Saturday, October 7, 2017

Capital / Labor Substittuion

At what wage rate do you no longer hire a guy to twirl your sign for you?


  1. “If you begin with the costs, you will always get confused; but if you begin with the decision, you will never get confused.” (Froeb, McCann, Shor, Ward, 2016) Obviously in the picture, they have abandoned the human touch. The decision was to abandon the guy twirling the sign. We know that a good decision considers all the costs. Let’s say that we paid the sign twirler $7.25/hr. for 6 hours per day. I can’t imagine anyone wanting to stand and hold a sign for longer than that. For 5 days the person would make $217.50. You would also pay employment costs for OASDI, Medicare, Workers Compensation and State Unemployment. Roughly this would add another 28% to the cost. So for about $280 you’re getting a live person to twirl your sign adding interest and liveliness to your marketing campaign. But not so fast, what if the person was simply sitting down, or leaning on a street sign or has a miserable look on his face? Wouldn’t that take away the desire to visit the business? Maybe even discourage a customer from ever entering the establishment. Are we giving up business instead of attracting customers? Did we experience an uptick in business enough to cover the cost of the twirler? Did our costs exceed our expectations? The answer would be no in this instance.
    It looks like the business concocted a moving contraption that would twirl the sign for them. Perhaps because there would be no showing up late for work, no long breaks or sweating all over the place with a disgruntled, bored look on its face. The cost of electricity would be a variable cost but the machine would be a fixed cost. It would be very easy to track the sales during the time period the sign would be active. This was their decision.
    Perhaps this business should have looked into hiring a real “sign spinner”. Although there is a cost of $70/hour, these guys are good. Professionals who guarantee results. Jason Rambeck and his crew are truly phenomenal spinning, throwing and twirling fast and furious. Maybe the labor substitution should be to spend more money on this form of advertising – maybe a shorter amount of time but a more interesting character. (Rambeck, 2009) Check out the website! So fun!

    Rambeck, J.,2009. “How to make $70/hr. holding a sign on a street corner”. Blog (11/13/09) retrieved 10/9/17 from:
    Froeb,L., McCann,B., Shor,M., Ward,M., (2016) Managerial Economics A Problem Solving Approach. Boston, MA., Cengage

  2. I found this question that was posed very interesting, especially when living in NY and knowing that the minimum wage rate will be increasing to $15 an hour by 2019. From my point of view, this creates a huge problem economically in our society and this example shows how variable costs of labor are being replaced by fixed cost because they are much cheaper in the long run.

    For businesses, when increasing the wage that quickly, forces companies to do two things which is to reduce work force and/or inflate prices to their customers to cover costs. One example, is Panera bread has installed kiosks to place orders and you then pick up the order up at the counter or in bins. Other examples can be seen in target, Walmart, and grocery stores with self-service checkout lanes that have been installed to eliminate the variable cost of labor. So from the government perspective, increasing the wage was to create a better life for people earning minimum wage but unintended opportunity cost is for the workforce because there will be less jobs available.

    In conclusion, if you hired a person to twirl a sign year round you would have to pay them 15 dollars hour multiplied by 2080 hours which would equal a salary of $31,200 a year. After reviewing the cost of the salary, a machine would probably cost $10,000 dollars and your payback would be in approximately 4 months. So unfortunately, with the higher minimum wage your choice will be easy to make and finally, do not be surprised to see more sign twirling machines in the future.