Posts tagged ‘minimum wage’

A Fundamental Shift in the Economy, At Least for Entrepreneurs and Small Business

When politicians argue about small business growth, they argue about stuff like taxes and access to capital and, god help me, completely irreverent (to small business) stuff like the ExIm Bank.

I would argue that there has been a fundamental shift in the economy relative to small business over the last four years, but it has nothing to do with any of that stuff.  I would summarize this shift as follows:

Ten years ago, most of my company's free capacity was used to pursue growth opportunities and refine operations.  Over the last four years or so, all of our free capacity has been spent solely on compliance.

Let me step back and define some terms.  What do I mean by "free capacity?"  In a small, privately-held company, almost all the improvement initiatives spring from the head of, or must heavily involve, the owner.  That would be me.  I have some very capable staff, but when we do something new, it generally starts with me.

So OK, our free capacity is somewhat limited by my personal capacity as owner and President.   But actually, I have a head full of ideas for improving the company.  I'd like to do some new things with training that takes advantage of streaming video.  I'd like to add some customer service screening to our application process.  But my time turns out not to be the only limit -- and this is one of those things that HBS definitely did not teach me.

In the real world, there are only so many new things I can introduce and train my line managers to do, and that they can then pass down to their folks.  An organization can only accept a limited amount of new things (while still doing the old things well).  This is what I mean by "free capacity"  -- the ability to digest new things.

Over the last four years or so we have spent all of this capacity on complying with government rules.  No capacity has been left over to do other new things.  Here are just a few of the things we have been spending time on:

  • Because no insurance company has been willing to write coverage for our employees (older people working seasonally) we were forced to try to shift scores of employees from full-time to part-time work to avoid Obamacare penalties that would have been larger than our annual profits.  This took a lot of new processes and retraining and new hiring to make work.  And we are still not done, because we have to get down another 30 or so full-time workers for next year
  • The local minimum wage movement has forced us to rethink our whole labor system to deal with rising minimum wages.  Also, since we must go through a time-consuming process to get the government agencies we work with to approve pricing and fee changes, we have had to spend an inordinate amount of time justifying price increases to cover these mandated increases in our labor costs.  This will just accelerate in the future, as the President's contractor minimum wage order is, in some places, forcing us to raise camping prices by an astounding 20%.
  • Several states have mandated we use e-Verify on all new employees, which is an incredibly time-consuming addition to our hiring process
  • In fact, the proliferation of employee hiring documentation requirements has forced us through two separate iterations of a hiring document tracking and management system
  • The California legislature can be thought of as an incredibly efficient machine for creating huge masses of compliance work.    We have to have a whole system to make sure our employees don't work over their meal breaks.  We have to have detailed processes in place for hot days.  We have to have exactly the right kinds of chairs for our employees.  We have to put together complicated shifts to meet California's much tougher overtime rules.  Just this past year, we had to put in a system for keeping track of paid sick days earned by employees.  We have two employee manuals:  one for most of the country and one just for California and all its requirements (it has something like 27 flavors of mandatory leave employers must grant).  The list goes on and on.  So much so that in addition to all the compliance work, we also spent a lot of work shutting down every operation of ours in California, narrowing down to just 3 contracts today.  There has been one time savings though -- we never look at any new business opportunities in CA because we have no desire to add exposure to that state.

Does any of this add value?  Well, I suppose if you are one who considers it more important that companies make absolutely sure they offer time off to stalking victims in California than focus on productivity, you are going to be very happy with what we have been working on.  Otherwise....

I fully understand the dangers of extrapolating from one data point**, but for folks who are scratching their head over recent plateauing of productivity gains and reduced small business origination numbers, you might look in this direction.

By the way, it strikes me that regulatory compliance issues set a minimum size for business viability.  You have to be large enough to cover those compliance issues and still make money.  What I see happening is that as new compliance issues are layered on, that minimum size rises, like a rising tide slowly drowning companies not large enough to keep their head above water.  We are keeping up, but at times it feels like the water is lapping at our chin.


**Unrelated Postscript:  I have found that in the current media/political world, people love to have only one data point.  Why?  Well, with two data points you are are stuck with the line those points define.  With just one, you can draw any line you want in any direction with any slope.

Cargo Cult Regulation -- How Much Effect Did Card and Krueger Have on New York's Fast Food Minimum Wage Ruling?

New York is proposing a $15 minimum wage for any fast-food restaurants that are part of a national chain with 30 or more stores.  How this survives any sort of equal protection test is beyond me -- if I own a restaurant and call it "coyote's place" I don't have to pay $15, but if I own a single restaurant where I pay franchise fees to McDonald's, I do.

Let's leave the inevitable court challenges on fairness aside.  Of all the possible industries, I wonder why the focus on just fast food and on just large franchises.  Some of it is obviously mindless Progressive soak the rich thinking, and some of it is a liberal distaste for any foods that are not kale.  Is it just because the fast food workers have been the most vocal?  If so, that is pretty lame the the government is merely focusing on the squeaky wheel, a real indictment of any pretensions technocratic politicians have to legislating intelligently.

But I wonder if it is something else.  Pick a progressive on the street, and in the unlikely event they can name any economic study, that study will probably be Card and Krueger's study of the effect of a minimum wage increase in New Jersey.   Sixty bazillion studies have confirmed what most of us know in our bones to be true, that raising the price of labor decreases demand for that labor.  Card and Krueger said it did not -- and that a minimum wage increase may have even increased demand for labor -- which pretty much has made it the economic bible of the Progressive Left.

What intrigues me is that Card and Krueger specifically looked at the effect of the minimum wage on large chain fast food stores.  In this study (I will explain the likely reason in a moment) they found that when the minimum wage increased for all businesses in New Jersey, the employment at large chain fast food restaurants went up.

So I wonder if the Progressives making this ruling in New York thought to themselves -- "we want to raise the minimum wage.  Well, the one place where we KNOW it will have no negative effect from Card and Krueger is on large fast food chains, so...."

By the way, there are a lot of critiques of Card & Krueger's study.  The most powerful in my mind is that when a minimum wage is raised, often the largest volume and highest productivity companies in any given business will absorb it the best.  One explanation of the Card & Krueger result is that the minimum wage slammed employment in small ma and pa restaurants, driving business to the larger volume restaurants and chains.  As a whole, in this theory, the industry saw a net loss in employment and a shift in employment from smaller to larger firms.  By measuring only the effect on larger firms, Card and Krueger completely missed what was going on.

Worried about your privilege? Want to be treated like an abused underclass? Start a business!

John Scalzi tries to explain privilege to non-SJW-types by saying that being a white male is like playing life on "easy" difficulty.

I'll grant I benefited from a lot of things growing up others may not have had.  I had parents that set high standards, taught me a work ethic, taught me the value of education, had money, and helped send me to Ivy League schools (though the performance there, I would argue, was all my own).

Well, for those of you concerned about living down a similar life of privilege, I have a solution for you: start a business.  Doing so instantly converted me into a hated abused underclass.  Every government agency I work with treats me with a presumption of guilt -- when I get called by the California Department of Labor, I am suddenly the young black man in St. Louis called out on the street by an angry and unaccountable cop**.  Every movie and TV show and media outlet portrays me as a villain.  Every failing in the economy is somehow my fault.   When politicians make a proposal, it almost always depends on extracting something by force from me -- more wages for certain employees, more health care premiums, more hours of paperwork to comply with arcane laws, and always more taxes.

Postscript:  I will add an alternative for younger readers -- there is also a way to play college on a higher difficulty:  Try to be a vocal male libertarian there.  Write editorials for the paper that never get published.  Sit through hours of mindless sensitivity training explaining all the speech limitations you must live with on campus.  Learn how you can be charged with rape if your sex partner regrets the sex months later.  Wonder every time you honestly answer a question in class from a libertarian point of view if you are killing any chance of getting a good grade in that course.  Live every moment in a stew of intellectual opinion meant mainly to strip you of your individual liberties, while the self-same authoritarians weep and cry that your observation that minimum wage laws hurt low-skilled workers somehow is an aggression against them.


** OK, this is an exaggeration.  I won't likely get shot.  I don't want to understate how badly abused a lot of blacks and Hispanics are by the justice system.   I would much rather be in front of the DOL than be a Mexican ziptied by Sheriff Joe.  But it does give one the same feeling of helplessness, of inherent unfairness, of the unreasoning presumption of guilt and built-in bias.

The Uphill Battle to Reduce the Size of Government

Last year, when Congress did a 1-year renewal of legislation governing public recreation and fee policies (FLREA) they left out a tiny provision that discouraged government agencies from taking back tasks they had privatized.  With that gone, parts of the USFS immediately began to move to bring certain operations back in house, even when doing so required that they both spend more tax money AND reduce services levels to the public.  Such is the strength of incentives in any government bureaucracy to expand their scope, staffing, and budget, even when it makes no sense for the public.

This week in an article at PERC, I tell one such story in depth. Here is an excerpt:

Consider one example: The Tahoe National Forest in California recently took the operation of some of their parks out of private hands, ending a nearly 30-year partnership with one of our competitor companies.

Did the Forest Service do it to save money? The private concessionaire operated entirely with the user fees paid by visitors, using no taxpayer money, and even paid rent back to the government. The agency’s in-house operating plan for running these campgrounds requires at least $2 million in taxpayer money over the next five years to supplement user fees.

Did they do it to improve service? The private concessionaire employed more than 60 paid workers living on site, with managers who worked weekends and holidays. The Forest Service plan calls for half this number of paid employees, and none will live on site or work weekends—the busiest time for recreation.

Did they do it to address some egregious for-profit abuse? The agency is actually planning to replace dozens of paid private workers with volunteers. At the same time that the federal government is mandating higher minimum wages for campground concessionaires, the Forest Service is replacing paid workers with unpaid labor.

Did the Forest Service do it to keep user fees low? The original stated reason for kicking out the private operator was the concessionaire’s request to increase user fees in response to recent increases in California’s minimum wage. In the end, however, the Forest Service raised fees even higher than those proposed by the concessionaire.

A Good Roundup on the Minimum Wage

David Brooks has what looks to be a pretty even-handed piece on what academic work shows on the minimum wage.  A few highlights:

Recently, Michael Wither and Jeffrey Clemens of the University of California, San Diego looked at data from the 2007 federal minimum-wage hike and found that it reduced the national employment-to-population ratio by 0.7 percentage points (which is actually a lot), and led to a six percentage point decrease in the likelihood that a low-wage worker would have a job.

Because low-wage workers get less work experience under a higher minimum-wage regime, they are less likely to transition to higher-wage jobs down the road. Wither and Clemens found that two years later, workers’ chances of making $1,500 a month was reduced by five percentage points.

Many economists have pointed out that as a poverty-fighting measure the minimum wage is horribly targeted. A 2010 study by Joseph Sabia and Richard Burkhauser found that only 11.3 percent of workers who would benefit from raising the wage to $9.50 an hour would come from poor households. An earlier study by Sabia found that single mothers’ employment dropped 6 percent for every 10 percent increase in the minimum wage....

What we have, in sum, is a very complicated situation. If we do raise the minimum wage a lot of people will clearly benefit and a lot of people will clearly be hurt. The most objective and broadest bits of evidence provoke ambivalence. One survey of economists by the University of Chicago found that 59 percent believed that a rise to $9 an hour would make it “noticeably harder” for poor people to find work. But a slight majority also thought the hike would be worthwhile for those in jobs. A study by the Congressional Budget Office found that a hike to $10.10 might lift 900,000 out of poverty but cost roughly 500,000 jobs.

So 900,000 would get up to a 25-40% raise while 500,000 would get a 100% cut.

The Arrogance of Regulators: Department of Labor Edition

Well, they did it.  The Obama Administration has proposed a new rule that everyone has to punch a time clock unless they are paid at least $921 a week.  Here is the proposed rule.  Of course, everyone on the Left is patting themselves on the back for giving everyone under that number a raise.  In fact what has happened is that everyone under that number just got a demotion, from trusted junior manager to 40-hour-a-week timeclock puncher.

Here is another way to put it:  The only people who now have the right to work more than the minimum to demonstrate one's readiness for more responsibility are those paid over $48,000 a year.  McKinsey consultants and lawyers and investment bankers can choose to work extra hours in order to gain promotions.  McDonald's shift managers no longer have that same right.  This is a law written by salaried professionals telling younger and lower-paid workers that they have no right to be ... salaried professionals.    This is a law propounded by a President who pays many of the young professional interns in his campaign and non-profit $0.00 an hour.

More here.

Update:  By the DOL's own reckoning, 40% of salaried employees fall below this number and thus are affected.  Some will get a small raise over the bar, but an enormous part of the workforce will find themselves dumped into the ranks of work-just-the-minimum timecard punchers.  This has the potential to hit far more people than any minimum wage increase.

Dear Paul Krugman: Please Explain Labor Demand Elasticity in Puerto Rico

Paul Krugman and a surprisingly large portion of Leftish economists have staked out a position that labor does not act like any other commodity, such that higher minimum wages have no effect on demand.  I have had people on the Left tell me that this absurd, common-sense-offending position is actually "settled".  So explain Puerto Rico:

Another problem is that just 40 percent of the population [of Puerto Rico] has a job—or is even looking for one. That figure has plummeted in recent years. In the United States as a whole, it is 62.9 percent....

The report cites one surprising problem: the federal minimum wage, which is at the same level in Puerto Rico as in the rest of the country, even though the economy there is so much weaker. There are probably some people who would like to work, but because of the sickly economy, businesses can't afford to pay them the minimum wage.

Someone working full time for the minimum wage earns $15,080 a year, which isn't that much less than the median income in Puerto Rico of $19,624.

The report also cites regulations and restrictions that make it difficult to set up new businesses and hire workers, although it's difficult to know just how large an effect these rules might or might not have on the labor market.

By the way, the fact that the author thinks this is "surprising" just goes to show how far this anti-factual meme of a non-sloping labor demand curve has penetrated.

As pointed out in several places today, Puerto Rico has a surprising number of parallels to Greece.   It seems to have zero fiscal restraint, it has structural and regulatory issues in its economy that suppress growth, and has its currency pegged to that of a larger, much richer nation.  It is apparently facing a huge $70+ billion potential debt default.

Brink Lindsey Proposes a Growth Plan with Appeal Across The Political Spectrum

It turns out that small government libertarians like myself and large-government progressives actually have something in common -- we both fear accumulations of unaccountable power.  We just find such power in different places.  Progressives fear the accumulation of power in large corporations and moneyed individuals.  Libertarians fear government power.

I won't try to take Caplan's ideological Turing test today, but will just speak from my own perspective.  I wonder how Progressives can ignore that government has guns and prisons while corporations just have the ability to sell you something or hire you (though perhaps not on the terms you prefer).  When pressed to explain why the Left is more comfortable with government power, their explanations (to my taste) depend too much on assumptions that competent versions of "their guy" pull the levers of power, and that power itself and the vagaries of government incentives will not corrupt this guy.

On the other hand, progressives ask me all the time, "how can you trust corporations so much" and then list off a justifiably long list of examples of them acting poorly.  This, I think, is where the real difference comes in, and where the confusion often comes int he public discourse.  I will answer that I don't trust anyone, government or corporations.  What I trust are the incentives and the accountability enforced in a market where a) consumers can take their money elsewhere if they get bad products or services; b) employees can take their labor elsewhere if they are treated poorly; and c) entrepreneurs can make a fortune identifying shortcomings in incumbent businesses and offering consumers and/or employees a better deal.

Unfortunately, when a person or organization finds itself very successful in this game, there is a natural tendency to want to protect their winning position.  But nothing in the market can stop a challenge from a better product or service, so successful entities tend to turn to the government (which has a monopoly on guns and prisons and asset seizures and the like) for protection against upstart challengers.  If successful, these restrictions tend to hobble growth and innovation -- imagine if IBM had successfully used government influence to halt the PC revolution or if AT&T had blocked the growth of cell phones.

This dynamic is at the heart of Brink Lindsey's new white paper at Cato (pdf).   As has been his wont in several past works, Lindsey is looking for proposals that bridge the gap between Left and Right.  So, rather than stake out the 98th salvo in an area where there seems to be a hopeless ideological divide (e.g. minimum wage or low-skill immigration), he focuses on four areas one could imagine building a broad coalition.  Lindsey focuses on attempts by successful incumbents to use government to cement their position and calls them "regressive regulation" because they tend to benefit the already-successful at the expense of everyone else.

In the following sections, I examine four major examples of regressive regulation: (a) excessive monopoly privileges granted under copyright and patent law; (b) protection of incumbent service providers under occupational licensing; (c) restrictions on high-skilled immigration; and (d) artificial scarcity created by land-use regulation. In all four examples, current government policy works to create explicit barriers to entry. In the first two cases, the restriction is on entry into a product market: businesses are not allowed to sell products that are deemed to infringe on a copyright or patent, and individuals are not allowed to sell their services without a license. In the other two cases, actual physical entry into a geographic area is being limited: on the one hand, immigration into the country; on the other, the development and purchase or rental of real estate.

One can immediately see how this might appeal across ideologies.  Libertarians and market Conservatives will like the reduction in regulation and government scope.  Progressives should like the elimination of government actions that primarily help the wealthy and powerful.**

I said "cross ideologies" above rather than bi-partisan because things get messy when actual politics intrude.  All of these protected constituencies wield a lot of political influence across both parties -- that is why the regressive regulation exists in the first place.  And they all have finally honed stories about how these restrictions that prevent new competition and business models are really there to protect the little people (just watch the battles between Uber and the taxi cartels and you will see what I mean).

Never-the-less, this strikes me as a pretty good list.  For whatever barriers there may be, it is a hell of a lot easier to picture a bipartisan agreement on any of these issues than on, say, low-skill immigration.  I haven't finished reading to the end -- I have to get on now with my day job -- so I have yet to see if there are any concrete proposals that look promising.


**The ideological problem here, of course, is that libertarians think that these restrictions are the primary way in which the wealthy unfairly benefit while most Progressives would (I suppose) see it as a side issue given that they believe that even the free-est of market capitalism is inherently unfair.

CA Labor Commission Has Just Killed Uber, Though It May Take Years to Bleed Out

A while back I wrote a long article about all the ways the government is making it nearly impossible to employ low-skilled labor.  I worried that because it is getting harder and harder to profitably employ low-skill labor, the country would soon sort itself into those with skills and jobs and those on government assistance, with little or no opportunity for people in the second category to move to the first.

As part of that article, I observed that much of the capital in this country is flowing to new business models that use minimal numbers of employees.  I wrote:

Is it any surprise that most entrepreneurs are pursuing business models where they leverage revenues via technology and a relatively small, high-skill workforce?  Uber and Lyft at first seem to buck this trend, with their thousands of drivers.  But in fact they prove the rule.  Uber and Lyft are very very careful to define themselves and their service in a way that all those drivers don't work for them.  I would go so far to say that if Uber were forced to actually put all of those drivers on their payroll, and deal with they myriad of labor compliance issues, their model would fall apart.

Well, we are going to find out if my last statement is true.

The California labor commission has ruled that an Uber driver qualifies as an employee, not a contractor, of the company.  As a result Uber will have to reimburse a driver for expenses accumulated in the line of duty. That includes $256 in tolls and the IRS rate of $0.56 per mile for use of a personal vehicle for business purposes.

The actual issue in this case of reimbursement of expenses is pretty narrow, and actually kind of stupid.  Uber is already paying drivers effectively by the mile by giving them a percentage of the mileage-based fee customers pay.  All this will do is cause Uber to reduce the share of revenues drivers get by something like 56 cents a mile and then hand the $0.56 to them in a separate check.  Its an extra accounting and paperwork hassle, but business people deal with mitigating such government-imposed stupidity 10 times a day.

No, the real danger of this ruling lies far beyond expense reimbursement.  A few top of head thoughts

  • This would obviously make Uber drivers subject to minimum wage.  How does one even figure that out?  Now that there are local minimum wages (e.g. LA soon to be $15 an hour) how do you compute minimum wage for a trip that begins outside of LA but ends inside the city?  Or vice versa?
  • Uber drivers currently only get paid for transporting passengers, but what about their time driving around waiting for a passenger?  Will that be classified as standby time for which the employer must pay for?  You can expect the standby time class action in California in 3..2..1..
  • This changes the whole relationship between Uber and its drivers.  Currently, Uber does not have to worry about driver productivity or work ethic, as long as they get good customer ratings when they do drive. Why?  Because Uber is not paying them except when they haul a passenger.  Now, if they have to pay them by the hour, Uber suddenly must police them for productivity and set minimum revenue generation targets for drivers.  The flexibility that drivers love will be gone.
  • And then there is Obamacare.  If drivers drive more than 29 hours a week, Uber would have to provide health care or pay really expensive penalties.  Will Uber find it necessary, as my company has and many other service businesses have, to cap driver hours at 29 hours a week max?
  • What about California break law?  Employers have an affirmative duty to make sure employees take a 30 minute unpaid meal break after X hours.  And just allowing for it (ie allowing drivers to put themselves in unavailable status) is not enough - employers have to have processes and documentation in place to make sure the employee takes their break (I kid you not).
  • What about CalOSHA?  Is Uber suddenly responsible for working conditions and safety in the vehicle?  And how does it do that if it does not own the vehicle?
  • Every employee is essentially his or her own manager.  Does that now make Uber subject to ensuring every driver has all state-mandated manager training, such as sexual harassment training?
  • Employers are typically liable for actions by their employees, even if those employees are breaking the rules and ignoring the employer's wishes.  Is Uber now liable for a driver who, say, verbally harasses a passenger?  In the past, that gets sorted out pretty fast by the rating system, but does Uber have to take a more direct hand now do avoid a deluge of lawsuits?
  • As of July 1, California employers must provide paid sick leave to employees.  They must provide unpaid leave under the family and medical leave acts.  In fact, California requires employers provide and track literally dozens of forms of mandatory paid and unpaid leave (including leave for victims of stalkers, just as one example of the scope of these requirements)
  • The taxes and required fees owed by employers for each employee are myriad.  State and Federal income tax must be withheld, Social Security and Medicare taxes paid, California state disability tax paid, unemployment tax paid, and workers compensation premiums paid.
  • Unemployment could be real nightmare.  Can drivers choose to drive for a while, then take unemployment for a while, maybe while tourist season in San Francisco is slow, then go back to driving?  You think that can't happen?  A number of my seasonal employees work in the summer, then take unemployment all winter despite having no intention of trying to find work in the winter.  I pay 7% of wages in California as unemployment taxes and would pay more except that scale is capped and I can't get in a worse category than my current F-.
  • Then there are a myriad of smaller issues that probably can be solved but consume bandwidth of a company's management that would otherwise be innovating.  As one small example, one has to post about 20 different state and Federal labor posters in CA where all employees can see them.  Where would that be for Uber drivers?

Barack Obama Poised to Convert Millions of Junior Managers into Timeclock Punchers

The title of this post is my alternative to Politico's headline which reads, "Barack Obama poised to hike wages for millions." What is actually happening is that Obama is proposing to raise the threshold for how much money an employee can make before he or she can be considered exempt from overtime rules (and thus exempt from filling in a time sheet).

As early as this week, the Labor Department could propose a rule that would raise the current overtime threshold — $23,660 – to as much as $52,000, extending time and a half overtime pay to millions of American workers.

The Obama Administration and its supporters (and apparently Politico, by how they wrote the headline) are smoking something if they think employers are going to react by raising salaries of current exempt employees being paid 23,660 or 30,000 or 40,000 to $52,000.  Absolutely no way.  There may be a few just under the $52,000 threshold that get a bump, but that will be a minor effect.

Everyone else is going to suddenly find themselves converted from a junior manager back to a wage earner.   Companies are not going to allow these newly minted wage earners to earn overtime, and so I suppose one good outcome is that we may see a new boost in productivity as companies find ways to automate or eliminate junior management tasks to get all these folks down to 40 hours a week.

Five years ago, I might have really been in a panic over this in my company, but fortunately our experience with Obamacare has given me confidence we'll figure it out.  With Obamacare we were facing enormous costs which we (like many service and retail companies) managed to eliminate by converting almost all of our full-time employees to part-time.   Compared to that effort, figuring out how to get all of our managers down to 40 hours seems like child's play.

As usual, most of the costs of this regulation will be born by workers.  As with other minimum wage-type laws, some will be better off, actually getting the "raise" promised by Politico, while some will be worse off, dropped to straight 40-hour work which does not pay as well, or out of work entirely.

However, this law has an even bigger impact-- it changes the relationship between the worker and their employer.  There are important differences between hourly and salaried work in the relationship with employers.  Some are psychological -- for better or worse, management things of salaried workers differently than hourly workers.  And some are real -- salaried workers can try to demonstrate that they are worthy of promotion by working extra hours and taking on extra tasks, things that hourly workers really can't do.

As a final note, I have to give the Coyote Academic Arrogance Award to Daniel Hamermesh of UT Austin who is quoted as follows:

“It’s hard to believe that somebody making $30,000 is a supervisor,”

He knows this, how?  We have supervisors who do a fabulous job for $2500 a month and are happy to be making that.

But that is actually not the Hamermesh statement that I would rank most ignorant of reality.  This is:

But Hamermesh said that to whatever extent employers reduced hours to avoid overtime the result would be more job creation, not less, since someone else must [be] hired to perform that work. Jared Bernstein, an economic adviser to Vice President Joe Biden during President Barack Obama’s first term, added that for many workers reduced hours would be a plus: “Their salary is the same but they have more time with their families.”

Are these guys for real?  Employers are not going to give employees the same salary for fewer hours.  They are going to try pay them less if they are getting fewer hours of work (of course their ability to do so depends on the labor supply).  But the change is worse than this.  They are not only getting fewer hours, but they are getting a different person and a different relationship.  Before, say for a junior manager job, employers could get go-getters who worked 60 hours a week to impress management with their diligence and dedication, signaling they were ready for promotion.  Now, employers will get time-clock punchers.

The Federal Government's Minimum Wage Hypocrisy

Diana Furchtgott-Roth and Jared Meyer have an article in the Federalist discussing the hypocrisy of members of Congress who advocate for higher minimum wages while paying their interns nothing.  It is worth a read, but rather than excerpt it, I wanted to add another example.

The example comes from the world of private operation of public parks, the business my company is in.  We keep parks open by operating much less expensively than can the government, usually using only the fees paid by park users without any additional tax dollars.

Last year, Barack Obama issued an order raising the minimum wage of Federal contractors to $10.10 an hour.  Though concessionaires like us are normally thought of legally as tenants of the government rather than contractors, the Department of Labor wrote the rules in such a way that this wage order would apply to concessionaires that operate Federal parks, such as those in the US Forest Service's campground concession program.

As a result of this order and similar minimum wage increases by the State of California, a concessionaire (not our company) that ran campgrounds in the Tahoe National Forest in California informed the Forest Service that it would need to raise camping rates to offset these minimum wage increases.  As an aside, wages and benefits that are tied to wage rates (e.g. workers comp and payroll taxes) make up about 50% of a private concessionaire's costs.  So if minimum wages go up, say, 20%, then (given the very low margins in the business) a 10% price increase is necessary just to stay even.

The Tahoe NF rejected the fee increase request, despite the fact that the concessionaire turned over its books to show that it was losing money at the higher minimum wage rates.

So what did the Tahoe NF do?  It took over operation of the campgrounds itself, ending a successful 30-year partnership with private operators.  How did it solve the minimum wage issue?  Simple!  Minimum wage laws don't apply to the Federal government.  So it will use dozens of volunteers who are paid nothing to operate the campground.

In other words, at a time when the President believes it is a burning priority to make sure every campground worker makes at least $10.10 an hour, the US Forest Service is firing private, paid workers and replacing them with volunteers.

By the way, even using volunteers, the US Forest Service will STILL be paying more to operate the campgrounds than it did with the concessionaire.  Under the private partnership, the private operator paid all expenses and paid the US Forest Service a concession fee, essentially rent.  The campground's operation and maintenance were paid for entirely with user fees, and the USFS actually made money from the operation.  Now, even with volunteers, the USFS operating plan shows it using $2 million of taxpayer money over the next five years in addition to user fees to keep the parks open.

Update:  Despite the original (stated) reason for taking over the campground, and despite using dozens of unpaid laborers, the USFS still had to raise customer rates in the end -- higher than the original private concessionaire proposed!

My Plan to Help African-Americans

Really, political plans should be to help everyone, and certainly many people beyond African-Americans would be helped by the steps below.  But since the nature of modern politics seems to demand race-specific plans, and since so many destructive policies have been put into place to supposedly help African Americans, I will offer my list of suggestions:

  • Legalize drugs.  This would reduce the rents that attract the poor into dealing, would keep people out of jail, and reduce a lot of violent crime associated with narcotics traffic that kills investment and business creation in black neighborhoods.  It would also reduce the main excuse for petty harassment by police that falls disproportionately on young black men.  No it's not a good thing to have people addicted to strong narcotics but it is worse to be putting them in jail and having them shooting at each other.
  • Bring real accountability to police forces.  When I see stories of folks absurdly abused by police forces, I can almost always guess the race of the victim in advance.  I used to be a law-and-order Conservative that blindly trusted police statements about every encounter.  The advent of cell-phone video has proven this to be supremely naive.  No matter how trusted, you can't give any group a pass on accountability.
  • Eliminate the minimum wage   (compromise: eliminate the minimum wage before 25).  Originally passed for racist reasons, it still (if unintentionally) keeps young blacks from entering the work force.  Dropping out of high school does not hurt employment because kids learn job skills in high school (they don't); it hurts because finishing high school is a marker of responsibility and other desirable job traits.  Kids who drop out can overcome this, but only if they get a job where they can demonstrate these traits.  No one is going to take that chance at $10 or $15 an hour**
  • Voucherize education.  It's not the middle class that is primarily the victim of awful public schools, it is poor blacks.  Middle and upper class parents have the political pull to get accountability.   It is no coincidence the best public schools are generally in middle and upper class neighborhoods.  Programs such as the one in DC that used to allow urban poor to escape failing schools need to be promoted.

** This might not be enough.  One of the main reasons we do not hire inexperienced youth, regardless of wage rates, is that the legal system has put the entire liability for any boneheaded thing an employee does on the employer.  Even if the employee is wildly breaking clear rules and is terminated immediately for his or her actions, the employer can be liable.  The cost of a bad hire is skyrocketing (at the same time various groups are trying to reign in employers' ability to do due diligence on prospective employees).  I am not positive that in today's legal environment I would take free labor from an untried high school dropout, but I certainly am not going to do it at $10 an hour when there are thousands of experienced people who will work for that.  Some sort of legal safe harbor for the actions of untried workers might be necessary.

I Never Listen to Democrats; I Learned Everything I Need To Know About them From Rush Limbaugh

One of my huge pet peeves is when people rely only on their own side for knowledge of their opponents' positions.  The inevitable result of this is that there is a lot of debating against straw men.

As an aside, this is why I really like Bryan Caplan's ideological Turing test.  If you are going to seriously debate someone, you need to be able to state their arguments in an unironic way such that that person's supporters would mistake you for one of their own.  If I were to teach anything at all political, I would structure the course in a way that folks would debate and advocate both sides of a question (that is, of course, if any university would allow me to ask, say, a minimum wage advocate to take the opposite position without accusing me of creating an unsafe environment).

Anyway, a while back I asked if the folks who were protesting the showing of American Sniper on campus had actually seen the damn movie.  I suspected they had not, or at least really interpreted film differently than I do.  Though perhaps pro-soldier, I read the movie as having a pretty stark anti-war message.

Anyway, American Sniper has become a favorite target for banning within our great universities the purport to be teaching critical thinking.  This is from one student group's (successful) appeal for a ban on showing the movie on campus:

This war propaganda guised as art reveals a not-so-discreet Islamaphobic, violent, and racist nationalist ideology. A simple Google search will give you hundreds of articles that delve into how this film has fueled anti-Arab and anti-Islamic sentiments; its visceral "us verses them" narrative helps to proliferate the marginalization of multiple groups and communities - many of which exist here at UMD.

This is not the language people would use if they had actually seen the film.  Instead of taking specific examples from the film, they refer to Google searches of articles, perhaps by other people who have not seen the film (as an aside, this has to be the all-time worst appeal to authority ever -- I can find not hundreds but thousands of articles on the Internet about anything -- there are tens of thousands alone on the moon landings being faked).

Who's Subsidizing Whom? And Should We Oppose All New Anti-Poverty Programs as Crony Giveaways?

Well, the new meme on the Left in favor of higher minimum wages seems to be that since many minimum wage workers also receive government benefits, those benefits "subsidize" the employers paying minimum wage.  Example from Kevin Drum here.  This is utter madness.  A few responses:

  • The implication is that the choice is between a job at $8 an hour or a job at $15 an hour.  But this assumes the jobs still all exist at $15 an hour.  Clearly, many would disappear over time, either as companies automate or as consumers reduce purchases at now higher cost establishments.  If the alternative to offering a $8 an hour job is in fact offering no job at all, then minimum wage employers are reducing government benefits payouts.
  • The Left has pushed eligibility for many programs (e.g. the changes in Obamacare to Medicaid) into higher income bands of people making more than 100% of the poverty line.  How is this creeping up of transfer program eligibility somehow the fault of employers?
  • Does this mean that all right-thinking Americans should oppose any future expansions of transfer programs as crony giveaways?  And if you say no, that they should not be thought of crony giveaways in advance of their passage, why should they be considered such afterwards?
  • The whole point of many of these programs, like the EITC which is listed among the programs in Drum's post, is exactly this -- to provide transition assistance from not working to supporting oneself.  The Left's view on this is, as usual, entirely static.  What are the folks who are on benefits and working in food service doing 5-10 years from now?  Would they look back on that time as a stepping stone to something better?
  • If you require that all employers pay a salary such that none of its workers are on assistance of any sort, which is the logical conclusion of this meme, then you divide the world into two classes -- those 100% employed and those 100% on benefits, with most people in the latter having little or no prospect of moving to the former.
  • My company pays minimum wage to the vast majority of our 300+ campground workers.  But who is subsidizing whom?  Most of these folks are over 60 and on Social Security and find that they need or want more money than their Social Security can provide.  One reason for this is that Social Security is a horrible retirement savings program, essentially paying a negative interest rate on the money contributed to the system in the retiree's name.  If Social Security were a private retirement plan, its proprietors would be in jail by now.  Because Social Security is so lame, older people seek work, and come to me, happy to stay active and earn money to supplement their government checks.  So am I subsidizing the SSA's inability to provide a fair return?

Why Prostitution Should Be Legal

Folks often use the abuses in the prostitution industry as evidence of why it should be illegal.  But these abuses are actually a result of the illegality.  Sex workers in illicit industries cannot use the police and legal system to address abuses without risking arrest.  Essentially, they are cut off from access to the legal system and its protections that we take for granted.

People act like the abuses are inherent to the fact that prostitution is a sex work industry, but here is an example of (legal) sex workers protecting themselves and addressing abuses through the legal system, just like all the rest of us do.  If prostitution were legal, then prostitutes could do the same.

Three Valley strip clubs are being sued by exotic dancers with the help of a Texas law firm over alleged unpaid tips and wages....

Hodges' firm and the strippers are suing to make the strippers official employees. Their new system would be similar to that of restaurant wait staff, who typically earn a sub-minimum salary (Arizona allows as low as $3 an hour for tipped employees) while pooling tips among their fellow workers. If no customers come in, the staff is still guaranteed to make at least minimum wage, plus time-and-a-half for any overtime worked.

I'm not a big fan of the premise of the lawsuit (trying to force businesses to change their employment model from dancers as independent contractors to dancers as employees) but it is their free access to the legal system that is the point here.  One could never imagine such a lawsuit with a group of prostitutes arguing that the people they worked for were not paying them fairly.

Minimum Wages as a Terrible Anti-Poverty Program, Part 2

The Unbroken Window has more along the lines I wrote about last week.  It is all good, here is an excerpt:

MaCurdy found that less than 40% of wage increases [from a minimum wage hike] went to people earning less than twice the poverty line, and among that group, about third of them are trying to raise a family on the minimum wage. In other words, something like 1 in 8 people who do receive the minimum wage (and ignoring any potential adverse effects of it), are actually in what you might call the “targeted” group. 7 out of 8 people who receive minimum wage increases fall outside the targeted group.


Why Minimum Wage Increases are a Terrible Anti-Poverty Program

The other day when I expressed my (temporary) ennui about blogging, I said I was tired of posting about things like "why the minimum wage is a terrible anti-poverty program" and getting back one line comments such as "you hate poor people."  In looking back at that post, I realize I actually haven't put in one place my reasons why minimum wage increases are a bad way to fight poverty.  So here they are:

1.  Only a tiny minority of workers make the minimum wage.  Something like 5% of hourly workers, and 3% of all workers, are paid minimum wage or less.  This number is not quite right for two reasons.  One, many states have higher minimum wages than the Federal rate and this analysis by the BLS is done at the Federal rate only.  Thus this understates the number of minimum wage workers in those higher minimum wage states.  But, these numbers also exclude tips, which about half these workers receive.  If one reasonably includes tip income, these numbers are overstated.  On balance, if one looks carefully state by state and excludes workers who get tips, the percentage of all workers who make the minimum wage holds around 3%.

Further, about half (53% by the source above) of minimum wage earners are 24 years old and under.  These are not the folks activists generally picture when they say "A family cannot live on that wage..."   Thus only about 1.5% of all workers are people 25 and older making minimum wage.  The target for this "anti-poverty" program is thus truly tiny.

2.  Most minimum wage earners are not poor.  The vast majority of minimum wage jobs are held as second jobs or held by second earners in a household or by the kids of affluent households (source)



Most of the data I have seen points to about a third of minimum wage jobs held by earners in families below the poverty line.  So 2/3 of the increased wages from a minimum wage increase go to non-poor households (it is actually probably more than this given #4 below).

3.  Most people in poverty don't make the minimum wage.  In fact, the typically hourly income of the poor appears to be around $14 an hour.  The problem is not the hourly rate, the problem is the availability of work.  The poor are poor because they don't get enough job hours.

4. Minimum wage increases kill unskilled labor hours.  You can certainly find Leftish studies that point to niche situations where a minimum wage increase maybe kindof didn't hurt employment.  But in general I think most people understand that when you raise the price of something, people will use less of it.  In this case, businesses will find ways to hire less unskilled labor as the price of such labor rises with the minimum wage.  Even if businesses hire the same number of people after a minimum wage increase, they likely will demand and get more skilled and experienced employees for this money, which likely will leave the poor out in the cold just as much as if the job were eliminated.



If one replaces the words "minimum wage" with "starting wage for new unskilled workers", the problem becomes more obvious.

5. Minimum wage laws ignore substantial non-monetary benefits of entry-level jobs.   Many young workers or poor workers with a spotty work record need to build a reliable work history to get better work in the future, just as a young couple must build their credit history with small purchases before they can take out a mortgage.  Further, many folks without much experience in the job market are missing critical skills -- by these I am not talking about sophisticated things like CNC machine tool programming.   I am referring to prosaic skills you likely take for granted (check your privilege!) such as showing up reliably each day for work,  overcoming the typical frictions of working with diverse teammates, and working to achieve management-set goals via a defined process.  I wrote a lot more about these here.  By defining acceptable compensation of jobs only as dollars of pay rather than to include softer skills and such, these wages disproportionately discriminate against unskilled and inexperienced workers.

Where's Coyote

Well, it is time for many of our seasonal operations to open over the next few weeks so I have been running in circles on business issues.  Also, I must confess that blogging is becoming a sort of Groundhog Day (the movie) experience, with the same arguments circling over and over.  How many more times can I write, say, a long article about how minimum wage increases are a terrible anti-poverty program only to get one line emails asking me why I hate poor people.  So blogging will be light as I do real world work and try to recharge.

I will leave you with one note of optimism, from Mark Perry.  I went to college in the nadir (1980) of the American beer industry, where a small oligopoly of mediocre beer producers was protected by government legislation.  It was a classic example of how regulation drives monopoly, consolidation, and loss of choice.  With deregulation, the American beer industry has exploded.



As an aside, my current go-to beer is actually Brazilian, Xingu Black


The Government's One Cost Advantage: It Can Exempt Itself from Regulation

Greg Patterson brings us this example from the AZ legislature, but this sort of thing is ubiquitous:

Just before I got to the Legislature, there was a big move to regulate day care facilities.  Naturally, the government has a role in establishing basic health and safety standards for facilities that take care of young children, so I thought it was a good move.

Then a funny thing happened.  The Legislature established one set of standards for private day care facilities and a different (lower) set of standards for public or non-profit day care facilities.  Some Legislators dared to ask why the health and safety rules would be different depending on what type of entity owned the facility.  After all, if a rule is really in place to keep a child healthy and safe, why should a publicly owned facility be exempt or have a lower standard?

The answer, of course, is that there's no reason for publicly owned facilities to have a different regulatory regime than private facilities and that these bills were really just disguised attempts to ensure that private day cares couldn't compete with public ones

We are facing something similar in my world.  As you may know, my company operates government parks and campgrounds on a concession basis (which means we get no government money, we are paid by the user fees of visitors).  This makes sense because we can do it less expensively and usually better than the government agency.

Recently, the Obama Administration has imposed an executive order that we concessionaires on Federal lands have to pay a $10.10 minimum wage.  Since most of our costs are labor, this is causing us to have a to raise fees to customers substantially to offset the higher costs.

In response to these fee increases, the US Forest Service in California is in the process of taking back traditionally concession-run campgrounds to run themselves, in-house.  Their justification is that they can do it cheaper.   Part of this is just poor government accounting -- because many costs (risk management/insurance, capital assets, interest on investments) don't hit their budgets but show up on other parts of the government's books, what appears to be lower costs is actually just costs that are hidden.  But their main cost savings is that since the Federal government is exempt from labor law and this new executive order, the Forest Service can staff the park with volunteers.  They are allowed to pay a minimum wage of ... zero!

This is just incredibly hypocritical, to say with one statement that private companies need to pay campground workers more and with the very next action take over the campground and staff it with people making nothing.

Thoughts on the Minimum Wage

Mike Rowe has some thoughts that sound like what I have been saying of late:

From the business owners I’ve talked to, it seems clear that companies are responding to rising labor costs by embracing automation faster than ever. That’s eliminating thousands of low-paying, unskilled, entry level positions. What will that mean for those people trying to get started in the workforce? My job as an usher was the first rung on a long ladder of work that lead me to where I am today. But what if that rung wasn’t there? If the minimum wage in 1979 had been suddenly raised from $2.90 to $10 an hour, thousands of people would have applied for the same job. What chance would I have had, being seventeen years old with pimples and a big adams apple?

Minimum Wage Deja Vu

This letter to customers from San Francisco bookstore Borderlands is making the rounds.  Apparently, the new "living wage" legislation in San Francisco is killing this store:

In November, San Francisco voters overwhelmingly passed a measure that will increase the minimum wage within the city to $15 per hour by 2018.  Although all of us at Borderlands support the concept of a living wage in [principle] and we believe that it’s possible that the new law will be good for San Francisco – Borderlands Books as it exists is not a financially viable business if subject to that minimum wage.  Consequently we will be closing our doors no later than March 31st.  The cafe will continue to operate until at least the end of this year.

I find the authors surprisingly open to the Progressive assumptions behind this bill, despite the death of their business.  I don't know if this is a pair of hipsters destroyed by their own cause, or if the nods towards Progressivism are merely boiler plate that is required in any San Francisco conversation, like having a picture of Lenin on your wall in Soviet Russia.

Anyway, I found the language here familiar because I spent most of last year writing such letters to angry customer bases.  In our case, fortunately, we had the ability to raise prices so the letters were to defuse customer irritation rather than to announce a closure.  Here is one example I wrote in Minnesota:

Labor and labor-related costs (costs that are calculated as a percentage of wages, like employment taxes) make up nearly 50% of our costs.  The Minnesota minimum wage is set to rise from $7.20 to $9.50 in the next two years, an increase of 31%.  Since wages and wage-related costs are half our expenses, the minimum wage increase raises our total costs by 15.5%. This means that all by itself, without any other inflation in any other category of expenses, the minimum wage increases will drive a $3.10 increase in our camping fees (.155 x $20).  Note that this is straight math.  The moment the state of Minnesota passed their minimum wage increase, this fee increase was going to be required.

One of the problems with these minimum wage increases is that the people behind them, with their hazy assumptions and flawed understanding of economics, typically think that companies will just absorb the increase.   Our net profit margin runs in the 4% range, so it difficult to see how any such retail company can absorb a 15+% cost increase, but it happens all the time.  After some trial and error, the "this is straight math" phrase seems to work the best in communicating the need for price increases.

Krugman on the Minimum Wage

Via Don Boudreaux:

Bluecravat found something telling that I missed a few months ago, namely, Paul Krugman explaining back in August that one potential cause of the high unemployment rate in France is that country’s “high minimum wage.”  As Bluecravat exclaims after quoting from Krugman’s August post: “Excuse me?  What was that?  Minimum wage levels impact employment?”

Of course, it could be that France’s minimum wage is too high compared to the one that Krugman advocates for the U.S.  Krugman supports Pres. Obama’s call for a $10.10 hourly minimum wage.  So how does the employment-discouraging minimum wage in France compare to the allegedly prosperity-enhancing, non-employment-discouraging minimum wage that Krugman, Obama, et al., support for the U.S.?  According to Bluecravat, France’s current minimum wage, when adjusted for purchasing-power parity, is $9.30 per hour, a rate that is lower than the minimum-wage rate advocated by Krugman, Obama, et al.

The minimum wage is terrible anti-poverty policy.  The thing to remember is that A. The majority of minimum wage earners are not poor (or in the poorest 20%); and B.  The majority of the poor don't earn minimum wage.  In most cases, the poor are poor because they don't get enough hours or don't have a job at all, a situation that will only be made worse with a higher minimum wage.

More Thoughts on Immigration -- Why I Think the Tiberius Gracchus Analogy is Particularly Apt

First, congrats to many millions of people who can remain in this country, a status they should have always have had.  We can argue whether anyone who makes his or her way over the border should be able to vote or draw benefits, but there is no doubt in my mind that they should be able to live anywhere they can pay the rent and work anywhere that there is an employer willing to pay them.

I am willing to accept the analysis of folks like Ilya Somin who say that the President's non-enforcement decision on immigration laws is legal.  But I think his concept of "precedent" when he says there are precedents for this sort of thing is way too narrow.  This is an important, dangerous new precedent.

What I think folks are missing who make this argument about precedent is that while many examples exist of the Executive Branch excercising proprietorial discretion, the circumstances are without precedent in both scale and well as in its explicit defiance of legislative intent.  One can argue that Reagan's executive actions vis a vis immigration provide a precedent, for example, but Reagan was essentially following the intent of then-recent Congressional legislation, arguably just fixing flaws with executive orders in the way that legislation was written.  What he did was what Congress wanted.

The reason I think Tiberius Gracchus is a good analog is that Gracchus too took actions that were technically legal.  Tribunes always technically had the legal power to bypass the Senate, but in hundreds of years had never done so.  Despite their technical legality, his actions were seen at the time as extremely aggressive and plowing new Constitutional ground, ground that would soon become a fertile field for authoritarians to enhance their power.

Somin includes the following, which I think is an example of where defenders of the President's process (as different from the outcomes) are missing reality.  He writes:

I would add that the part of the president’s new policy offering work permits to some of those whose deportation is deferred in no way changes the analysis above. The work permits are merely a formalization of the the president’s exercise of prosecutorial discretion here, which indicates that the administration will not attempt to deport these people merely for being present in the United States and attempting to find jobs here. They do not purport to legalize their status, and the policy of nondeportation can be reversed at any time by the president or his successor.

This is one of those statements that are technically true, but totally obtuse at the same time.   Issuing formal get-out-of-jail-free cards to 5 million people is unprecedented.  Think of it this way:  Imagine a Republican President who is opposed to the minimum wage.  The Executive branch is tasked with enforcing that law, so wold the folks defending the President's methods also argue hat the government can issue permits to 5 million businesses allowing them to  ignore labor law?  Or emissions standards?  Or insider trading laws?

People are just being blinded by what they rightly see as a positive goal (helping millions of people) if they fail to see that the President issuing licenses to not be prosecuted for certain crimes is a huge new precedent.  Proprietorial discretion is supposed to be used to avoid patent unfairness in certain cases (e.g. the situation in Colorado with conflicting state and Federal laws on marijuana).  It is not meant to be a veto power for the President over any law on the books.  But I can tell you one thing -- it is going to be seen by future Presidents as just this.  Presidents and parties change, and for those of you swearing this is a totally legal, normal, fully-precedented action, be aware that the next time 5 million wavers are issued, it may well be for a law you DO want enforced.  Then what?

Update:  Libertarians are making the case that the Constitution never gave Congress the power to restrict immigration.  I could not agree more.  However, I fear that will have zero impact on the precedent that will be inferred from all this.  Because what matters is how the political community as a whole interprets a precedent, and I think that this will be interpreted as "the president may issue mass waivers from any law he does not like."  Now, since I dislike a hell of a lot of the laws on the books, perhaps over time I will like this precedent.  But the way things work is that expansive new executive powers seldom work in favor of liberty in the long run, so I am skeptical.

Well, My Company Is Officially Required to Buy a Product That Does Not Exist For Us

As of next year, my company is required to offer health care plans to our full-time employees or else pay a penalty.    Unfortunately, after an extensive market search, no one will sell me such a policy -- not even the government health care exchange for small businesses.

Let's take a step back.  Business owners have had the rules pounded into us over the last few years, but many of you may not be familiar with the details.  The detail rules are here, as "simplified" as much as possible by the NFIB, but don't read them unless you have to or your head will explode.  The simple way to think of it is that there are two penalties out there:

  • The "A" penalty is for companies that do not offer any sort of health plan, no matter how crappy, to their full-time employees.  The A penalty in this case is $2,000 per full-time employee, with the first 30** free (so with 60 FT employees and no health plan, the penalty is (60-30) x $2,000 = $60,000 a year.
  • The "B" penalty is for companies that avoid the "A" penalty.  If a health plan is offered, but is not affordable (ie the employee monthly share of premiums is higher than a government-set floor) then the company gets penalized $3,000 for every full-time employee who both goes into an exchange and gets a plan with a government-subsidized premium.   There is a cap on the "B" penalty that it can be no higher than if the "A" penalty was applied to the whole company.

We have always pretty much assumed we were going to get the B penalty.  For minimum wage workers, the floor contribution is something like $9o a month, so the company share over a year for a typical employee of ours would be way over $3000.  Also, since over half of our full-time employees are on Medicare and another portion of them are on some sort of retirement plan from a corporation, we don't expect that many to go into the exchange anyway.  So we plan to just pay the penalty.

But we had expected to avoid the A penalty by offering some sort of policy to our employees.  When experts present this stuff, they act like only the dumbest of the dumb companies would ever be saddled with the A penalty.  After all, the company does not even have to pay anything for the policy, they just have to offer something.

But it turns out that all the things that protect us from the B penalty make us almost un-insurable.  First and foremost, insurers have a minimum participation rate they demand.  They are not going to go through all the overhead costs of setting you up on their plan if no one is going to sign up.  In the Government Small Business Health Care Exchange (SHOP), that minimum participation rate is around 70%.  No WAY we can meet that, since over half or our employees are on Medicare and would thus not sign up for anything.  The fact that the average age of our workforce is in the 60's, maybe even the 70's, just makes things worse.  Obamacare gives insurers only limited ability to price for higher risk, so they lose money on older people.  That means they are going to avoid like the plague signing up any group like ours that is all older people.

So, as a result, I am required by law, under harsh financial penalties, to purchase a product that is not available to me.  Had President Obama required that I buy 2 pounds of rocks from Mars, the result would not have been any more unfair.

By the way, I have for a couple of years now been discussing my efforts to convert all our full-time employees to part-time.  I have gotten a lot of grief for that in the comments.  But do you see why now?  The Administration is levying a penalty on me that I cannot avoid.  That penalty is calculated as a multiple of the number of full-time workers I employ.  The only way I can reduce the penalty is to reduce the number of full-time employees.

It is a sorry state of affairs to have to see my greatest business achievement of the last year was to get my number of full-time employees in a workforce of over 350 people down to just 42.  This year, we will work to get it under 30.  If we can do that, we will avoid all penalties entirely without having to mess with the health insurance marketplace.


** As a transition measure, the first 80 are free in 2015, which means my company will avoid penalties in 2015 no matter what but not in 2016 unless we can get our full-time employee count down further.


Postscript:  One of the oddball and confusing parts of the law is that the word "full-time" has multiple meanings.  This year, companies with more than 100 full time equivalents (FTE) are subject to the mandate.    Because of this, at cocktail parties, I have people walk up to me all the time saying the law does/doesn't apply to me based on a factoid they heard about minimum workforce sizes.  I have 350 total employees of whom 42 are full time.  Some say that puts me over 100 (the 350) and some say that puts me under the 100 (the 42).  It turns out that neither are relevant in determining if I am under or over 100, it is a third calculation that matters.  We do have more than 100 FTE, but we have less than 80 full-time employees that triggers the penalties in 2015.  Go figure.

Poverty and the Minimum Wage

Mark Perry had this chart on the demographics of income distribution.  From it, I want to draw a couple of conclusions about minimum wage and poverty

Click to Enlarge

Note the household income per earner for the lowest quintile.  It equates to something over $14 an hour, well above minimum wage almost everywhere in the US and nearly as high as the $15 national minimum wage proposed as an anti-poverty program.

The problem with most poor households is not wage rate, it is getting full time work.  The household income per earner is nearly as high as the average income of the second quintile.  The problem is that most poor households do not have full-time earners.   The key stat is that only 16% worked full-time and only 30% had any sort of job at all.

This is what always amazes me about the minimum wage discussions.  An increased minimum wage doesn't address the root problem of poverty at all, and in fact will tend to make it worse by pricing the 85% of the poor who need a job or need more hours out of the job market.  If they can't find a job at $8, it is the purest insanity to think they will have a better chance with their limited skills of finding a job at $15.**


**Postscript:  I suppose there is one set of facts that would lead to a minimum wage increasing employment in this lowest quintile:  If people who don't work in this quintile are not seeking work because they are happy to live on government benefits and other sources of charity.  This would imply that the reason they are not working full-time is not because no work is available but because they choose indolence.  If this were the case, then a rising minimum wage would provide enough incentive, I suppose, for some to get off the couch and go to work.  I am reluctant to buy into this explanation, but I am SURE that those on the Left who promote the idea of rising minimum wages increasing employment would not accept these assumptions.