, General Motor’s total cost of labor in this country was running as high as $75 per hour.
Then there is apparel and footwear manufacturing. Who makes these items in the US anymore: not many. With labor rates under $1 per hour in countries like Bangladesh there is no need to explain Econ 101.
Along came companies like Alibaba supplying products and manufacturing services and suddenly asymmetric information disappeared from the market for globally sourced goods.
The Internet Is Twisting Economics
Until now, the Internet has been a virtuous source in goods, services and just as importantly a source of information. Online shopping is disrupting the face of retailing and the ripple effect can be found in the commercial real estate market.
There is no doubt that the Internet has virtually eliminated asymmetric information. If you have a laptop or mobile phone, there is no limit to the information you can get. If you shop on line, for example, at Best Buy or Wal-Mart, a few clicks enable you to quickly compare features, prices and customer reviews before making a purchase.
These are all familiar themes we have been hearing about for some time. But there are a few things we have overlooked.
The one thing we haven’t measured with the Internet is how much its impact has had on price levels, i.e. inflation. What we do know is that since the early days just after Al Gore invented the Information Superhighway, inflation, as we knew it during the previous 25 years, virtually ended.
What Does Wedding Planning Have To Do With Labor Rates?
Janet Yellen and members of the FOMC are wrestling with a problem that is contradicting Econ 101. It is the Internet and the disappearance of asymmetric information that is the most likely cause.
We say most likely because, no one yet knows with absolute certainty. There has been only anecdotal evidence, and the logic makes sense. Here is what we are getting at.
The unemployment rate is near it lowest level in the post-Great Recession period: around 4.5%. HR departments are reporting greater difficulty in finding suitable applicants to fill positions. Technology positions are particularly hard to fill but so are the more menial jobs in areas like construction, warehousing and others.
Professors of Econ 101 argue that there are still millions or workers that fall into the category of the E6 Unemployment Index and that if labor is scarce it is because wages offered are too low.
The New York Times recently dispatched a team to Omaha to interview the owner of Rooforia Home Exteriors, Sarah Smith. Roofing repair and replacement is not easy work so employees are offered $17 per hour. (Minimum wage is $9)
With an accountant’s precision, Smith explained that Rooforia charges $8000 for a complete replacement targeting a 40% profit margin.
Rooforia claims it is impossible to pay higher wages and remain competitive. Because of online services like Thumbtack, there is no asymmetry of information in Omaha’s roofing business. Says Smith, “A lot of customers we get through online lead services like Thumbtack are people who collect from four or five businesses and most of the time choose the cheapest one.”
Extrapolate Rooforia’s observations to the general labor market and it spells one amazing fact. Everything we thought about the law of supply and demand is changing. This is bound to have a huge influence on Fed Policy and interest rates.