Benefiting Low-Wage Workers without Minimum Wage Laws

by Erik Randolph | Mar 4, 2021

Benefiting Low-Wage Workers without Minimum Wage Laws

Strategies to help everyone

If it is a bad idea to raise the minimum wage, or even have a minimum wage law to begin with, where does this leave the low-wage worker?

We already examined the empirical evidence showing that minimum wage laws reduce employment among the groups the laws are intended to help. (If you missed it, check out my blog.)

We also looked at the negative impact on small business—that most important job-creation engine. (Check out this blog.)

Now we want to know what we can do to help low wage workers.

A job is better than no job

True. Some workers earning a minimum wage will find themselves better off with a law that increases their pay. However, millions others will be hurt. Some are harmed because their hours might be reduced. Worse, many others will not be able to find a job or lose their job. The nonpartisan Congressional Budget Office predicted this number will be 1.4 million people if the federal $15 minimum wage proposal becomes law.

If you cannot find a job or lose your job, you are not better off. This is especially true for workers starting out in the labor force. They learn things on the job that they cannot learn in a classroom or at home.

They learn the all-important soft skills required to function in the workplace, such as getting along with coworkers, meeting expectations, and showing up on time prepared for work.

Importantly, they also begin building their net worth. At a minimum, they do this by putting away for their future with contributions—matched by their employer—to Social Security and Medicare.

No minimum wage law does not mean no standard

The minimum wage is an arbitrary number with little meaningful relationship to the particulars of a specific job. The United States has nearly 6 million business firms with 7.9 million establishments in thousands of industries in over 3,000 counties, according to the Economic Census. Each has its own characteristics in terms of expectations, skills, and pay.

One of my first jobs was in a machine shop. I still recall how the employer misrepresented the minimum wage when he hired me. He tried passing it off as a pay level sanctioned by the federal government. I did not buy it and was offered higher pay. Later I learned others in the shop fell for his ruse—and were receiving just the minimum wage.

If we would eliminate the minimum wage law, then low-wage workers would look to other standards reflective of the job and industry.

Think of Kelley Blue Book that helps consumers know the value of a car. There are also companies—like PayScale—helping job seekers know what to expect in terms of pay. Moreover, the U.S. Bureau of Labor Statistics conducts 12 surveys on pay and benefits—including wage data for over 800 occupations by area—that can be used as guidance.

It would be better for workers to have knowledge about pay scales based on real factors than rely on arbitrary and artificial standards set by government law.

The Success Sequence provides an outline of how to reverse the cycle of poverty in our communities. GCO uses this as a framework for much of our work.

Career ladders and skill sets

The Georgia Center for Opportunity works with community groups helping job seekers link with employers. Setting career goals, understanding the skill requirements of various occupations, and having realistic expectations of pay are all important components of putting together a plan to help job seekers grow in their career and compensation.

These plans are what will help them the most if they are stuck in a minimum wage job. It gives them a plan of action on how to meet their goals. It also helps employers who often complain they can’t find good help with the skill sets they really need. This solution involves working with individuals on a one-on-one basis.

It also takes time—there is no magic button to push. However, in the end, it will be a win-win situation for both workers and employers. Raising the minimum wage is a win-lose situation—some people will win, but many others, including the overall economy, will lose.

Understanding the needs of employers in the labor market also requires us to do a better job at education in preparing our children for their future. As research has shown, giving parents more choices improves the quality of education—and will ultimately benefit our children and society.

We need to stop coming up with solutions that help some people at the expense of others. It makes little sense to damage the entrance ramp to employment in order to increase the pay for just some workers. Or for the government to have an inflation policy that hurts the poor the most, which I pointed out in this blog.

Instead, let’s focus our attention on solutions that help everyone. If you have comments, especially on what are the best solutions, we would love to hear from you. Be sure to post them in the comments.

*Erik Randolph is Director of Research at the Georgia Center for Opportunity. This blog reflects his opinion and not necessarily that of the Georgia Center for Opportunity.

Why the Minimum Wage is Bad News for Small Business

by Erik Randolph | Mar 2, 2021

Why the Minimum Wage is Bad News for Small Business

Why that’s bad for everyone else, and how raising costs can have disastrous economic consequences.

In a prior blog, I explained how empirical research supports the side of the debate asserting negative consequences due to minimum wage laws. Now we’ll look under the hood to understand more why this might be the case.

After the stock market crash of 1929—yes, I’m taking you back that far—President Herbert Hoover rolled into action to get the U.S. economy out of the recession that would become the Great Depression. Among his activities were efforts to boost prices and wages, including White House conferences to cajole business leaders to maintain wage rates.

His successor, Franklin D. Roosevelt, went further to promote higher prices and wages, especially with the Wagner Act intended to strengthen labor unions and the National Industrial Recovery Act (NIRA) that established a system of industry cartels that regulated, among other things, wages and prices.

In 1935, the U.S. Supreme Court struck down the NIRA. In response, the minimum wage became a platform issue for his 1936 reelection campaign, and FDR succeeded in getting a federal minimum wage of 25¢ per hour in 1938.

Economists seemingly agree on little, but one thing they do agree on is that the policies of Hoover and Roosevelt did nothing to get the U.S. out of the Great Depression. Keep this history in mind when you hear advocates who want to raise the minimum wage.

Importance of small business

Small businesses are at the heart of the American economy. They are a major engine of prosperity and job growth, enriching society and helping to spread wealth at a time when economic disparities are receiving more attention.

Examples of small businesses are too many to list but include your local restaurant, hair salon, construction firm, dentist, bakery, and small-town law firm. It also includes many franchisees who may own your local McDonald’s, Subway, UPS store, hardware store, senior home care service, or handyman service.

According to the U.S. Small Business Administration:

There were 31.7 million small businesses in the U.S. in 2017.
They employed 60.6 million people, or 47.1 percent of the private workforce in 2018.
That number included 4.2 million self-employed persons of color.

Small businesses created 1.6 million net jobs in 2019.

Not all about profits

Also according to the Small Business Administration, there were 249,000 business start-ups creating 863,000 new jobs in 2018. However, those gains were partially offset by 222,000 businesses shutting down, taking 762,000 jobs with them.

This comparison is a good way of exposing a common myth about economics: It is not all about profits. It is also about losses.

If you took an economics course in college or high school, you probably found yourself spending time looking at the impact of losses and how much a business can lose before it must shut down.

What it takes to run a small business

Running a small business is hard. It requires dedication, resources, and daily decisions to keep operations viable without the benefit of an array of professional managers and departments that large businesses typically have. When a small business owner makes a mistake, he takes a direct hit. If the mistake is large enough, it could threaten his or her livelihood.

Politicians, on the other hand, can make a policy mistake impacting business, but they do not take a direct hit. Because every business is different, it is impossible for politicians to know what it takes for every type of business to stay viable and make a profit. Yet changes in government regulations, taxes, and wage laws can have devastating impacts on businesses.

The ability of businesses to withstand changes in minimum wage laws depends on the circumstances of the business and their profitability. It is naive to assume that every business relying on low-cost labor would be able to pay its employees more just because the government mandates them to do so.

Many businesses operate on thin profit margins. If their costs go up, they may substitute technology for labor, if they can, which naturally and unfortunately results in workers losing their jobs.

Worse, the business may have to shut down. It makes no sense to expect businesses to continue operating if they are losing money. Many small business owners who shut down may need to find a job themselves or risk landing in poverty. This helps no one, least of all the laid-off employees.

Final warnings

Beware of large corporations like Amazon or Walmart who might support minimum wage laws. It could be because they see it as a way to drive out competition from small mom and pop businesses.

Forcing small businesses to raise wages, especially after they sustained a financial hit from a pandemic, only promises to weaken an all-important job growth engine for the U.S. economy at a time when we need to bolster the small business sector and get the economy rolling again. This strategy of mandating wage increases certainly did not work out well during the Great Depression. There is no good reason to think it will work now.

So, what do our state and national legislators need to be doing? They need to concentrate on getting the economic job engine revving up again, and this is done by finding ways to reduce costs for businesses (not raising them), making it easier for entrepreneurs to start their own businesses (not making it harder), and making sure the financial markets are working properly so small businesses can access much-needed funds.

Where does all this leave the worker stuck in a low-wage job? Stay tuned. I’ll answer that question in my next blog.

*Erik Randolph is Director of Research at the Georgia Center for Opportunity. This blog reflects his opinion and not necessarily that of the Georgia Center for Opportunity.

Let’s Take Politics Out of Healthcare

by Erik Randolph | Feb 19, 2021

Let’s Take Politics Out of Healthcare

The federal government’s surprise move against Georgia

In a raw political move, the Centers for Medicaid & Medicare Services (CMS) removed the approval of Georgia’s Pathways to Coverage, labeling the program as “pending.”

Despite the fact that the COVID-19 vaccine rollout is consuming the resources and attention of the Governor’s office and the Department of Community Health, CMS gave Georgia only 30 days to respond before the federal government might eviscerate the program. In its February 12 letter, CMS targeted the program’s work or other community engagement components and also threatened “review” of other provisions of the program.

This move by the new administration in Washington, D.C., appears to be unprecedented. Finally secured last fall, the approval was part of an administrative process, which included time for public comments, that took years to develop.

Pathways to Coverage serves non-disabled adults below the poverty line. It is a critical component of Georgia’s plan to reduce the number of uninsured and make healthcare coverage more affordable, without sacrificing quality of care or causing other serious drawbacks associated with a traditional Medicaid expansion. It is based on the idea of not keeping these adults below the poverty line but moving them above it.

The Success Sequence provides an outline of how to reverse the cycle of poverty in our communities. GCO uses this as a framework for much of our work.

Let’s focus on helping people instead

Pathways to Coverage is really about helping people. Readers might want to check out my prior blog on this program as well as some of our published research on fixing the healthcare system.

The so-called Affordable Care Act (ACA) has caused havoc for Georgians when it comes to healthcare coverage and costs. The rate of healthcare price increases did not abate but accelerated. As we reported before, our own data analysis confirmed other research by showing that for individual markets, “Georgians suffered average price increases of 70.7% for Bronze plans, 77.3% for Silver plans, and 70.4% for Gold plans” over five years.

We also found that prior to the ACA, the median cost for a health insurance plan on the individual market for a family of four was $5,386 per year. But within six years, the cost varied from $17,550 to $26,081, depending on the level of the plan.

The bulk of Georgia’s uninsured problem lies not below the poverty line, but above it. Therefore, Pathways to Coverage necessarily links to Georgia’s Reinsurance Program designed to drive down costs in the individual markets. The test of the demonstration project will be to see how well Georgia can move people out of poverty into situations where they have better opportunities and more resources for health coverage, such as coverage through affordable individual markets or, better yet, employer-based coverage.

America has one of the world’s best and most innovative healthcare systems, if you have insurance to afford it. By far, employer-based and private insurance provides the best coverage. Medicaid has among the worst healthcare outcomes, can trap families in poverty (as we and others have demonstrated), and can be an obstacle in moving to the much-better private coverage. Incentivizing people to improve their circumstances is an important strategy that this demonstration project hopes to prove.

The Spirit of the Law

The new administration in Washington might feel like they are doing the right thing by attempting to strongarm states like Georgia into Medicaid expansion. However, this action raises concerns.

First, the question of whether the federal government can mandate states to expand Medicaid was already settled in the negative by a seven-to-two U.S. Supreme Court ruling. Second, removing a critical component of this demonstration project will not likely accomplish expansion but, if followed through, will compromise the effectiveness of the project. Third, it goes against the whole purpose of demonstration projects.

Pathways to Coverage is an approved—and hopefully remains so—Section 1115 waiver to Medicaid rules, which is found in the Social Security Act. In enacting this section of the law, Congress acknowledged that a one-size-fits-all approach dictated by the federal government is not always the best way to solve our public policy challenges.

Congress acknowledged this principle again when it enacted Section 1332 of the Affordable Care Act that allows states to come up with alternative plans in coordination with Section 1115 waivers. Georgia took advantage of both these provisions of law in developing its healthcare strategy.

Finally, demonstration projects allow states to experiment with what works best. Without experimentation, we hinder our ability to discover better ways to run public programs for the benefit of people.

What’s next

The best overall resolution would be for CMS to reinstate the approval and allow the demonstration to move forward. CMS will monitor the project, of course, but it must let it play out to see if the project will demonstrate a better way. Georgia has a vested interest in making it work. If not, Georgia could choose to modify or abandon the project. Besides, the federal government will have the opportunity to review the results when the waiver comes up for renewal.

Failure to reinstate the approval will likely result in a legal struggle before the courts. Who knows how long such a legal process will take? Instead of using our resources and time to bicker before the courts, we should apply them to seek out the best ways to improve people’s lives.

*Erik Randolph is Director of Research at the Georgia Center for Opportunity. This blog reflects his opinion and not necessarily that of the Georgia Center for Opportunity.

Does the Minimum Wage Hurt or Help the Poor?

by Erik Randolph | Feb 9, 2021

Does the Minimum Wage Hurt or Help the Poor?

What economic research really tells us

Finally, we have the definitive answer on a longstanding debate on whether empirical studies show that minimum wage laws negatively impact employment.

You may have heard conflicting summaries, perhaps from economists themselves, on the economic research on this important topic. Some summarize the research to say that indeed raising the threshold of minimum wage laws comes with a cost of lost jobs, especially for poorer individuals who tend to lack experience and job skills. Others summarize the research to suggest that no such evidence can be found or there might be even slight benefits. And, still, others claim that the evidence is mixed, and you can’t conclude anything.

Last month, David Neumark—an economic research associate at the University of California, Irvine, and Peter Shirley with the Joint Committee on Government and Finance for the West Virginia Legislature—released a study that answered the question.

What does economic research tell us about the minimum wage?

In their National Bureau of Economic Research working paper, the researchers assembled what they believe to be the entire set of published empirical economic studies on the minimum wage in the United States since 1992. They did not include unpublished papers, simulations, or studies using methods considered to be less empirically rigorous.

Of the total 66 papers they identified and examined, they found that 79 percent of them showed a negative impact.

In summarizing the demographic groups most impacted by the minimum wage, the authors said the following:

There is strong and consistent evidence of negative employment effects for teens, young adults, the less-educated, and directly-affected (low-wage) workers, with the estimated elasticities generally larger for the less-educated than for teens and young adults, and larger still for directly-affected workers.

By the way, in case you don’t know, “elasticity” is simply an economic measurement of sensitivity. In this case, it refers to employment’s sensitivity to a change in the wage rate.

Interpreting the research scientifically

Some might want to spin the results to say that because 21 percent of the studies showed no adverse impact, we cannot conclude anything. Or, worse, they may argue that raising the minimum wage in this case may have some positive effects on employment.

However, this is what is known as cherry picking—a no-no when reviewing statistical evidence. We need to keep a few things in mind.

First, when reviewing statistical studies, there is always the chance you get false results. These are known in the profession as Type I or Type II errors, depending on whether you reject your null hypothesis when you shouldn’t have, or its opposite.

We have to look at the confidence level. (Not to be confused with the confidence interval or margin of error.) A 90 percent confidence level, which is usually the standard for national employment data released by the Bureau of Labor Statistics, means that 10 percent of the time, your results will be totally wrong. (That is, outside your margin of error.)

Because of these reasons, the science tells us to look at all valid studies—methodologically valid, that is—and go with the preponderance of the evidence. In this case, because 79 percent of the studies show negative impact, this is the conclusion we need to go with.

When it comes to empirical studies applied to economics, there is another consideration. The design of the study must be consistent with economic reasoning.

This is harder than it sounds. For minimum wage issues, economic reasoning says that negative impacts will occur only when price floors—minimum wages in this case—exceed the market equilibrium. Absent that condition, there would be no impact, but then also no point in establishing the price floor.

This adds a level of complication that, if anything, would increase the error rate. In this case, a 21 percent error rate would be consistent with what we should expect. By the way, this is also why it’s important to do multiple empirical studies to replicate the results. You can’t rely on just one study.

If raising the minimum wage is not the answer, what is?

For advocates of the minimum wage, the empirical evidence will be disappointing. Take heart. There are better solutions out there.

The main reasons people support the idea of a minimum wage are to help wage earners keep up with inflation and to enable them to earn a decent living. In response, I suggest a three prong approach: attack inflation, promote economic growth, and improve education and job skills of the population, especially low-income workers.

Few people realize that inflation is government policy. The Federal Reserve Board of Governors has adopted an annual inflation target of 2 percent, and since the start of the pandemic the board eased its policies to allow inflation to exceed its target.

From my perspective, this inflation target is crazy. It’s a hidden tax that hits the poor the worst. My recommendation is to eliminate the inflation target with a new target so prices remain stable or decline slightly every year to match general gains in productivity.

Of course, economists are divided as ever when it comes to macro policies, and a host of them will cry that eliminating the inflation target is dangerous. They’re wrong, but I’ll save my rebuttal for another day.

“I suggest a three prong approach: attack inflation, promote economic growth, and improve education and job skills of the population, especially low-income workers.”

Second, the more the economy grows, the better it is for the labor market, increasing the demand for jobs. This is a natural and excellent way to push up wages for workers. When you have a growing economy, businesses can afford to pay their workers more—and they will do so without government cajoling them because it will be in their economic interest to do so. We only need to look at the increase in employment and wages over the several years leading up to the COVID-19 recession for evidence of how this works.

Conversely, when you have a recessionary time, like now, it is the worst time—not that there is any good time—to force businesses to pay their workers more when they can least afford it. Politicians take heed. Follow the science on this one.

There are countless stories of this in action. For example, the restaurant Boca Nova in Oakland, California, implemented dramatic changes to its pay structure after the city mandated a $12.25 minimum wage in 2015. In lieu of gratuity, the restaurant tacked 16 percent onto customers’ bills: 4 percent went directly to servers and the remaining 12 percent covered the cost of raising salaries for other workers. The results were that about 60 percent of the restaurant’s servers quit because the policy slashed their average hourly earnings by around half—from between $38 and $70 an hour to $22 to $28 an hour.

Finally, our public education systems have been failing us and our children, especially for students stuck in underperforming schools or lacking resources at home. The consequence is too many workers unable to secure higher wages in our current job market.

This last prong is where the Georgia Center for Opportunity (GCO) really shines. It is actively promoting improved education and job training. And GCO is collaborating with other nonprofits to help place people in employment with a career ladder to improve their earning capacity over time.

The Pandemic Doubles the Food Stamp Program Part 2

by Erik Randolph | Dec 8, 2020

The Pandemic Doubles the Food Stamp Program

Part 2

By Erik Randolph

It has been said that haste makes waste. Apparently, this saying also applies to legislation.

Back in March with the pandemic looming, Congress quickly passed major legislation to address the pain of the pandemic. It was well known at the time that the quickness by which the pandemic legislation became law would lead to mistakes and inefficiencies. Here is just one of them.

The Food Stamp Cliff

My last blog highlighted the new food stamps rule created by Congress to address the pandemic. I hinted at how it made welfare cliffs worse.

Welfare cliffs, also known as benefits cliffs, show up whenever a loss in benefits exceeds an increase in earnings. These cliffs are disincentives for earning more money and can show up in tax and welfare programs individually or in combination.

When it comes to the food stamp program, our research shows that normally these cliffs are fickle. Whether a cliff occurs for a family depends on several factors. In some cases, such as when there is an elderly or disabled member of the household, there are no welfare cliffs. However, if the household has no member who is disabled or elderly and especially receives the maximum deductions and allowances, there can be significant cliffs.

Now with the pandemic food stamp program, all households have cliffs—and they are steeper than ever before.

The table below shows the cliffs for households up to six6 persons when no member of the household is disabled or elderly. The benefit amounts stay the same no matter what income a household receives. Therefore, any household over the gross income limit—even just one dollar over the limit—would lose the entire benefit no matter what level of income it had prior to its income exceeding the limit.

Households with an elderly or a disabled member also have cliffs of the same magnitude. However, the gross income level when they hit the cliffs varies depending on the net income calculations, but in every case, these levels would be greater than the gross income limits listed in the table.

From March 2020 to August 2020, these cliffs were immaterial because the Georgia Division of Family and Children Services (DFCS) received permission from the Federal government to extend eligibility certification for six months. In practice, this meant that those households no longer qualifying for benefits were allowed to stay in the program.

However, DFCS began processing renewals again in September, and now households gaining in earnings can find themselves faced with the cliffs at the magnitudes displayed in the table.

What was Congress thinking?

The food stamp changes were part of the Families First Coronavirus Response Act (P.L. 116-127), which had overwhelming bipartisan support. With the legislation, Congress intended to ensure the physical and financial security of families.

One concern was access to food. Congress wanted to make more food available through the food stamp program. Fair enough.

However, changing the rule so that every household participating in the program gets the maximum allowable benefit was crude and blunt. It guaranteed steep welfare cliffs across the board. A single-parent household with one child earning $1,868 a month would lose $374 in monthly benefits if the parent received just one dollar more in income.

The action also favored wealthier participants. A four-person household with $2,839 in monthly income gets $680, which is exactly the same amount received by a four-person household with no income despite being more vulnerable.

Four Person Household Food Stamp Benefits

Congress did not have to be so crude and blunt in its approach. Just as easily, Congress could have simply increased the maximum allotment. This action would have spread out the extra funding across all incomes more evenly among the participants.

Congress could have also been more daring by simultaneously increasing the gross income limit, making any potential cliffs less severe.

The dilemma

Perhaps Congress chose not to consider these two easy alternatives because key members believed it would be too difficult to roll back the enhanced benefits once the pandemic is finally over.

There is probably some truth to this fear. However, we do not escape the political difficulty. My next blog will focus on the coming food stamp crisis.

If you have experience with the food stamp cliff, we would like to hear from you. Be sure to let us know in the comments below.

Erik Randolph is Director of Research at the Georgia Center for Opportunity. This blog reflects his opinion and not necessarily that of the Georgia Center for Opportunity.

DISINCENTIVES FOR WORK AND MARRIAGE IN GEORGIA’S WELFARE SYSTEM

Based on the most recent 2015 data, this report provides an in-depth look at the welfare cliffs across the state of Georgia. A computer model was created to demonstrate how welfare programs, alone or in combination with other programs, create multiple welfare cliffs for recipients that punish work. In addition to covering a dozen programs – more than any previous model – the tool used to produce the following report allows users to see how the welfare cliff affects individuals and families with very specific characteristics, including the age and sex of the parent, number of children, age of children, income, and other variables. Welfare reform conversations often lack a complete understanding of just how means-tested programs actually inflict harm on some of the neediest within our state’s communities.

DOWNLOAD WHITE PAPER

DOWNLOAD EXECUTIVE SUMMARY

VISIT WELFARECLIFF.ORG