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Labour economics

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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. 

 

worker and coin stacks

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.

 

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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. 

 

worker and coin stacks

“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.

 

How to Take Away Something Positive from the COVID Crisis

By Kristin Barker

The year 2020 has been difficult for everyone. It has caused organizations and businesses to pivot from their planned strategies and shift quickly to identify new ones. It has forced individuals to find new career paths and create new support structures. It’s kept us from our families and isolated us from the communities we are used to counting on. In short, it has been one tough year.

It has been the most difficult year I have seen over my lifetime. But I will say it has also been inspiring. I have been inspired by the ability of our community and its leaders to come together. Leadership in Columbus has been able to connect in new and sometimes surprising ways to support and meet continually changing needs. 

Betsy Covington at the Community Foundation and Ben Moser at United Way acted very early in the year to coordinate COVID Response calls to keep Columbus connected, positive, and focused throughout much of this crisis year. Their efforts and the efforts of others to join hands and find out-of-the-box solutions in the moment has been very encouraging.

While seeing these efforts gives hope to myself and (I’m sure) to others, our Hiring Well, Doing Good (HWDG) partners also know there will be many additional challenges to address and emerging issues to tackle in the future. We began to talk about the shifts that were happening with our own efforts in Columbus. We heard about the new practices that our business and nonprofit partners were having to adopt and the heightened needs that continue to arise among the populations we serve. 

Our subcommittees began to ask, “What can we learn from our ability to pivot in 2020 that will allow us to react more effectively and responsively in 2021?” This question led us to develop a series of events focused on The Changing COVID Workforce. 

Our first event in this series will be held on January 21, 2021. This event will address Economic Forces During a Pandemic: How COVID is Shaping the Labor Market. During this event we examine the labor-supply gaps that exist and look at business policies and practices that impact workforce participation. This discussion will set the stage for later events and will consider the need for possible shifts in training and hiring practices. 

Our second event in the series will be on March 24 and will examine how we leverage our community assets to mitigate the impact of COVID. Betsy Covington and Ben Moser are going to speak during this event and help us think through what our community did really well in 2020. We will discuss how we can leverage what we have learned to navigate 2021 and to improve our community in the future. The final event on May 19 will focus on maintaining the strength of our workforce.

All three of these discussions will help us prepare to successfully repair our local economy in light of the COVID-related adjustments we have been forced to make along the way. We need to be sure that businesses (large and small) can prosper while keeping all people in our community safe and avoiding as much collateral damage from this virus as possible. 

There are also some existing issues that COVID has shined a light on. In comparison to other areas of the country, Columbus has very low average wages. This has created a situation locally where national stimulus efforts may harm our local economy disproportionately. In some cases, businesses have shared that their challenges in hiring additional labor have hamstrung their efforts to produce at scale or accept additional contracts. In other cases, employers have had to scale down production due to workforce restrictions. These situations open up an essential conversation about both average and living wages in Columbus, because it’s important for everyone to earn enough to support their families.

Ultimately, I see a heart at work in our community that is something I don’t believe you can find everywhere. There is a genuine and pervasive desire to work together for the common good. This is something special about Columbus, and I believe the Changing COVID Workforce event series will allow us to take greater advantage of our outstanding community spirit.

 

covid series

Register Now

 

 

If You Accept this Raise, You Fall Off the Welfare Cliff

 

By Howard Baetjer, Jr

 

 

 

 

 

This article was originally posted on August 29, 2016 by the Foundation for Economic Education (FEE).

Getting a raise from $15 to $18 could cost you over $20,000 in net income. Would you work hard for that promotion?

Pretend you are a poor, single parent of two in Chicago, earning $12 an hour, working full time, and determined to do what is best for your family. And suppose your employer, impressed with your work, offers you training for and promotion to a new job paying $15. Should you take the offer?

It sounds like a no-brainer, but it’s not.

At your present $12 an hour you are eligible for refundable tax credits, food assistance, housing assistance, child care assistance, and medical assistance worth $41,465 combined. Together with your earned income after taxes of $22,121, you are now bringing home to your kids about $63,586 a year.

If you take your employer’s offer, you’ll earn $5,451 more after taxes, $27,572. You will also become eligible for an Affordable Care Act (ACA) premium tax credit. But at that level of earned income all your other benefits would decrease by $8,336, more than your increase in net pay. That means the income you would bring home would decrease from $63,586 to $60,701.

Now, would you take your employer’s offer? What would be best for you and your family, a move up the job ladder with a loss of $2885 in income? Or staying in your same job and keeping the larger income?

The Low-Wage Trap

This example, which is taken from a fascinating, and appalling study by the Illinois Policy Instituteentitled “Modeling Potential Income and Welfare Assistance Benefits in Illinois,” illustrates with clear charts and tables what is known as “welfare cliffs” or the “low wage trap,” which can trap families in poverty. When earning more means taking home less, the disincentive to work is obvious. The report provides striking visual representations of the “welfare cliffs” that poor people’s total incomes can fall off as they increase their earned incomes. Here is the chart on which the hypothetical above is based (the particular numbers in our example come from tables in the report, which clarify the visual data in the charts.)

Notice that welfare cliff we considered above, which occurs between $12 an hour and $15 an hour, is relatively small. A bigger one (and the reason I call the report “appalling”) occurs between $15 an hour and $18 an hour.

An Unaffordable Raise?

To pick up our thought experiment, let’s suppose that you want to get free of welfare eventually, and you know that moving up the job ladder is key to doing so, so you take your employer’s offer of a raise to $15 an hour and the corresponding loss of $2,885 in annual income. You cut back on spending where you can and look to the future. Now suppose further that you do well in your new job, you boost your knowledge and skills, and your employer offers you another promotion, with still more training and a raise to $18 an hour. Should you take it? Can you afford to take it?

At $18 an hour full time you would earn gross income of $37,440, and net income (after taxes) of $33,023. But earned income that high would reduce your refundable tax credit and ACA premium assistance, and eliminate your cash assistance, food assistance, housing assistance, and child care assistance, for a total reduction in government benefits of $26,820. So if you take the promotion and raise, your income would decrease from $60,701 to $39,332! A case could be made that it is irresponsible for you to reduce your family’s income that way.

Just think what that kind of welfare cliff does to the incentive to work (“on the books,” at least) and thereby to get off welfare. And the problem is not restricted to Chicago; the same kind of problem exists all across the country.

One of the tragedies of America today is that so many adults of sound mind and body do not support themselves and their families. It’s a tragedy not because they suffer material want; indeed, relatively few suffer so, because government assistance satisfies many of their material needs. It’s tragic because one of the keys to human happiness is earned self-respect, which requires, as Charles Murray has written, making one’s own way in the world. The vast majority of poor people don’t want welfare; they don’t want handouts; they want a good job with which they can support themselves and their families comfortably. The tragedy of the American welfare system is that it traps so many people in dependency on government, by hindering them from getting on and climbing up the job ladder, and thereby earning self-respect and happiness.

Welfare cliffs are of course not the only reason so many capable Americans languish in partial dependency on government assistance. Dreadful government schools in poor areas and systematic obstacles to getting a job, such as minimum wage laws and occupational licensing laws, are also to blame. But the perverse incentives of America’s welfare system really hurt.

 
Howard Baetjer Jr. is a lecturer in the department of economics at Towson University and a faculty member for seminars of the Institute for Humane Studies. He is the author of Free Our Markets: A Citizens’ Guide to Essential Economics.

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.

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