Wage Rate Regulation at Different Scales

Readers know I like a good graphic and I love state by state comparisons. Here’s a nifty little state by state comparison of wage rate regulation in the U.S.:

Minimum Wage Legislation by state

Of course, the federal minimum has been set at $7.25 since 2009, and the Obama Administration is contemplating an increase to $10.10. Moreover, cities can get in on the action as well. Danielle and I commented on Seattle’s wage experiment here and here. On that latter score, I stumbled across some friendly-fire skepticism on the wisdom not of raising the minimum but of a city raising it much higher than its surrounding community. Former Labor Department and current Brookings Institution economist Gary Burtless asks us to

Consider a business that mainly sells low-cost, fast-food meals. If it must pay $15 an hour to its low-wage employees, while its competitors less than a mile away are only required to pay $10 an hour, the companies outside Seattle can charge lower prices to their customers for shakes, burgers, and fries, and yet still make a profit. The lower cost establishments can capture a larger percentage of the local fast-food trade, reducing fast-food sales inside Seattle’s city limits. The same is true of the goods and services sold by laundry and dry cleaning establishments, inexpensive motels, and other businesses that depend on low-wage workers to stay competitive. The labor cost disadvantage caused by a higher minimum wage can hurt low-wage employment in Seattle and possibly reduce the value of some of the city’s commercial real estate.

To the extent that consumers have the option of buying goods or services from companies that are not required to pay a higher minimum wage, some of the hoped-for gains from a higher minimum wage will be lost. When customers can conveniently buy products or services from firms that face lower labor costs, the new businesses that they patronize will grow and the old, high-cost businesses they abandon will shrink. Low-wage workers may earn higher wages inside the Seattle city limits, but their employment opportunities in Seattle may shrink.

Read Burtless piece in its entirety here.


Mandatory Labor Union Education?

There is new legislation that is being considered in Connecticut, suggesting that primary school should include a class on labor unions. At first glance, a history lesson on an important institution in America’s history does not seem harmful or ill-advised. However, labor unions are the primary supporters of this legislation and they want to see labor unions not be a one-week lesson in 10th grade, but rather integrated in a year-long course.


“They believe that one of the reasons young people are not organizing in unions is because they’re not taught in schools the benefits of being in a collective workforce,” Kevin Dayton, a policy consultant to non-union construction companies in California.

This is somewhat scary. It appears that this group actually wants to educate kids on the benefits of labor unions and show the power that they hold.  Most certainly, labor unions have power… but is it good power?

Labor unions started in 1866 with the National Labor Union in America.  In 1869, the Knights of Labor emerged to fight against child labor, depressed wages, eight-hour workdays and poor working conditions. Membership rose to 700,000 workers.Fast forward to today where 14 million people are a member in a labor union, roughly 37% of all public sector employees.

A friend of mine, who is in a labor union, gets 16 days off a year for holidays plus an additional 3 weeks of vacation, which he can accrue the more he works over-time. Further, if he is asked to do a job that is not in his job title, he is required to get paid over-time for the work. The health insurance plan is ridiculously good where there are minimum out of pocket pays and most prescriptions cost less than $5.00. Instead of getting a raise in the last five years, the labor union has been arguing over contracts requiring a 3% cost-of-living-increase (COLA) along with a yearly 1.5% raise. Inflation has only been going up approximately 2% per year over the last 5 years  and the economy has not been growing as fast as the proposed raise in this industry. With the newest report of a large GDP quarterly fall of -2.9% this seems hard to justify from the employer’s perspective. So, it is a partial COLA increase, partial raise and an additional raise the labor-union is asking for.  The company refuses this contract and the labor union refuses anything but this contract. Eventually, when the economy booms again, this will retroactively be passed. This labor union has power.

So, if labor union history is going to be taught. I assume it will be taught something like this…tout about the benefits only and never mention the costs. Examples of benefits: higher way for low-wage workers/middle-tier workers, better benefit packages, better work conditions, more picketing with you do not get your way, etc.

The costs that almost certainly outweigh the benefits of labor unions in today’s society may be twiddled down to a ‘hindrance’ or not mentioned altogether if this legislation passed. Examples of costs: less employment (unions raise the price of labor, so employers will purchase less of it), a shift of power to low-skilled or low-wage workers at the expense of the higher-wage or higher-skilled workers (note, I am not saying that low-wage workers have low-skill, however in a free market economy such that each worker is paid their marginal product a low-skill worker would only garnish a low-wage).  Further, bad employees are harder to fire in a labor union as they usually have high-powered lawyers supporting against bad working conditions or mean management.

EconLib explains this quite well:

“According to Harvard economists Richard Freeman and James Medoff, who look favorably on unions, ‘Most, if not all, unions have monopoly power, which they can use to raise wages above competitive levels’ (1984, p. 6). Unions’ power to fix high prices for their members’ labor rests on legal privileges and immunities that they get from government, both by statute and by nonenforcement of other laws. The purpose of these legal privileges is to restrict others from working for lower wages. As antiunion economist Ludwig von Mises wrote in 1922, ‘The long and short of trade union rights is in fact the right to proceed against the strikebreaker with primitive violence.’ Interestingly, those who are expected to enforce the laws evenhandedly, the police, are themselves heavily unionized.”

Some people are fearful of stepping out and debating on employment contracts on their own, so they want a collective group to do it for them. Labor unions are equally scared to wither away in existence as more people in society see them as a disgruntled employees always looking for a fight. No one wants to work with the mean guy or in this case, a group of mean employees. People like to be individuals and think freely, but they also like to be taken care of.  In the matter of public school education on labor unions, I think it would be a major win for labor union supporters and collectivism. It would be a major failure on the part of a free society for the economics (and thus the costs) behind labor unions not to be explained.


Seattle’s New Minimum Wage Law

The Seattle City Council recently unanimously voted to raise the city’s minimum wage to $15 and hour, the highest in the nation. The law also contains a provision exempting minors from the new minimum. It is a stylized fact in economics that higher minimum wage mandates lead to increased unemployment as the marginal worker (the worker not quite productive enough to make such a wage cost-effective for his/her employer) is displaced. Since the marginal worker is the worker most likely to be stuck at the lowest end of the pay scale and thus the intended beneficiary of such a policy, the fact that this is the worker most likely to be out of a job following a wage rate hike is somewhat perverse.

On the other hand, many proponents of the minimum wage (and advocates for much higher minimums) argue that most workers will keep their jobs at a higher wage rate which will improve the quality of their lives. They cite studies that show that the displacement effect is minimal and eclipsed by the overall benefits of paying a “fair wage” or “living wage.”

The Seattle experiment in wage rate regulation should provide yet another opportunity to test the effects of this type of labor market policy. In the meantime, I leave you with this informative Intelligence Squared debate on the motion “Abolish the Minimum Wage”:

The first attempt at establishing a national minimum wage, a part of 1933’s sweeping National Industrial Recovery Act, was struck down by the Supreme Court in 1935. But in 1938, under the Fair Labor Standards Act, President Franklin D. Roosevelt signed into law a minimum hourly wage of 25 cents—$4.07 in today’s dollars. Three-quarters of a century later, we are still debating the merits of this cornerstone of the New Deal. Do we need government to ensure a decent paycheck, or would low-wage workers and the economy be better off without its intervention?

For: James A. Dorn
For: Russell Roberts

Against: James Bernstein
Against: Karen Kornbluh



Fear the Boom and Bust

If you want to understand two different ideologies within economics watch this rap video about Hayek vs. Keynes. It is accurate and the rap is pretty funny.  And if you already understand the differing economic ideologies and haven’t seen this video yet, you’ll love it!


From the video: In Fear the Boom and Bust, John Maynard Keynes and F. A. Hayek, two of the great economists of the 20th century, come back to life to attend an economics conference on the economic crisis. Before the conference begins, and at the insistence of Lord Keynes, they go out for a night on the town and sing about why there’s a “boom and bust” cycle in modern economies and good reason to fear it.




Part-Time Work on the Rise–Is It Here to Stay?

The San Francisco Federal Reserve has a great article titled, “What’s Behind the Increase in Part-Time Work?”  During the recession and even three years post, part-time work has dramatically increased in teens, young adults and single men and women with less than a high school degree.  These populations typically have lower employment in general, so these results are striking, as Greg Mankiw also mentions in his blog.

Part-time employment for selected groups, as a percentage of total employment

part time employment

Note: Gray bars indicate NBER recessions.

Two possible explanations offered from the economists, Valletta and Bengali, suggest that the emergence of part-time work in these populations represents a slow recovery of old jobs rather than a permanent increase and the anticipation of the 30-hour cutoff for health care benefits for the Affordable Care Act (ACA) of 2010.   If it is believed that most of the effect comes from the Affordable Care Act, then it will be interesting to see whether part-time work will continue to increase now that there is a delay in the ACA until January 1, 2015.  I think both explanations are plausible, but perhaps this phenomena may also represent a cultural change as well–that more single men and woman and teens may be going back to school part time and working part-time to cover expenses.  Labor force participation rates in ages 16-24 are low indicating that the shift to more education and training may be here to stay and that this increase in part-time work may be permanent.

Part-time employment as a share of total employment