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Bad Burrito Call

A stock analyst downgraded Chipotle for paying its workers too much. That tells you everything wrong with the economy right now.

Chipotle restaurant workers fill orders for customers in 2015 in Miami.
Chipotle restaurant workers fill orders for customers in 2015 in Miami.
Joe Raedle/Getty Images

Chipotle had its stock downgraded on Wednesday by an analyst at Bank of America. It makes sense. The chain has endured a tough time. Health-safety issues that had scared customers away resurfaced this summer. Bill Ackman—the erratic, hypomanic hedge-fund manager—has amassed a large stake in the company, which is often a contrary indicator. Chipotle’s latest game-changing product—queso!—hasn’t met a rapturous reception. In this golden age of lunch, competition is intense, and consumers have fantastic, affordable choices. The stock has fallen about 20 percent in the past year—a year in which the S&P 500 rose 20 percent.

So, yes, an analyst might question Chipotle’s prospects. But this one had another problem: the wages of the generally low-paid people who staff Chipotle’s locations. While the company has aggressively cut down on the number of hours per employee as its sales have fallen, analyst Gregory Francfort noted, “We believe further gains from trimming hours will prove difficult which limits the opportunity to get labor below 27 percent of sales even if traffic recovers.” Simply put, Francfort is down on the stock because Chipotle can’t lower the percentage of every dollar of revenue it spends on labor.

Which tells you everything that is wrong about our economy. There is a widespread mystification about why wages have failed to grow in the past several years even as the labor market has tightened. Technology and automation and the decline of unions are of course partially to blame. But the underplayed, unspoken, and often unrecognized problem is a broader pathology about wages. We’ve raised a generation of managers, executives, investors, and stock analysts to believe that labor costs shouldn’t have to rise, that people don’t deserve raises in line with the rising cost of living, and that the labor market shouldn’t function like all the other markets that businesspeople have to negotiate.

But the labor market is a market in which people have to compete for resources. As with any market, supply and demand fluctuate, which influences prices. When there’s a glut, you can get what you want for very little. When there’s a comparative shortage, you have to cough up more and start thinking of how you can do more with less. Alas, too many people believe that the dynamics of the labor market are frozen where they were in 2009.

The most damaging thing about the deep recession was the sharp rise in unemployment. Millions of people were thrown out of work in 2008 and 2009, and the unemployment rate spiked to 10 percent in October 2009. The competition for jobs was Darwinian: In July 2009, there were 6.6 unemployed people for every job opening in the U.S. That’s a horrific ratio. And it meant that every type of employer could find the exact employee it wanted at prices it could dictate. Desperate for work, even highly paid professionals were willing to work at places like Chipotle and Starbucks for the low hourly wages on offer. They needed the income.

But that was supposed to be temporary. The economy and the labor market move in cycles. And as the economic expansion gained its footing in 2009 and 2010, the economy began to add jobs at the same time that companies began posting higher numbers of new jobs. (Thanks, Obama and Bernanke and Yellen!) In fact, the economy added jobs for 83 straight months, until hurricanes interrupted the streak in September of this year. With each passing month, there were more people on payrolls, fewer people desperate for work, and importantly, more employers looking to fill positions. In August 2010, there were 2.92 million job openings in the U.S.; in August 2017, there were 6.1 million. The ratio of unemployed people to job openings now stands at a mere 1.1 to 1, an 83 percent decrease from July 2009. That’s a terrible ratio—for employers.

In a world in which employees should have the upper hand over employers, you’d expect those fishing in the shallow end of the labor pool to confront the most difficulty. People with skills are largely able to put them to work in today’s economy. Despite the retail apocalypse, there are hundreds of thousands of open service positions at stores, restaurants, and hotels. Retailers are trying to add hundreds of thousands of temporary employees for the holiday shopping season. Of course a labor-intensive outlet like Chipotle would have a hard time clamping down on labor costs.

In fact, given what is going on in the marketplace, managing only a small increase in labor costs may show a high level of competence, or at the very least, recognition of reality. Indeed, when you look at the actual numbers, it seems like Chipotle is doing a pretty good job of doing so. In the most recent quarter Chipotle’s labor costs were 26.2 percent of revenues. That’s actually down from 27.7 percent of revenues in last year’s comparable quarter.

You could even argue that Chipotle’s inability—or unwillingness—to drive labor costs proportionally lower is a positive sign. While automation gets a ton of ink, it’s clear that in many areas the robots just aren’t ready to do humans’ jobs. When I look at a company whose labor costs are rising or staying the same, that indicates to me that it’s not simply signing up any warm bodies it can get at the lowest possible wages. Rather, it’s actually competing at some level for talent. It means it’s staffing up sufficiently to keep things moving along. (Nothing kills traffic at a fast-food chain like having to wait 20 minutes for your burrito bowl.)

There’s another thing that analysts have forgotten: There are no winners in the race to the bottom. When companies with large numbers of employees raise wages (either because they’re responding to regulations, or to the market, or because they want to differentiate themselves), they push their competitors and those in adjacent industries to do so as well. And when wages rise, especially for those on the lower end of the labor market like restaurant and retail workers, more money gets plowed into consumption. If Bank of America gives 10 analysts a $100,000 bonus, it won’t lead to $1 million more being spent at Walmart and Chipotle. If Walmart and Chipotle give 100,000 employees a $10 bonus, a substantial chunk of that money will wind up in retail outlets and restaurants. Maybe then even professional financial analysts would understand that rising wages aren’t a bad thing.

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