Should You Lay Off Employees in Need? Jorge Pine is a restauranteur who attributes success to three elements: great food, great operations, and enough capital to support them. However, after opening up a new restaurant, "Taco Love," he noticed a problem with operations. The profit margin (net income divided by revenue) was only 5%, well below the 20% required to cover the cost of capital. After looking at the books, Jorge noticed that labor costs were unusually high. He spoke to his manager and discovered that she was reluctant to send workers home when demand was low, as on rainy days. "They need the money," the manager explained, pointing out several workers who supported young families, or sent money back to struggling parents in Mexico. Question: What is the problem, and how do you fix it? Answer: The cause of the problem is obvious: the manager was motivated more by compassion for her fellow employees than by whatever incentive pay scheme Jorge is using. An obvious solution would be to make her incentive pay stronger but, in this case, Jorge found a better solution. Jorge sat his manager down and said, "Look, if you do not hold costs down, this restaurant won't earn a profit, and my investors will not fund our next one." Jorge had plans to open three more "boxes" under the same brand name. Jorge continued, "Think about the families of the workers that I am not going to be able to hire, and what is going to happen to them if you don't earn a profit." The manager responded positively to Jorge's talk, and now Taco Love is so successful that Jorge plans to expand to other cities. The moral of this story is still one of incentive alignment—successful businesses will find ways to give workers enough information to make good decisions and the incentive to do so—but incentives include more than just money. Great managers learn what motivates employees, and use that knowledge to get them to do the right thing. This story also illustrates: (i) the zero-sum fallacy (when the restaurant makes more profit, workers also benefit), (ii) the consequentialist morality of earning profit, and (iii) the hidden-cost fallacy (the manager ignored the hidden cost of her initial decision—on the workers who were not going to be hired). Explain your answer (Should you lay off employees in need?)