The Best Thing For Low-Skill Workers Would Be To Make It Enormously Profitable to Employ Them

I am constantly amazed how little people understand about economics and prosperity.  I have to give some background first.  Yesterday Mickey Kaus tweeted, "Isn't point of 'Americans are dreamers too' that there *are* zero-sum aspects: American lo-skill workers, who haven't done well for decades, have to compete for jobs/wages w/ DREAMers and (more important) new illegals a big DREAM amnesty will attract."

People talking about zero-sums in economics always get my hackles up, because they are frequently feared and seldom actually exist.  There is a lot of research that immigration does not reduced native-born unskilled employment, but it is impossible to discuss such things on Twitter without devolving into dueling appeals to authority.  Instead I wrote:

So what about a bipartisan compromise that increases immigration while simultaneously repealing labor regulations that make profitably employing low-skill workers difficult?

This was towards the end of my time on Twitter when I was mad that it was making me a worse person and I resolved to instead focus on trying to bridge differences.  But this proposal got a response I had not expected.

I am willing to believe I don't understand his point or Twitter is limiting his ability to explain himself, but this just seems really ignorant of how markets work.  How are jobs for low-skill workers going to exist if it is NOT profitable to employ them?

Here is how the world works:  Profits attract investment.  Profits are the fresh blood in the water that attracts sharks.   If I am making a good profit employing low-skill workers, then I am likely to reinvest those profits to grow and get more of those profits next year.  But even if I don't, at the same time other people will start to notice my profits and want to copy what I am doing.  Through all of this, we will all be hiring more and more unskilled workers.  None of this growth, none of this investment, none of this job creation happens without the profits.

This is why I have said for years that the greatest thing that could ever happen to low-skill workers in America is for entrepreneurs to find ways to make a fortune employing them.  I always get folks who consider this statement grossly exploitative, but it is the literal truth.  There are tons of well-paying jobs for programmers because a bunch of companies like Google are very visibly making a ton of money employing them.  Unfortunately, it is harder and harder to make the economics of a business that hires low-skill workers a success, something I know well because I run such a business.  The local, state and Federal governments are layering on more and more labor regulations that make it increasingly difficult to viably employ lower-skill workers.   I have a lot to say on this, and hopefully a paper I have written on the topic will soon be published and we can talk about it more.

Postscript:  Margaret Peters argues that one reason the Republican Party is more nativist is that the business sectors of the party that traditionally lobbied in support of immigration have reduced their support, at least for unskilled immigration, because they just don't have as much demand for unskilled labor any more.

As part of my research, I checked to see whether businesses are indeed lobbying less often on immigration. To find this out, I examined which groups testified before Congress on immigration, using that as one measure of lobbying.
Here's what I found. In the 1950s, on average, more than eight businesses used to testify before Congress at each hearing on immigration. By 2010, that number had dropped to two, as you can see in the figure below. The decline has been even steeper for industries that have been exposed to increased imports from foreign countries -- from eight businesses that produce goods that can be traded per hearing in the 1950s to less than one today.

Some industry groups have increased their lobbying for more immigration -- but those are in the tech sector and others that use high-skill labor. We should expect, then, that Trump will continue to push in his State of the Union address Tuesday for a "merit-based system" in which immigrants with high skills get priority.

In contrast, lobbying by nativist groups has hardly increased.

Google beats the doors down in DC lobbying for more immigration spots for programmers.  If someone were making good money hiring unskilled labor, they would be doing the same for unskilled immigration.

  • mlouis

    While I agree in theory, the link between corporate profit growth and employment/wages seems to have broken down. If record profits don't spur hiring, why would even-higher-record-profits?

  • SamWah

    I think the tweeter cannot even imagine the benefit the low-skill workers would get. He only sees "exploitation of the workers!!!!1111!!!"

  • herdgadfly

    The worst thing for any solution will be to make laws and impose administrative rulings designed to pick a winner. If a business is artificially directed to do A rather than B - free market capitalism always loses.

  • mlhouse

    To make low skill workers more competitive, instead of raising minimum wages eliminate the FICA taxes on labor that earns less than $12/hour. This gives the employee an increase in their net and makes these workers a little bit more competitive in the market.

    In the long run, subsidizing entry and low skill work will pay off in the end. Much of the value of working these low paying jobs is that the job experience and job skill creation pays off over the long run for these employees. High costs of low end labor means there is less of it, particularly when the artificial minimum wage is raised significantly. A young high school person is going to greatly benefit from a 20 hour/week job and we should crate the enviroment to create them.

  • The_Big_W

    This is a common argument that is brought up in this discussion. I think it unfairly conflates a couple of things. The rate of corporate profit growth at fortune 500 companies has little to do with the impact of forcing wage increases on the local cafe, or the small business that provides services to visitors at state and federal parks.

    The Cafe owner and Warren, in these proposed cases aren't mustache twirling villains who just yearn to lower wages. Their profit margins and ability to even run the business become IMPOSSIBLE at some of the proposed minimum wages being thrown about out there.

    The open willingness of those on the left to throw out the idea that businesses need profit to EXIST AT ALL is amazing. Businesses exist to make money, if they make enough money to have employees they pay them money to make more money. But if you take away the ability for a business to pay someone just a bit less than it costs to provide a service, you've taken away that businesses ability to even operate.

  • Agammamon

    Why would record profits ever spur hiring? You hire people based on *need*, not based on how much money you're making.

  • Agammamon

    Por que no los dos?

    In any case, the ones making less than $12/hour are going to see all that tax money (and more) come back in the form of refunds and welfare.

    Just get rid of the minimum wage - *that's* the primary advantage non-documented workers have, employers are more willing to employ them under the table because they're less likely to be working while scamming welfare payments for not working. Plus the illegals are not in a position to turn around and sue the employer for paying less than min wage even if the employee had agreed to it.

  • me

    That's a really good point - I'll also add that shifting the regulatory burden would help tremendously with job creation.

    I should not have to do all the heavy lifting in determining which rules and regulations to follow and be penalized if I get it wrong, instead, give me an IRS employer web portal where I can enter hours worked and rate and that does all the math for withholding and taxes.

  • Eric Bjerke Sr.

    Has the administration cut any regulations that help you? I hear about the elimination of onerous regs, but no actual real-world examples. Would love to hear you’re take.

  • buanadha

    Part of the problem with the "recovery" of the past 8 years was that it did nothing to stimulate small business growth which is the kind of growth that puts pressure on wages and pressure on the entrenched companies making those big profits.

  • Piero

    The tweeter should bear in mind that if the profitability of employing low skill workers is low, it must mean that the marginal contribution of an additional low skill worker is also low. This, of course, should suggest that employers are reluctant to hire new workers. Not only is this detrimental to the low skill workers who are unable to become employed, but it is also detrimental to the workers currently employed: given that employment opportunities are scarce (because it is not profitable for employers to employ them), they must incur extraordinary efforts in order to protect their current job. These efforts more often than not include the tolerance of many forms of exploitation which cannot be measured by the amount of surplus value that is extracted from the worker, which seems to be the only form of exploitation relevant to the tweeter.

  • mlouis

    Then perhaps we are looking in the wrong place. We know returns on capital have been very strong over the last 20 years while "returns on labor" have been rather poor. And you are telling me that the profit pool for large businesses is healthy, but for small business is not. I would suggest that it's not labor costs that are the problem: but the sucking up of the profit pool by large entities who are able to use sophisticated tax planning, regulatory barriers, and other anti-competitive measures which small businesses cannot. We want to punish labor for the transgressions of the multinationals?

  • mlouis

    The very title of the article is: "The Best Thing For Low-Skill Workers Would Be To Make It Enormously Profitable to Employ Them". In other words, the theory which serves as the basis for the entire argument is that hiring is a profit-driven activity.

  • mlouis

    Sounds to me more like small businesses are being out-competed by large ones. Now those small businesses want to "fix" the problem by lowering labor costs. The problem is the various advantages that large corporate have relative to small businesses. Labor is a red herring and taking the focus off where it should be: which is leveling the playing field for large vs small (simplify tax laws, simplify regulation, disallow tax havens, etc etc).

  • The_Big_W

    I love how the formerly evil for not raising wages corporations are now the example of "competitiveness". Way to move those goalposts. The fact is that large businesses aren't raising wages and small businesses are hamstrung by labor laws that favor large businesses.

    I would wager that almost all small business owners would love to pay their employees more, but are totally put off by progressive demands that they pay a rate for labor that makes no sense for their business and in fact makes their business unable to remain in operation.

    All those "level the playing field" options you detail are primarily directed at Labor...

  • mlouis

    If there have been initiatives directed at helping labor it certainly has not shown up in wages. Whereas corporate profits and returns on capital have increased substantially. Labor and small business should join forces to level the playing field vs the (much favored) corporates.

  • Maximum Liberty

    Corporate profits have risen largely as a result of over-regulation. Over-regulation comprehensively protects incumbents against new entrants. That frees them from competitive pressure on their prices. The mechanism Warren is talking about only works where entry into the business is fairly easy. That's true in much of retail, but is now comprehensively not true for the financial sector, which is where corporate profits have racked up. Sadly, Wall Street cronyism is largely bipartisan.

  • Daniel Barger

    The left wants dreamers, illegals etc. in America to vote for them. The GOP/Right wants them for cheap labor.
    If this was a zero sum issue the GOP/Right...often considered the political wing of big business wouldn't be all
    that interested in importing labor.

  • texasjimbo

    If one looks at the political donations at election time and the corporate culture of most of big business now, there is far more evidence that the democrats are the party of big business than republicans. Big business likes big government. Small business does not. And while there are plenty of GOPe types that are ok with big government and less freedom, there is virtually no one in the democrat party that is not dedicated to expanding the size and power of the government and reducing freedom.

  • Quincy

    There is another class of workers that has to be considered: unknown skill workers. These are young folks trying to get a start in life who have trouble finding that first opportunity. Labor force participation rates for people ages 16-24 have slipped from 65.5% in 1996 to 52.5% in 2016. For men, who are earning fewer college degrees these days, labor force participation for ages 16-24 have dropped from 68.8% to 52.6%.

    If a minimum wage hike or new labor regulation shrinks the pool of low skill jobs available, it becomes more difficult for a worker with no track record to get that first line on a resume that they can use to build a career. Even with a college degree, there's no better proof for an employer that a person is responsible and productive than being able to talk to someone who has worked with them.

    The longer someone has to struggle to get their first opportunity, it not only shrinks their potential to build wealth over a lifetime, but it increases the odds that they drop out of the legal economy altogether. This hits minority communities especially hard. From 1996 to 2016, the labor force participation rate among all black men declined from 68.7% to 61.1%. Across the board, the declines in labor force participation have been driven primarily by the 16-24 age bracket, so I'd guess that the pattern holds true here as well. (Unfortunately, BLS doesn't put out the data by age and race that I can find.)

  • marque2

    The hiring of new people is secondary. If companies make record profits, they typically want to expand those operations making the huge profits which results in the hiring of new workers. With too many regulations, companies might not be willing to expand.

    Secondly, companies are hiring, the problem is that the supply of people for jobs is still too great to cause salary increases - and to cause companies to make the productivity enhancements for the new hires. I know unemployment is 4.1%, but I believe that the new hires are being sopped up by an increased participation rate as folks decide to join the workforce again.

  • morganovich

    " the link between corporate profit growth and employment/wages seems to have broken down" i do not believe this is so. hourly wages are up quite a lot.

    this can be readily seen in the data:

    https://fred.stlouisfed.org/graph/?g=i6mL

    and this does not include equity compensation, about the purest link between employee comp and profit growth around.

    hourly earnings are up from about 20 in 2006 to nearly 27 today. that's a MASSIVE gain. corp profits have grown from $1.4tn to $1.85tn over the same period. thus, the growth rates are essentially identical. (33% for wages vs 32% for profits)

    so, i'm not sure where you are getting this idea that wages are not tracking profits, but the Fed/BLS data seems to show that they are tracking with remarkable accuracy.

    the interesting part of this issue is that wage growth has been lowest at the low end. but, more telling, the low end has also had TERRIBLE productivity growth. in fact, for a decade, wage growth at the low end has far exceeded productivity growth.

    this means it is getting less and less profitable to employ low skill workers.

    "Taking a longer view, from 1987 to 2012 the same BLS data show that worker productivity in the food service sector rose by an average of 0.6 percent per year. In limited service restaurants, the gains were slightly lower, only averaging 0.5 percent per year. Meanwhile, unit labor costs have risen by an average of 3.6 percent. Over this period the minimum wage has risen from $3.35 to $7.25 per hour which is an average annual increase of 3.1 percent. In other words, at least in food service, the minimum wage has risen at a rate five or six times as fast as justified by the gains in worker productivity."

    https://www.forbes.com/sites/jeffreydorfman/2014/01/30/almost-everything-you-have-been-told-about-the-minimum-wage-is-false/#2d707c9c76bc

    this is the key pivot. productivity at the low end has not risen much, but wages have risen a ton. OF COURSE businesses are choosing to switch to automation.

    this is precisely the point warren is making.

    it's also worth recognizing that what caused productivity growth matters to wage growth. if you are a ditch digger and can dig 10 feet an hour and you get better at your job and can now, with the same shovel, dig 12 feet an hour, you are likely to get paid more and keep most or all of that additional productivity. but, if i, the employer, buy you a backhoe to use and you can now dig 100 feet, most of that is going to accrue to me because it's my very expensive capital equipment that is making you so productive and i would not lay out that kind of cash unless i got a return on it. your salary will rise, but not by 10X. maybe it doubles. of course, 9 other guys got laid off because you can now do the work of 10...

    that's the story of progress. it used to take an incredible number of people to plant and harvest food. now we use unmanned combines guided by satellite, tractors, and 100 other things that make labor vastly more productive and food incredibly cheap.

  • morganovich

    regulation is always the friend of the big firm. oh, that takes $20k to comply with for each SKU or clothing? "no problem" says baby GAP. "whoops, i'm out of business", says the smaller seller that had been doing great with their own website. (this is a real example. it happened to my business partner's wife and her line of baby clothes.)

    complying with osha, labor rules, and 1000 other things makes running a small business really hard and running one that has a number of employees even harder. just the paperwork requires full time staff to deal with.

    anyone who doubts this should try hiring 10 people some time. you'll be literally staggered by how hard it is to hire and maintain the paperwork for an employee, especially in the crazy states like California. every time they try to "protect workers" they are just making them harder to employ.

  • Mercury

    "Unfortunately, it is harder and harder to make the economics of a business that hires low-skill workers a success, something I know well because I run such a business."
    ------------------------------------------------------------------------------------------------------
    Yeah but it's somewhat less harder if you can pay those low-skill workers under the table, or if those workers don't feel safe/confident enough to agitate for a better deal or if those workers are part of a "community" that you'll never interact with outside of the workplace.

  • wreckinball

    A large portion of the illegal immigrants are no-skill workers who are attracted to the welfare state. These theories about how it really is better just to let a large group of unskilled workers into the country always leaves that out.
    Yes, all things being equal completely free trade , whether it be goods or labor would be best. But welcome to the real work. All things are not equal. Being on welfare and doing landscaping or laborer jobs on the side for cash is way better than anything available to these folks in Mexico.