In a world of perfect economic conditions, product prices gravitate towards the marginal cost level, whereas wages gravitate in a similar fashion towards marginal labor productivity. Markets however appear to be imperfect. Over the last decades the neo-classical approach of markets drifting towards a state of equilibrium like in Adam Smith’s “Invisible Hand” or more mathematically grounded in Leon Walras’ 'Éléments d’économie politique pure (1874–77; Elements of Pure Economics)' are no longer supported in mainstream economic theory development. Understanding the interconnections between the two markets is relevant to understand what is happening in the world, and specifically in the leisure, tourism and hospitality domain. The academics are now focusing more on the presence/absence or distribution of market power.
If employers can claim a share of the increase in labor productivity, they generate an extra profit. In that scenario wages don’t increase as much as they could. If employees can, by using their negotiating position, claim an increase of wage levels, that exceeds labor productivity, profits drop. So the question comes down to who can leverage their position best at the formal or informal bargaining table?
Managing Human Capital in leisure, tourism & hospitality
As argued in a recent column in trade magazine R&T, labor is too cheap in the leisure, tourism and hospitality domain. There is definitely room and need for a raise of the wage level. This has been argued before and it will help in other Human Capital issues as well. Longitudinal studies show that organisations consistently operate on a price level above the marginal cost level, which translates into profits. Especially in our domain we see that good to great concepts lead to memorable experiences which translate into premium prices or customer loyalty or a combination. Both effects are beneficial for profit margins. If you view the interplay of these market characteristics it becomes clear that they are extremely inter-connected. Employees can only leverage their bargaining power if actual profits are made. Market power at the level of products, services and experiences influence the wage determination. Since we are essentially a people business, great labor performance creates value, revenue and profit.
Joint perspective: Professor of Operations and Human Capital
This actually means that we should stop separating the perspectives and start doing research into the relationship between the two markets and how they influence each other. Only then we can create the necessary insights to design effective policy options. What is the influence of disruptive trends? Technology, COVID-19? What is the influence of neighboring or nearby sub labor market where similar competencies are in play? Housekeeping vs. home help and other level 2,3 care jobs? Absence or relevance of labor unions? Especially when we reset, coming out of the COVID-19 crisis, it makes sense that we invest in a Professor of Operations and Human Capital in the leisure, tourism and hospitality sector. There is so much at play that is domain specific. If anyone wants to co-sponsor, I am pretty sure CELTH will do their part to help host such a research chair.