The Minimum Wage Follies

Ten days ago, LA made a historically dumb decision to raise its minimum wage to $15 an hour. The usual chorus of Leftists emerged to claim that the contention that raising the minimum wage destroys low-wage jobs — a premise that was accepted by most economists until about two years ago — has been “debunked” as a myth (it hasn’t and it won’t be because the Law of Supply and Demand isn’t magically suspended for low-wage labor).

Some of the biggest supporters of the minimum wage hike were labor unions. You may wonder why labor unions would support hiking the minimum wage since most labor members don’t make minimum wage. The reason is that many union wages are pegged to the minimum wage and are set to automatically rise if the minimum wage does. It further gives them leverage in negotiations. If the minimum wage if $30,000 a year, it gives them an argument for larger starting union salaries. And since, in California, most labor arbitration is done by former union lawyers, it’s a nice racket. So their support has nothing to do with how much they care about the poor masses. It’s about cynically playing on sympathy for those masses to leverage their own pay hikes.

The unions have been at the forefront of claiming that the idea that minimum wage hikes destroy jobs is a myth. Well, guess what folks: they are perfectly aware of what a higher minimum wage will do. Why else would they want this:

Labor leaders, who were among the strongest supporters of the citywide minimum wage increase approved last week by the Los Angeles City Council, are advocating last-minute changes to the law that could create an exemption for companies with unionized workforces.

The push to include an exception to the mandated wage increase for companies that let their employees collectively bargain was the latest unexpected detour as the city nears approval of its landmark legislation to raise the minimum wage to $15 an hour by 2020.

For much of the past eight months, labor activists have argued against special considerations for business owners, such as restaurateurs, who said they would have trouble complying with the mandated pay increase.

But Rusty Hicks, who heads the county Federation of Labor and helps lead the Raise the Wage coalition, said Tuesday night that companies with workers represented by unions should have leeway to negotiate a wage below that mandated by the law.

So here’s how this two-step works:

1) the unions advocate for a higher minimum wage.

2) the raising of the minimum wage either triggers pay hikes for union members or gives them a leg up in negotiations.

3) However, they allow exceptions for industries that might have to lay people off … as long as those industries are unionized.

4) Industries that can’t pay the minimum wage either leave or … become unionized.

The net result? More money for unions, more union members, less jobs and higher prices for everyone else. And liberals wonder why we are so cynical about Big Labor.

The Big Shoes Drop

Two 5-4 decisions from SCOTUS today. The first was on forcing non-union employees to pay union dues. The Court decided they can not be forced to. The second was on mandated contraception coverage. The Court ruled narrowly that closely-held corporations can get a religious exemption. But it kept the door open for the government to provide such coverage.

I think the Court ruled correctly in both cases but expect very ugly commentary, especially on Hobby Lobby. There is a huge problem in the Left Wing in understanding the difference between something being a good idea (employer insurance should cover birth control) and something being mandated by law (employer insurance should be forced to cover birth control). So expect lots of commentary about how women’s rights have been set back (all the way to yesterday), how the court was mansplaining, how none of the female justices rules in favor of Hobby Lobby, etc., etc.

Just remember this. At the end of the day, women have no less access to birth control than they did last week. If you really want to make a difference in access to birth control, push the FDA to make it available over the counter. That will do a lot more good than forcing corporations to pay for it.

Update: A very important point from McArdle. The net result of this decision will almost certainly be that Obama will extend the deal he made with religious non-profits — where insurance companies agree to pay for contraception — to closely-held for-profits. And this compromise could have been made years ago.

As I see it, this case should never have made it to the court; the Barack Obama administration should have pre-empted the issue by quietly allowing exemptions for nonprofits and closely held corporations that had clear and deep religious beliefs that existed outside of the desire not to pay for contraception. (Hobby Lobby, for example, is closed on Sundays in observation of the Sabbath, even though this costs them sales; I think we can all agree that the Little Sisters of the Poor have demonstrated a fair amount of commitment to demanding religious principles.)

Instead, the administration chose to pick this fight — and got a definitive ruling that will probably have much broader impacts than quiet exceptions. Nor is this surprising; it was pretty predictable from earlier rulings like Citizens United, in which the court also held that people don’t lose their First Amendment rights simply because they have come together in a group or legally organized that group as a corporation.

Presumably, the administration hates this ruling — but at the same time, it has to love the passion that it has engendered. This is going to be fundraising gold for Democrats for the next two years. In a politics that cares more about symbolism than substance, that too was predictable. And it’s hard to avoid the conclusion that this was the prediction that mattered more. Politics may not be rational, but it still has its own remorseless logic.

Look at Twitter. Look at Facebook. Look at the liberal blogs. They are exploding with rage over a decision that will ultimately have almost no impact on women at all. Women will get contraception coverage; just through a different financial means. So the Obama Administration has riled up their base over next to nothing.

This is how they operate, people. Let’s not act surprised.

Upscale Seattle

Seattle is about to raise its minimum wage to a staggering $15 per hour. The deal is being touted as a cooperation between labor and business. However, that deal was basically extorted by the local government:

With his Income Inequality Committee failing to reach a decision at its final scheduled meeting April 23, and business and labor representatives still at odds over core issues on a deal for a $15 minimum wage, Seattle Mayor Ed Murray gathered the business members of the committee the following day.

Unless they reached an agreement with labor, he told them, he would announce a plan worse for them — and more closely resembling Socialist City Councilmember Kshama Sawant’s pro-worker initiative.

But Murray didn’t announce his own proposal April 24. He stood before a room packed with local and national media and said while there was broad agreement, there were unresolved issues.

One week later, Murray returned to the same conference room in City Hall to announce a historic agreement between business and labor to raise the city’s minimum wage to $15 an hour over five to seven years.

The negotiated deal calls for a three- to seven-year phase-in, with large businesses — those with at least 500 workers — required to reach the $15 wage first.

As you can imagine, the usual suspects are crowing, claiming this will inject half a billion dollars into the local economy (since we all know that wages can be raised with money grown on trees). I find this claim to be ridiculous. All the minimum wage will do — as the minimum wage proponents themselves so often note — is redistribute income. It will not create income on its lonesome.

But even that comes with a price. With this wage hike, Seattle will have a higher minimum wage than any country in the world.

Any plan that makes hiring a worker more expensive than in France should be cause for concern. We know that businesses in high-wage countries are especially eager to replace workers with software. Fast-food restaurants in Europe, for instance, have been some of the earliest adopters of labor saving technologies like digital kiosks where customers can order. Those innovations are already beginning to make headway in the United States. But by passing a $15 minimum, Seattle would risk speeding the process up within its city limits.

Liberal rag the New Republic, while supporting the minimum wage hike, is honest enough to note at least three negative consequences: employers will hire fewer workers; employers will replace employees with computers and employees will be priced outside of the city.

That last point should really be unpacked. Reihan:

It is entirely possible that as Seattle’s new minimum wage proposal takes effect, the poverty rate within the city limits will decrease. What remains to be seen, however, is if the new proposal decreases the poverty rate by raising the market incomes of low-wage workers currently residing in Seattle or if it instead prices some number of less-skilled women and men out of Seattle’s housing market by reducing their market incomes, either by forcing them to exit the city’s formal labor market to seek lower-wage employment in neighboring jurisdictions or by encouraging local employers to reduce work hours.

A question for the class: what businesses pay the minimum wage? The discount and low-price businesses that the working poor and middle class utilize most often, such as fast food restaurants. So what’s going to happen when the minimum wage is raised? The cost of living for Seattle’s lower classes will go up massively. It won’t go up for Seattle’s upper class since their preferred stores are expensive anyway and pay high wages.

The result will be, as Reihan has documented, poor people moving to areas that have lower minimum wages so that they can afford to live, then commuting long ways to areas of higher minimum wage. I don’t see that having to maintain a car and commute a couple of hours every day improves their lifestyle.

But it’s worse:

However, while this is an even trade of money from one group to another, one specific source of money actually shrinks.

The lost money is federal government benefits that low wage workers lose thanks to the increase in the minimum wage. In fact, many of these workers will lose food stamps, some or all of their earned income tax credit, and other means-tested federal benefits. This money is currently spent in the local economy, but after the minimum wage is increased the money will revert to Washington, D.C., to be spent on something else.

As I showed in an earlier column, low wage workers can lose as much as half of any new income to increased taxes and lost benefits. Given the percentage of low wage workers that live in low income households (around 30 percent) and that eligibility for the earned income tax credit extends to about $50,000 for a family of four, the loss to the Seattle area economy is likely on the order of $75-100 million.

We’ve talked about this before: how the federal tax and welfare systems have created massive effective marginal tax rates for those attempting to climb out of poverty. So the notion that this is a straight-up cash dump into the wallets of poor people is incredibly misinformed. At least half and probably more of that money will swirl right out of the bottom of their wallets in the form of reduced government subsidies. And the rest will vanish with increased prices and long commutes. Reducing people’s dependence on government is a good thing, of course. But let’s not pretend they’ll have more money.

Some people are saying that this will be an interesting economic experiment to test the effect of raising the minimum wage. I’m dubious of that. First, people are not economic lab rats and shouldn’t be treated as such. Second, I am sure that the books will be cooked on this experiment. When poor people flee Seattle to live in places they can actually afford, this will give the appearance of a more prosperous city. It’s the same logic by which a city reduces its poverty rate by using imminent domain is used to force poor people to sell their homes to rich people.

Oh, well, could be worse. Down in California, some fools want to raise the minimum wage to $26 an hour.

I wish that was a joke.

Fixing the Problem They Created

What the what?

As the New York Times reported yesterday, President Obama intends to barge unilaterally into a hotly contested area of employment law by ordering the Department of Labor to develop regulations “to require overtime pay for several million additional fast-food managers, loan officers, computer technicians and others whom many businesses currently classify as ‘executive or professional’ employees.” As with the expansion by decree of minimum wage law, it will be interpreted in some quarters as an undiluted boon to the employees it covers – their employers will either raise their pay or limit the hours they are expected to work, or both, and how could they be anything but happy about that? But as the piece quotes Cato’s Dan Mitchell as warning, ”There’s no such thing as a free lunch… If they push through something to make a certain class of workers more expensive, something will happen to adjust.”

Several thing to unpack here. First, as Olson points out, labor law is already a nightmare. The example he cites is that many business refuse to give cell phones to employees lest that be interpreted as an admission to working them after hours. If this regulation goes into place, employers will have to guess whether an employee is eligible or exempt from overtime, with thousands or millions of dollars in the balance. The change may hit small business hard and hit low-wage employees harder. Many businesses may get rid of “transition” jobs where people who work on an hourly basis can be tested out in salaried management positions.

Second, the ostensible reason for this is that employers are working employees harder these days, putting many on salary to avoid paying overtime and trying to squeeze every ounce of productivity out of them. But there’s a reason for that and it’s not because employers are evil. It is because hiring new employees has become very expensive. And the reason it has become expensive is because of Democratic pushes for mandated insurance, Democratic pushes for more extensive employer insurance, Democratic pushes for higher minimum wage, Democratic pushes for more more more more more. Even if this falls into place and millions of employee exemptions are rescinded, it may not result in wave of hires. Because overtime for a good employee is often worth more than the start-up costs of a new and untested one.

(Actually, I think the likely result of all of this stuff is going to be to push employers toward fewer employees and more contractors.)

This isn’t a constitutional issue, actually. The FLSA does give the executive the authority to decide the criteria for exemption from overtime. And maybe there’s a case to be made that the system is being abused (assuming you think it’s the government’s business to dictate labor conditions like this). But I’ll raise the same objection I did to the minimum wage: why would you hit businesses with this when unemployment is our nation’s biggest problem?

Quite simply because we have an Administration that doesn’t understand the Law of Unintended Consequences.

SCOTUS Takes On Blago

This could be interesting:

A 55-year-old woman who earns less than minimum wage caring for her disabled son could unravel decades of labor law and strike a blow against one of the most powerful political lobbies in the nation.

Pamela Harris is fighting an Illinois law crafted by imprisoned former Gov. Rod Blagojevich (D.) and enforced by his successor Pat Quinn (D.) that forces her and other home healthcare workers to pay union dues. Her case, Harris v. Quinn, begins oral arguments at the Supreme Court on Tuesday morning

“I don’t want to be the face and name associated with anti-union campaign, but this is at its heart a mother doing what she thinks is right for her son,” she told the Washington Free Beacon. “I don’t see this as a union issue, but the current administration in Illinois has an unhealthy relationship with public sector unions. We got swept up in that.”

Ms. Harris provides care to her son, who has a very rare disease that leaves him completely disabled. However, because she gets payments from Medicaid for this, under a Blagojevich law, she has to pay union dues (although without getting union benefits). No word yet on whether Illinois Democrats plan to deduct UAW dues if you get a tax credit for buying a hybrid car.

There is a lot of fear on the Left over what SCOTUS will do, because they could rule very broadly and strike a devastating blow against organized labor. However, I think that hype is overblown. The pattern of the Roberts court is to rule conservatively but narrowly. I expect it is very likely they will strike down this specific law 5-4 but avoid broadly striking down similar laws. The Left will freak out and go back to hating Roberts. And it’s likely some forced unionization laws will be nipped in the bud or be repealed. So expect a step against government-supported labor cartels, but not a decisive blow.