Posts tagged ‘wages’

In Defense of Profits -- Why They Are At Least As Moral as Wages

Quick background:  my company privately operates pubic parks, making our money solely from the entry fees voluntarily paid by visitors and campers.  We don't get paid a single dollar of tax money.

A major partner of ours is the US Forest Service (USFS), which actually operates more recreation sites than any other agency in the world (the National Park Service has a higher profile and the Corps of Engineers has more visitors, but the USFS is the most ubiquitous).  Despite the USFS being an early pioneer of using private companies to reduce the operating costs of parks and campgrounds, the USFS still has a large number of employees opposed to what we do.  The most typical statement I hear from USFS employees that summarizes this opposition -- and it is quite common to hear it -- is that "It is wrong to make a profit on public lands."

It would be hard to understate the passion with which certain USFS employees hold to this belief.   I discovered, entirely accidentally through a FOIA request my trade group had submitted to the USFS, that the Forest Supervisor at the time of the Tahoe National Forest, a fairly senior person in the USFS management structure and whom I have never met or even had a conversation with, circulated emails through the agency about how evil he thought I was.

This general distaste for profit, which is seen as "dirty" in contrast to wages which are relatively "clean" (at least up to some number beyond which they are dirty again), is not limited to the USFS or even to government agencies in general, but permeates much of the public.  As a result, I thought I would describe a conversation I had with a USFS manager (actually this is the merger of two conversations).  The conversation below had been going on for a while discussing technical topics, and we will pick it up when the District Ranger makes the statement highlighted above (a District Ranger is the lowest level line officer in the USFS, responsible in some cases for the land management functions of an area the size of a county.  I have cleaned up the text (I am sure the sentences would not be as well-formed if I had a transcript) but I think this captures the gist of it:

Ranger:  I think it's wrong that you make a profit on public lands

Me:  So you work for free?

Ranger:  Huh?

Me:  If you think it's wrong to make money on public lands, I assume you must volunteer, else you too would be making money on public lands

Ranger:  No, of course I get paid.

Me:  Well, I know what I make for profit in your District, and I have a good guess what your salary probably is, and I can assure you that you make at least twice as much as me on these public lands.

Ranger:  But that is totally different.

Me:  How?

At this point I need to help the Ranger out.  He struggled to put his thoughts on this into words.  I will summarize it in the nicest possible way by saying he thought that while his wage was honorable, my profit was dishonorable, or perhaps more accurately, that his wage paid by the government was consistent with the spirit of the public lands whereas my profit was not consistent

Me:  I'm not sure why.  My profit is similar to your wage in that it is the way I get paid for my effort on this land -- efforts that are generally entirely in harmony with yours as we are both trying to serve visitors and protect the natural resources here.    But unlike your wage, my profit is also a return on the investment I have made.  Every truck, uniform, and tool we use comes out of my profit, whereas you get all the tools you need paid for by your employer above and beyond your salary.  Further, your salary is virtually guaranteed to you, short of some staggering malfeasance.  Even if you do a bad job you likely would just get shunted to a less interesting staff position at the same salary, rather than fired.   On the other hand if I do a bad job, or if one of my employees slips up, or even if some absolutely random occurrence entirely outside my control occurs (like, say, a flood that closes our operations) my profit can completely evaporate, or even turn into a loss.  So like you, I get paid for my efforts here on public lands, but I have to take risk and make investments that aren't required of you.  So what about that makes my profit less honorable than your wage?

Ranger:  Working on public lands should be a public service, not for profit

Me:  Well, I think you are starting to make the argument again that you should be volunteering and not taking a salary.  But leaving that aside, why is profit inconsistent with service to the public?  My company serves over 2 million visitors a year, and 99.9% give us the highest marks for our service.  And for the few that don't, and complain about a bad experience, every one of those complaints comes to my desk and I personally investigate them.  Do you do the same?

Why do I make such an effort?  Part of it is pride, but part is because I understand that my margins are so narrow, if even 5% of those visitors don't come back next year -- because they had a bad time or they saw a bad review online -- I will make no money.  Those 2 million people vote with their feet every year on whether they think I am adequately serving the public, and their votes directly affect how much money I make.  Do you have that sort of accountability for your public service?

Postscript:  Interestingly, though perhaps not surprisingly, the government ranger did not bring up what I would consider the most hard-hitting challenge:  How do we know your profits are not just the rents from a corrupt, cronyist government contracting process.  Two things let me sleep well at night on this question.  The first is that I know what lobbying I do and political connections I have (zero on both) so I am fully confident I can't be benefiting from cronyism in the competitive bid process for these concession contracts.  Of course, you don't know that and if our positions were reversed, I am pretty sure I would be skeptical of you.

So the other fact I have in my favor, which is provable to all, is that the recreation areas we operate are run with far lower costs and a demonstrably higher level of service than the vast majority of recreation areas run by the government itself.  So while I can't prove I didn't pull some insider connections to get the work, I can prove the public is far better off with the operation of these parks in private hands.

Your Good Intentions Mean Virtually Nothing

I am exhausted with folks, particularly on the Progressive Left, judging themselves and each other based on their intentions.  Your intentions mean virtually nothing.  I suppose it is better to have good intentions than bad, but beyond that results, particularly in the public policy arena, are what should matter.  And the results of most Progressive well-intentioned legislation are generally terrible.  For example, as I wrote earlier today, poverty in this country is mainly caused by lack of work rather than low wage hours, but Progressives preen over their good intentions in introducing higher and higher minimum wages that will only serve to reduce the work hours of low-skilled poor people.

Via Mark Perry comes this great article on Progressive good intentions in Seattle collapsing into rubble.  It does not except well, so I recommend you check it out, but I will summarize it.

Begin with a libertarian goal that should be agreeable to most Progressives -- people should be able to live the way they wish.  Add a classic Progressive goal -- we need more low income housing.  Throw in a favored Progressive lifestyle -- we want to live in high density urban settings without owning a car.

From this is born the great idea of micro-housing, or one room apartments averaging less than 150 square feet.  For young folks, they are nicer versions of the dorms they just left at college, with their own bathroom and kitchenette.

Ahh, but then throw in a number of other concerns of the Progressive Left, as administered by a city government in Seattle dominated by the Progressive Left.  We don't want these poor people exploited!  So we need to set minimum standards for the size and amenities of apartments.  We need to make sure they are safe!  So they must go through extensive design reviews.  We need to respect the community!  So existing residents are given the ability to comment or even veto projects.  We can't trust these evil corporations building these things on their own!  So all new construction is subject to planning and zoning.  But we still need to keep rents low!  So maximum rents are set at a number below what can be obtained, particularly given all these other new rules.

As a result, new micro-housing development has come to a halt.  A Progressive lifestyle achieving Progressive goals is killed by Progressive regulatory concerns and fears of exploitation.  How about those good intentions, where did they get you?

The moral of this story comes back to the very first item I listed, that people should be able to live the way they wish.  Progressives feel like they believe this, but in practice they don't.  They don't trust individuals to make decisions for themselves, because their core philosophy is dominated by the concept of exploitation of the powerless by the powerful, which in a free society means that they view individuals as idiotic, weak-willed suckers who are easily led to their own doom by the first clever corporation that comes along.

Postscript:  Here is a general lesson for on housing affordability:  If you give existing homeowners and residents the right (through the political process, through zoning, through community standards) to control how other people use their property, they are always, always, always going to oppose those other people doing anything new with that property.  If you destroy property rights in favor of some sort of quasi-communal ownership, as is in the case in San Francisco, you don't get some beautiful utopia -- you get stasis.  You don't get progressive experimentation, you get absolute conservatism (little c).  You get the world frozen in stone, except for prices that continue to rise as no new housing is built.  Which interestingly, is a theme of one of my first posts over a decade ago when I wrote that Progressives Don't Like Capitalism Because They Are Too Conservative.

Postscript #2:  So, following the logic above, one can think of building restrictions and zoning as a form of cronyism.  Classic cronyism is providing subsidies to politically favored companies and restricting the ability of new competitors to arise to compete with them, granting them an effective monopoly and the ability to jack up their prices.  So what do we do with housing?  We give massive subsidies to home-owners and restrict competition from new housing that might reduce their home value, thus granting current homeowners an effective monopoly and the ability to jack up their prices.  I challenge anyone to tell me that rising home prices in Palo Alto are not driven by the exact same government actions for favored constituents as are rising prices for Epipens.

Postscript #3:  I will ask a question using Progressive terminology -- you were worried about these young renters and their power imbalance vs. development companies and landlords.  So how much more powerful are they now with a thousand fewer rental units on the market?  Consumers have power when supply is plentiful.  Anything done to reduce supply is going to reduce consumer power.

Why the Minimum Wage is A Bad Anti-Poverty Policy in One Chart

This is a regular chart used by Mark Perry, updated for the most recent data.  It is one of my favorites.

click to enlarge

Mark has a lot of great analysis of this data, too long to excerpt, so I refer you back to the link to see his comments.  But I want to add one of my own.

Let me restate the numbers in this chart one other way to give a pretty stark view of utility of raising the minimum wage as a poverty program. Let's look at the first lowest vs. the second lowest quintile.

Raising current workers in the poorest quintile to second quintile earnings ($28,970 to $35,858) would increase the first quintile's average income by $2,962. On the other hand, keeping first income wages flat but raising first quintile household's average earners to second quintile number of earners (0.43 to 0.91) increases the first quintile's average income by $13,905.

By this analysis, increasing first quintile hours worked (and % employment) has 4.7 times more leverage than fiddling with wage rates.

So now consider raising the minimum wage, which will raise some wages but reduce unskilled employment -- it is exactly the wrong thing to do, even before we consider that the majority of minimum wage earners who benefit from such an increase and keep their jobs are not in the lowest quintile but are 2nd and third earners in rich and middle class households.

It Is All About Mix

After 20+ years of technical, economics, and business analysis, I will offer up my best piece of advice to young data analysis folks looking to make an name for themselves:  Focus on the mix.  Or more particularly, changes in the mix.

The mix of what?  It could be most anything.  Here is a recent example from economics, arguing that the slowdown in wages is in part due to a mix shift in the country's employment to lower-paying industries.  In the corporate world, it could be the mix of markets, or customers, or regions.   Typical metrics used in the business world almost always miss mix.   In a large aerospace company, we had the irritating situation that the profitability of every single product line was rising at the same time revenues were rising but overall profitability was falling.  The problem was the mix.  The most profitable product lines were all on older aircraft, ironically because they were the least reliable (aerospace parts companies have traditionally operated on a razor and blades model, so that more failures let one sell more really profitable aftermarket parts).  As airlines modernized, our mix shifted to new product lines which were less profitable.  This difference in profitability was also due to a mix shift -- since newer products were way more reliable, more newer aircraft in the fleets shifted the mix from aftermarket sales (which were astoundingly profitable) to OEM sales (which were often made at a loss).

Example of the Impact of Minimum Wages on Consumer Prices

I thought folks might be interested in a letter I just wrote to the US Forest Service.  I have left some of it out, but these are the guts of it.  As many of your know, we manage parks and campgrounds under concession contract for public entities.  As such, we typically must get changes to customer fees approved in advance by the agency.  This is a version of a letter we just wrote to a number of US Forest Service offices in California explaining the substantial increases to camping rates that must occur over the coming years to accommodate the new California minimum wage laws.

2017 Fee Proposal & Impact of California Minimum Wage Increases on Camping Rates

The purpose of this letter is to make you aware of the substantial effect that the recent increase in California minimum wages will have on use fees. I will get into details below, but in short the newly-legislated 50% increase in the state minimum wage is likely to increase our costs by about 22%, even ahead of inflation in other categories of expenses. Just to stay at parity and to avoid cuts in service, we (and other California concessionaires) are going to need substantial increases in fees over the next five years. Frankly, this does not make me very happy – our company will have to struggle with public resentment of the new fees without making an extra dollar in profit – but it is the reality we must face together. The only other alternative would be large cuts in service (e.g. bathroom cleaning frequency) which frankly I am not going to accept.

Background on the Minimum Wage Increase

California minimum wages have already risen over the last three years by 25% from $8 to $10 an hour. The new California law, which will apply to most concessionaires, demands the following timetable for minimum hourly wages (smaller companies with fewer employees than we have will have one extra year to comply):

2016: $10.00

2017: $10.50

2018: $11.00

2019: $12.00

2020: $13.00

2021: $14.00

2022: $15.00

Note that given the terms of other portions of labor law, these same sorts of percentage increases must trickle up to all managers and salaried employees in California as well.

Background on Concessionaire Cost Structures

Not surprisingly, as a labor-intensive service business, a substantial portion of concessionaire costs are directly tied to wage rates. The minimum wage increase will increase at least three categories of our costs:

  • Wages
  • Payroll taxes (which are calculated as a percentage of wages, so will go up by the same percentages as wages go up)
  • Workers compensation insurance premiums (which like payroll taxes are calculated as a percentage of wages and go up by the same percentage wages go up)

Looking at our financials for our California permits (we have three large permits in the Inyo NF and one in the Cleveland NF) these three categories make up 44% of our total costs.

Preliminary Estimated Fee Impacts

Let’s look, then, and how much our costs may rise between now and 2022.

For the labor and labor-related charges discussed above, we know that costs will rise 50% between now and 2022. A 50% price increase on 44% of our costs raises our total cost structure by 22% (0.5 * 0.44).

But all of our other costs will also continue to rise during this period by at least the national rate of inflation. It is very possible that these costs will increase faster in the future due to this minimum wage increase – for example, our waste disposal costs will almost certainly go up as the labor costs of waste disposal companies rise. For a starting point, we will assume 3% general inflation in 2016 and 2017 and 4% in the years after that. This would yield a 24% increase in the other 56% of our costs for an impact on our total costs of 13.4% (0.24*0.56). Combining these two effects, we can expect a total cost increase to operate campgrounds in California by 2022 of 35.4%.

Note that though we bid based on trying to earn a profit margin around 9%, our actual profit margin in the USFS campgrounds we operate in California has been between 3% and 7% of revenues (5% in 2013, 7% in 2014, 3% in 2015). There is simply no room in that margin to absorb a 35.4% cost increase. We are going to have to therefore seek fee increases over the next 6 years in the 35% range, or between $6 and $8 on the $18-$23 camping rates that currently obtain. This is about a dollar or year, or two dollars every other year.

Competitor Analysis

We understand that the USFS wants to justify fee increases based on market conditions. One problem we will have is that even though we don’t open until April or May at seasonal locations, we need to get fee approval the previous September or October. We fully expect private operators will have to pursue fee increases of a similar magnitude; however, they may not announce their new higher rates in time for our very early fee-setting process. This makes local competitive analysis misleading.

Fortunately, in California we have another large public campground provider, California State Parks (CSP), that has many of the same public service and land management goals as has the US Forest Service. They therefore make a very good comparison. While rates vary by park, CSP is typically charging $35 a night for a no-hook-up campsite in parks that are very comparable in their natural settings to USFS campgrounds.

We currently charge no more than $23 for a no-hook-up site in the USFS in California (both in the Inyo and Cleveland NF). Even with a $6 fee increase, we would still be offering no-hookup campsites at 17% lower cost than does the State of California today (and presumably even lower in 6 years given that CSP is likely to continue to increase its camping fees).

[Rest of the letter on exact fee recommendations and other contract issues omitted]

Progressivism is Not Caring. It is Authoritarianism

The city of Seatac (a small area of land around the Seattle-Tacoma Airport) gained national attention a while back for passing a $15 minimum wage.  Many other groups, including the city of Seattle itself, as well as this year's Democratic platform committee, cited the Seatac example as an impetus for higher minimum wages everywhere.

In today's politics, there is no better way for a Leftish politician to virtue-signal than to advocate for a $15 minimum wage.  It is a classic case of a government law that helps a few easy to identify people and hurts a whole bunch of people in ways that are hard to attribute to the law, such as reduced employment for low-skill workers and higher prices for consumers.

So the City of Seatac has been taking a victory lap over the last year, patting itself on its back for how caring it is of its citizens.  Oh, and it has also been doing this:

A three-month-long civil trial revealed the shadowy subterfuge behind a secret land grab that was orchestrated by the city of SeaTac, replete with backroom deals, baldfaced deceptions, and a mayor intent on driving Somali refugees from the neighborhood.

The aim of it all: to wrestle 4.23 acres of prime real estate from entrepreneurs Gerry and Kathy Kingen, according to the judge and jury who heard the case.

The West Seattle couple sued the city and won, proving in court that SeaTac officials intentionally sabotaged their development plans, strong-armed them into giving up their property and then violated the state’s Public Records Act by withholding city emails and documents proving the deception.

The trial judge also concluded the former SeaTac mayor wanted condos built on the site, believing they would price out Somalis who had moved into “his neighborhood.”...

In March 2004, K&S Developments [the Kingen's investment vehicle] began working with SeaTac’s planning department to get approval for [a] park-and-fly, and city officials “voiced support and encouragement” for the proposal. The judge noted there “was never any public opposition” to the plan.

But unbeknown to the Kingens, SeaTac’s planning director, city manager and other staff decided in late 2005 they didn’t want K&S to build the park-and-fly because it would create competition for a park-and-fly the city wanted to build about a mile south at South 176th Street.

So in February 2006, city staff “devised a secret plan” to get the City Council to pass a moratorium designed to kill the Kingens’ park-and-fly project, the judge wrote. After learning of the permanent ban, Gerry Kingen met with members of the City Council and then-Mayor Gene Fisher, who “promised to make things right.”

 

Job Turnover and the Minimum Wage

Don Boudreaux criticizes an academic article that puports to tell business people that they should be able to easily absorb minimum wage hikes without consequence:

The authors are above not doing economics, properly speaking.  Instead, they offer business advice – or, rather, present themselves as possessing knowledge and information that is salable as business advice.  The authors write as if they are management or business-operations consultants rather than economists.  Pollin and Wicks-Lim here implicitly assert that their information on the details the state of the market and their knowledge of the particulars of how to run actual, real-world businesses are so real, full, and trustworthy that we should accept their conclusion that higher minimum wages will not cause businesses to change their operations in ways that result in fewer hours of paid work for low-skilled workers.

Indeed, the trust that we are asked to put in Pollin’s and Wicks-Lim’s alleged business acumen is so high that we are supposed to accept their conclusions as justification to unleash the force of the state to alter the actual, real-world business decisions of actual, real-world people who are actually operating – with their own actual money – in actual, real-world markets.

In his comments, I focused on one issue in the academic analysis -- that pro minimum wage folks in such analyses always give businesses a big profitability boost from reduced turnover due to higher wages, and it is reduced turnover and resulting increased productivity which provides the resources to "pay" for the wage increase.  I think there is something inconsistent in this thinking:

I can't see how the assumption of turnover reduction is consistent with the assumptions made by pro-minimum wage folks. There are two possibilities. First, assume the turnover is due to employees moving on at their own choice, presumably for a better deal. But how is this consistent with the frequent assumption of monopsony and that employees have no bargaining power? If employees are imposing high turnover costs on employers and frequently shifting jobs for better deals, there can't be a monopsony. It would mean that folks are taking these jobs for a short period of time to gain job skills and experience, and then moving to higher-skilled, better paying jobs, exactly how things should work in a free market without an absurdly high price floor on wages (I remember the old stat form the 80's that 10% of all Fortune 500 CEOs had their first job at McDonald's).

OK, assume the other possibility that the turnover is due to the employer choices, that all the employees they hire are unacceptable because their skills or demeanor or productivity is insufficient in some way. Well if they were unacceptable at $7, how are they suddenly going to be acceptable at $15? Proponents seem to assume some magic occurs when one raises wages, that unskilled employees who can't show up on time will suddenly become attentive and skilled. In my experience, it never happens.

For the record, given our 50% wage costs (and costs tied to wages like payroll taxes), we have had to increase prices 10% for every 20% increase in the minimum wage, and even then we have seen our profits fall, as we never see the magic productivity increase that is supposed to come with suddenly paying the same people higher wages and at the same time we do see a drop in customer demand due to the higher prices, which reduces our fixed cost coverage.

Private Businesses in Europe Understand the Cost of Labor, But Public Agencies Don't Seem To

Most folks know that labor costs in Europe are high, both because of high minimum wages, high required benefits, and various government regulations that raise the cost of labor (e.g. making it impossible to fire anyone).

My observation so far is that private businesses understand this perfectly.  Given higher labor costs than in the US, most service businesses have fewer employees.  In restaurants in the US a waiter might cover 4-6 tables -- in most European restaurants I have been in the waiter covers the whole restaurant.  In fact, two of the places we have eaten are 12 table restaurants run entirely by a couple, with one being the totality of the waitstaff and the other being the totality of the kitchen staff.  In this case, the married owners of a small business might be hiring nobody.

But for reasons I don't know but I can guess, public agencies -- which presumably have higher labor costs than in the US -- are simply profligate with labor.  The example I will cite is trash pickup, both in Amsterdam and Bruges.  In these two lovely cities, every business and residence throws their trash on the curb in bags and boxes and even loose in piles.  Here is a portion of the 9 streets district in Amsterdam, an important upscale shopping area that lives and dies by attracting tourists.  Look how ugly the streets are:

CameraZOOM-20160607111815276 CameraZOOM-20160607105135443 CameraZOOM-20160607105122016

In Phoenix we all put our trash into standard cans which are a heck of a lot more attractive than basically just throwing garbage on the street.  These cans are then emptied by a truck with just one employee, a driver that has an arm that reaches out and grabs each can and dumps it in the truck.

In Amterdam, trash is picked up far slower and requires three people, a driver and two guys running around like crazy picking up trash and throwing it in the back.  The compactor on this truck was terrible and slow and so the truck compactor could not keep up with the workers, who had to bend down and pick up the same trash two or three times to get it to stay in the truck.

CameraZOOM-20160607112928522

It looked like a total custerf*ck

Minimum Wage Pits Employees vs. Customers, Not Employees vs. Management

This post earlier on the customer service downsides of the new salaried overtime rules got me thinking more broadly about the impact of minimum wage type laws.  Progressives justify such laws by saying that there is a power imbalance between management and employees, and that the government needs to have minimum wage laws to make up for the fact that employees lack power.

But from my experience in the service world, it is wrong to look at the situation as a power struggle between managers and employees.  It is much more correct to look at this as a power struggle between employees and customers.  Let me explain.

Service and retail firms tend to live on razor-thin margins.  Retailers typically live on single-digit profit margins, and those of companies like Wal-Mart are as low as 2% of revenues.  Our company in the service business has a similar experience, averaging profit margins of 3-5% of revenues over the last 10 years.

This is not an accident.  Most service and retail businesses depend on simple service-delivery models using relatively low-skilled workers.  There are many low-skilled workers in the world.  If a company were to start making huge profits with a service model using such workers, it would be easy for others to copy it and hire the same types of workers and undercut them on price.  Margins tend to get competed down to the bare minimum.

No matter how much progressives would like it to be so, when California raises its minimum wage, it probably is not going to come out of company margins, at least in the near term.  Over the 10 years from about 2013 to 2022, California will have raised its minimum wage over 87% from $8 an hour to $15.  Wages and costs like workers comp premiums that are tied to wages are about half my costs.  This means an 87% labor cost increase will increase my total costs 44%.  How is that going to come out of a 4% margin?  It is not.

There are really only two things we can do, individually or in combination.  First, we can raise prices 44%, just to try to stay even.  Of course, some customers will balk and stop buying, and then we will lose business and perhaps have to close (we have already closed over half our businesses in California for just this reason).  Or second, we could cut staff in half to keep wages under control.  Of course, this means customers get served much more poorly, which also may drive customers away.  Other companies like fast food restaurants have a third option of automation, replacing people with machines -- I wish we could do this but right now we have run out of ideas for automating bathroom cleaning and landscape work.

Hopefully, you can see what is going on here.  The real tension here is between employees and customers.  When the state mandates a minimum wage in low margin service businesses (such laws are largely irrelevant to high-margin technology companies and such), compliance is paid for by the customer, either in the form of higher prices or worse service or both.

Raising the Cost of Hiring Unskilled Workers by 50% is A Bad Way to Fight Poverty

After my prior post, I have summarized the chart I included from Mark Perry to the key data that I think really makes the point.  Household income is obviously a product of hours worked and hourly wages.  Looking at the chart below, poverty seems to be much more a function of not working than it is of low wages.  Which makes California's decision to raise the price of hiring unskilled workers by 50% (by raising their minimum wage from $10 to $15) all the more misguided.

click to enlarge

Note the calculations in the last two lines, which look at two approaches to fighting poverty.  If we took the poorest 20% and kept their current number of hours worked the same, but magically raised their hourly earnings to that of the second quintile (ie from $14.21 to $17.33), it would increase their annual household income by $2,558, a 22% increase (I say magically because clearly if wages are raised via a minimum wage mandate, employment in this groups would drop even further, likely offsetting most of the gains).  However, if instead we did nothing to their wages but encouraged more employment such that their number of workers rose to that of the second quintile, this would increase household income by a whopping $13,357, a 115% percent increase.

From this, would you logically try to fight poverty by forcing wages higher (which will almost surely reduce employment) or by trying to increase employment?

Why The Minimum Wage Does Not Make Moral Sense: Unemployment, Not Low Wage Rate, Causes Most Poverty

In response to his new $15 minimum wage in California, Governor Jerry Brown said:

Economically, minimum wages may not make sense. But morally, socially, and politically they make every sense because it binds the community together to make sure parents can take care of their kids.

Let me explain as briefly as I can why this minimum wage increase is immoral.  We will use data from the chart below which was cribbed from Mark Perry in this post.

click to enlarge

The average wage of people who work  in the poorest 20% in the US is already near $15 ($28,417 divided by 2000 full time hours - $14.20 per hour).    This is not that much lower than the hourly earnings of those in the second poorest or even the middle quintiles.  So why are they poor?  The biggest different is that while only 16% of the middle quintile households had no one who worked, and 31.5% of the second poorest quintile had no one who worked, of the poorest 20% of households a whopping 63% had no one who worked.  Only 16.1% of poor adults had a full time job.

The reason for poverty, then, is not primarily one of rate, it is one of achieving full time employment.  Many of these folks have limited education, few job skills, little or no work experience, and can have poor language skills. And California has just increased the cost of giving these folks a job by 50%.  The poor will be worse off, as not only will more of them miss out on the monetary benefits of employment, but also the non-monetary ones (building a work history, learning basic skills, etc.)

Past studies have shown that most of the benefit of the minimum wage goes to non-poor households (ie second and third earners in middle class homes).  The targets Jerry Brown speaks of, parents earning the minimum wage to take care of families, are perhaps only 1/8 of minimum wage earners.

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.

Of course, the price of a lot of stuff poor people have to buy in California is about to go up.  We are going to have to raise our campground rates by 20-25% to offset the labor cost increase.  But that is another story.

California Creates Another Setback of Unskilled Workers -- And Possibly A Setback for Immigrant Integation

It appears that California is going to increase its state minimum wage to $15 in steps over the next five or six years.  This is yet another body blow for unskilled workers in the state.  As I wrote a while back, it is already overly difficult to build a business based on unskilled labor in that state, and increasing the price people have to pay for that labor by 50% is only going to make things worse.  It is possible low-skill workers in large wealthy cities like San Francisco will be OK, as service businesses are still going to want to be there to access all that wealth, and will just raise their prices even higher to account for the higher wages.   For laborers in rural areas that are already suffering from high unemployment, the prospects are not very bright.

As most readers know, we run a service business operating campgrounds across the country, including a number in California.  Over the last  years, due to past regulation and minimum wage increases, and in anticipation of further goofiness of this sort, we exited about 2/3 of our business in California.

Our problem going forward is that in rural locations, sometimes without even electricity or cell phone service on site, we have simply exhausted all the productivity measures I can think of.  There appears to be a minimum amount of labor required to clean a bathroom and do landscaping.  Which leaves us the options of exiting more businesses or raising prices.  Most of our customers in California are blue collar rural folks whose lot is only going to be worse as a result of these minimum wage increases, and so I am not sure how far they will be able to bear the price increases we will need to cover our higher costs.   Likely we will keep raising prices until customers can bear no more, and then exit.

By the way, the 5-6 year implementation time is a frank admission by the authors of the law, not matter what they say in pubic to the contrary, that they know there will be substantial negative employment effects from the minimum wage increase.   They are hoping that by spreading it out over several years, those negative effects will lost in the noise of economic fluctuations.  The Leftist playbook is to do something like this that trashes the earnings of the most vulnerable low-skilled workers, and then later point to the income inequality of those low-skilled workers as a failure of free markets.

On a related note, one of the more interesting things I have read lately is this comparison of successful integration of Muslim immigrants in the US vs. poor integration in Europe.  Alex Tabarrok raises the hypothesis that high minimum wages and labor market rigidity in Europe may be an important factor in reducing immigrant integration.  He quotes from the OECD:

Belgian labour market settings are generally unfavourable to the employment outcomes of low-skilled workers. Reduced employment rates stem from high labour costs, which deter demand for low-productivity workers…Furthermore, labour market segmentation and rigidity weigh on the wages and progression prospects of outsiders. With immigrants over-represented among low-wage, vulnerable workers, labour market settings likely hurt the foreign-born disproportionately.

…Minimum wages can create a barrier to employment of low-skilled immigrants, especially for youth. As a proportion of the median wage, the Belgian statutory minimum wage is on the high side in international comparison and sectoral agreements generally provide for even higher minima. This helps to prevent in-work poverty…but risks pricing low-skilled workers out of the labour market (Neumark and Wascher, 2006). Groups with further real or perceived productivity handicaps, such as youth or immigrants, will be among the most affected.

In 2012, the overall unemployment rate in Belgium was 7.6% (15-64 age group), rising to 19.8% for those in the labour force aged under 25, and, among these, reaching 29.3% and 27.9% for immigrants and their native-born offspring, respectively.

Wow, I guess it is sure lucky California does not have a very large immigrant population.  Oh, wait....

More Evidence Against My Least Favorite Legislation of the 20th Century

I have written about the National Industrial Recovery Act many times, a love-note from FDR to Mussolini's fascist economic system that was thankfully overturned by the Supreme Court.  Its intent was to make the corporate-crony state the default economic system of the US.

Essentially, the NIRA cartelized the US economy, creating government-sponsored cartels in every industry that would set prices and wages as well as output and quality.  You can imagine exactly how well upstart competitors would have fared under this system.  I am pretty sure, for example, that the government mainframe cartel would never have let apply, or even DEC, see the light of day.

Now, a couple of academics have laid the blame for the long duration of the Great Depression at the NIRA's doorstep.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.
In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns," Ohanian said. "As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Hmm.  Certainly wages and prices are going to be especially "sticky" if the government creates cartels to keep them that way.

Looking at the Business Cycle as an MBA Rather Than an Economist: The Effect of Organizational Dynamics on Recessions

I will confess that there is much about advanced economics that I have trouble following, because I just don't have the background.  I suspect I am more comfortable with a mal-investment model of recessions because it is something I can see and understand as a business guy, whereas when talk gets into monetary policy I can quickly get lost.

For example, in this Arnold Kling review of Scott Sumner's book on the Great Depression, I totally get this:

Sumner's theoretical framework starts with a straightforward explanation for fluctuations in employment and output. Large shortfalls in output and employment occur when relatively flexible prices fall in relation to relatively sticky wages. When firms face high wages and low prices, they have to cut back on employment and output.

A business guy (outside of a commodity business) would probably say he sees a fall in demand for his product rather than a fall in prices, but I understand enough economics to know that these are essentially interchangeable -- the business is seeing a fall in demand at the old price but would likely see the same old demand if the price were lowered.

However, when I read stuff like this, I start to get lost.

If investors believe that the future path of monetary policy is expansionary, then they will immediately start to bid up prices for sensitive commodities. This means that if the central bank sends a credible signal today that it will maintain an expansionary stance going forward, this can quickly raise prices relative to wages, leading to a rapid expansion of employment and output.

I understand it intellectually, but I certainly don't go on a buying spree the moment the Fed announces more QE (though in retrospect looking a the rise in financial asset prices over the last few years, I should have).

But where I was going with all this is there are real-world effects that I am positive contribute to the depth of recessions that I seldom see in these economic theories.  For example, economic theories tend to assume firms are properly staffed heading into the downturn, such that layoffs are driven by the fall in prices/demand.

But that is not ever the case.  In my experience, it is an iron law of organizations that their staffing grows fat in the good times.  No matter how tough or attentive the management, firms will put on too much staff.

My personal theory is that organizations have a life of their own.  Almost literally.   In many ways the organization acts as a living entity with a mind of its own, trying to grow and feed itself.  It does not consider what size it should be, any more than a deer heard is concerned about its size vs. the available food supply.  It will keep growing until it is culled by an outside  force (lack of food or a predator).

I think of organizations the same way, and the only way to check its growth is with active management from the top.  Managers have to constantly stay on top of the organization's size and be pruning or culling it constantly (depending on the metaphor you want to latch on to).  However, because of scale economies, profits tend to grow faster than revenues at the top of the business cycle.  This creates a certain comfort level among management, and since pruning the organization is emotionally difficult -- at the least saying no to people's resource requests and at the most demanding layoffs --managers don't keep up with their job in this area in the good times.  No one notices that a 15% profit growth could have been 20% if they organization had properly been kept in check.

Then comes the downturn.  Demand and/or prices are falling, and profits are falling faster than revenues, and the crisis is now at hand.   Now that we have overcome whatever emotional starting friction there is to have layoffs, we might as well do the job right and cut not only what is required to keep up with falling prices, but we might as well take a look at the bloat we accumulated in the good times and right-size that away as well.  In fact, many businesses I have worked for or with as a consultant like to overshoot what they might have previously thought of as the right-size point, and cut even deeper, hoping that the limited resources will push the organization into finding new inefficiencies in how it does things.

And thus, in my view, the degree of layoffs in a recession will tend to be larger than that one might predict solely from sticky wages and declining  prices/demand.

By the way, for those of us who are skeptical about the government's ability ever mange a task efficiently, this organizational theory is one explanation.  Often commenters make the mistake of assuming that when I criticize tendencies in government organizations to look after themselves (rather than their mission) that I am singling government out as somehow operating differently from the private world.  That is not true.  Government is made up of the same human beings as businesses (though perhaps there is some negative self-selection) and government organizations are going to have the same tendencies as private organizations.

The difference is one of correction mechanisms and incentives.  Eventually, the private organization must clean out the bloat or else it will fail and go out of business entirely (unless of course the government bails it out, see: GM).  There is no such accountability with government organizations.   They just deficit spend or demand more taxes when they get bloated.   Making this worse are the incentives of  government agency leaders.   Lacking a profit metric or even a customer service metric, government agency managers typically get their pay and prestige set based on the budget and headcount of the organization they run, so cost and headcount cutting run directly counter to their incentives.  Combine this with higher barriers in government organizations to cleaning house (e.g. public union power and politicization of what should be efficiency decisions) and we get the dysfunctionality of government.  But again note, this is an issue of accountability mechanisms and incentives, not of having better or worse or smarter people.

On Immigration, Conservatives Sound Just Like Socialists

The other day John Hinderaker of Powerline wrote:

If someone proposes that next year we should import 10,000 unskilled immigrants from Pakistan, the first question we should ask is: why do we need them? But that is the one question that no one ever seems to pose.

This is a terrible question and to my eye shows just how close Conservatives come to accepting many of the assumptions of Socialism.

Socialists seldom think in terms of individuals, but instead talk about the economy as some great big machine that they get to run.  We all remember Bernie Sanders saying

“You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country”

When Hinderaker is asking if we need more immigrants, or Sanders is asking if we need more deoderant choices, they are both working from an assumption that some authoritarian gets to sit at the top and make these choices for us.

The question "do we need immigrants" is actually senseless. Who is "we"? Who gets to make decisions for "we"? Only a socialist thinks this way. In a free society, the questions that matter are "Do I want to hire this immigrant?" or, as an immigrant, "do I want to take the chance of moving to an unfamiliar country to try to better my life." If I wish to hire someone from another country and they wish to move here and take the job, what the hell does it matter if John Hinderaker thinks this person is "needed"? I have decided I need a certain immigrant for my business, and the immigrant has decided that moving here is a good tradeoff for him.  In capitalism, that should be a done deal.

Could the immigrant or I be wrong about my employment offer being a good idea? Sure.  But authoritarian government second-guessing of individual decisions is supposed to be a progressive-socialist game, and here is a prominent Conservative doing exactly the same thing.  If Bernie Sanders wanted to require me to get government permission to produce a new flavor of deodorant, Hinderaker would be outraged.  But never-the-less he similarly wants me to get government permission (actually he wants to deny me government permission) to hire the employee I want to hire.

All this "Amercan jobs for Americans" thing may sound nice, and get head nods at the local Rotary, but what it actually means is that individual business people like myself have to be limited to hiring from a government-approved list.  Doesn't sound much like the free markets and small government Conservatives claim to want.

Hinderaker quotes approvingly from David Frum

However one assesses [the Farook family] chain and its consequences, it seems clear that the large majority of legal immigrants choose to come—or, more exactly, are chosen by their relatives—for their own reasons. They are not selected by the United States to advance some national interest. Illegal immigrants are of course entirely self-selected, as are asylum seekers. …

Donald Trump’s noisy complaints that immigration is out of control are literally true. Nobody is making conscious decisions about who is wanted and who is not, about how much immigration to accept and what kind to prioritize—not even for the portion of U.S. migration conducted according to law, much less for the larger portion that is not.

Doing things for one's own reasons.  Self-Selection.  Lack of government control.  Lack of government decisions about who or what is wanted.  Lack of national priorities.  These all sound like ... capitalism and a free society.   Replace the word immigration with any other term and Conservatives would blast these two sentences and Bernie Sanders and Barack Obama would vigorously nod.  I could write a $15 minimum wage screed using almost these identical words from Frum.    Here, let me try:

However one assesses [the John Smith] $8 wage and its consequences, it seems clear that the large majority of employers set wages for their own reasons. These wages are not set by the United States to advance some national interest. The wage rates are entirely self-selected by employers and employees.

Bernie Sanders's noisy complaints that wage rates and income inequality are out of control are literally true. Nobody in government is making conscious decisions about who is hired and for how much, about how much income to accept and what kind to prioritize.

Postscript:  Yes, I know that Conservatives are all worked up because 1 in a 1,000 or so of our immigrants might be murderers.  You know what, one in a thousand Americans born every day will likely grow up to be murderers, but we don't ban sex.  We accept the consequences that we get a few bad apples along with a lot of awesome productive people.

I would also ask Conservatives this -- why don't you think the Left's desire to ban gun ownership to head off mass shootings is fair?  I would suggest one reason is that it is unfair to ban legal gun ownership for 1,000 good people because one will use their gun to commit a murder.  If you agree with this statement, explain why your argument against immigration is different from the Left's call to ban gun ownership.

My Testimony to the House Subcommittee on Public Lands

If you are really bored, and I mean for values of boredom approaching "Maybe I should pull out my old Menudo albums and give them a listen," you can watch me and others testify to the Public Lands Subcommittee of the House Natural Resources Committee.

As you will be able to tell, I pretty much never do the Washington thing.  there really being nothing much my business needs up there other than to be left alone (unfortunately a vain hope most of the time).

This case is a bit unique.  Fees and recreation on public lands are governed mainly by a certain piece of legislation called FLREA (I won't bother with all the actual words, everyone just calls it FLREA).  The law governs fees the government can charge for public recreation, passes that provide discounts to these fees, etc.

The Forest Service has a unique program (at least among the Federal Lands agencies involved in FLREA) where private concessionaires don't just run a resort, like in the Park Service, but run an entire "park".  This means that, unique to all the other agencies, the Forest Service actually has private companies charging park entry fees ("day use fees") and camping fees.   In theory this should be relatively easy to manage, and the existence of the concession program has never really been an issue in these proceedings, but sometimes in the rush of legislation we are simply forgotten, and rules are written into the law that are simply unworkable for private companies.  A good example in this law is the long fee approval process that could require 18 months to change a fee -- this provision would be a disaster for us because we often have to react to things like changing minimum wages on a couple months notice.

Postscript:  Yes I know -- Moire fail on the tie

Early Progressive, Race-Based Rational for the Minimum Wage

From the same article, From Eugenics and Economics in the Progressive Era by Thomas C. Leonard, that I quoted in a recent post on immigration comes this bit as well (emphasis added):

Progressive economists, like their neoclassical critics, believed that binding minimum wages would cause job losses. However, the progressive economists also believed that the job loss induced by minimum wages was a social benefit, as it 212 Journal of Economic Perspectives performed the eugenic service ridding the labor force of the “unemployable.” Sidney and Beatrice Webb (1897 [1920], p. 785) put it plainly: “With regard to certain sections of the population [the “unemployable”], this unemployment is not a mark of social disease, but actually of social health.” “[O]f all ways of dealing with these unfortunate parasites,” Sidney Webb (1912, p. 992) opined in the Journal of Political Economy, “the most ruinous to the community is to allow them to unrestrainedly compete as wage earners.” A minimum wage was seen to operate eugenically through two channels: by deterring prospective immigrants (Henderson, 1900) and also by removing from employment the “unemployable,” who, thus identified, could be, for example, segregated in rural communities or sterilized.

The notion that minimum-wage induced disemployment is a social benefit distinguishes its progressive proponents from their neoclassical critics, such as Alfred Marshall (1897), Philip Wicksteed (1913), A. C. Pigou (1913) and John Bates Clark (1913), who regarded job loss as a social cost of minimum wages, not as a putative social benefit (Leonard, 2000).

Columbia’s Henry Rogers Seager, a leading progressive economist who served as president of the AEA in 1922, provides an example. Worthy wage-earners, Seager (1913a, p. 12) argued, need protection from the “wearing competition of the casual worker and the drifter” and from the other “unemployable” who unfairly drag down the wages of more deserving workers (1913b, pp. 82–83). The minimum wage protects deserving workers from the competition of the unfit by making it illegal to work for less. Seager (1913a, p. 9) wrote: “The operation of the minimum wage requirement would merely extend the definition of defectives to embrace all individuals, who even after having received special training, remain incapable of adequate self-support.” Seager (p. 10) made clear what should happen to those who, even after remedial training, could not earn the legal minimum: “If we are to maintain a race that is to be made of up of capable, efficient and independent individuals and family groups we must courageously cut off lines of heredity that have been proved to be undesirable by isolation or sterilization . . . .”

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.

Minimum Wage, American vs. European Restaurants

In reading reviews of European restaurants to try to find places to dine, I saw a lot of criticisms of their service.  There seems to be a meme among travelers that Austrian restaurants in particular often have bad service.

I am not sure I can agree with this -- we had a lot of good wait-staff in Austria  But I can say that they had to service a LOT more tables than a typical American waiter.  I don't know what the standard is today, but it used to be that 4-6 tables was the max American restaurants considered that a waitperson could cover and still provide acceptable service.  In Austria, the number was often double that.  I watched one gentleman memorably service almost 20 tables during the busy lunch hour at a museum cafe in Vienna.  I can tell you he was working his butt off but we still had to wait for basic service like ordering or paying our bill or getting our food delivered.

I pair this information with a second factoid from a travel book we read when trying to figure out what tipping policy was over there.  The book, as well as most other sources we consulted, said that tips for waiters in Austria and Germany could be less generous because waiters were paid much more than in the US -- a fact that the source considered a point of superiority over the US for the Europeans.

That may or may not be -- personally, I have never like the US tradition of restaurants outsourcing the paying of their staff to the customers.  But it may well be that these higher wages have their cost in the form of reduced customer service, as restaurants are forced to minimize their higher cost staff to keep prices reasonable.

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.

Best Possible Thing for Low-Skilled Workers: Having Others Get Rich off Their Labor

I had an argument in a comment thread of one of Kevin Drum's minimum wage or some such posts (sorry, I can't even find which one now to link it).  Anyway, my concluding remark was that the best thing that could ever happen to the unemployed, and particularly to low-skilled workers, would be if people were to discover ways to get rich from their labor.   Of course, I was met with total scorn, as if I had suggested sacrificing virgins to improve the climate.

The reason I mention this is that this disconnect seems to be at the heart of the problem of Progressivism.  I am convinced that they honestly want to help low-skilled workers and the poor do better economically, but they advocate for policies that are 180-degrees askew.  Most of what they wish for -- higher minimum wages, larger mandated benefits packages, more paid leave, more ability to sue employers over trivial slights -- absolutely, with near mathematical precision, raise the cost of hiring low-skill workers, making it increasingly unlikely anyone will do so.  Low-skill workers get hired for one and only one reason (which is the same reason any worker gets hired):  someone thinks they can profit from that labor.  It is the potential for profit that is the sole reason for hiring anyone, but it is exactly that profit potential that Progressives most fear and deride.

The DOL is Admitting That New Overtime Rules Won't Lead to Much Extra Pay

Here are some numbers from the DOL draft rule.

They think there are 21.4 million salaried workers subject to the wage test.  Since the new number was set at the 40th percentile of these workers, presumably about 8.6 million will fall below the new number.  But of these, only 4.6 million would be have to be shifted to hourly/overtime rules (not sure why the difference, I guess other tests must still apply as well).

Those 4.6 million are expected to cost employers an additional $1.2 billion in wages, which seems like a lot but equates to an additional $261 per person per year extra.   In other words, a pittance for all this disruption.

The Left is already saying that companies won't adjust and all these folks will get raises.  But the DOL obviously thinks differently.  Either it thinks these folks are only working maybe an hour each of overtime per week, such that the overtime rules will only cost a few bucks a week, or the DOL thinks that a lot of work and wage rates are going to be pared back leaving folks about where they are today, except now as timeclock punchers rather than trusted salaried professionals.

I am still going through all the tables in the back where they generate this stuff, but there are a couple of admissions there you WILL NOT find on liberal blogs today

  1. The DOL expects that base wage rate for regular work hours to fall for the affected workers with this new law.  You heard that right.   See table 21.  The fall from $18.38 to $18.21 after this rule in DOL projections
  2. You will see folks (like Kevin Drum linked above) saying that this ends 60 hour work weeks.  In fact, in table 22 the DOL says the average work week of those affected by the rule is 41.6 hours, which will go down to 41.5 hours by this rule.  In fact, the 60 hour folks are a minority of go-getters who are trying to prove themselves out for upper management.  These are the folks hamstrung by this law, hammering precisely the upwardly mobile folks one would hope to encourage.

DOL's New Overtime Proposal A Great Example of Arbitrary Rule-Making Under the Guise of Science

I have only skimmed the new DOL overtime rules, but this bit really hit a nerve:

The Department has long recognized the salary level test as “the best single test” of exempt status. If left at the same amount over time, however, the effectiveness of the salary level test as a means of determining exempt status diminishes as the wages of employees entitled to overtime increase and the real value of the salary threshold falls. In order to maintain the effectiveness of the salary level test, the Department proposes to set the standard salary level equal to the 40th percentile of earnings for full-time salaried workers ($921 per week, or $47,892 annually for a full-year worker, in 2013).

This is exactly the kind of thing that will look scientific to you average journalism major.  See, $921 is not arbitrary, it is set at the 40th percentile of salary earnings.

WTF?  Where did the 40th percentile come from?  Out of someone's butt, that is where.  The Administration started with a number they wanted, between $47K and $50K and then obviously went looking for some round-number metric that landed in this zone to justify their number as somehow analytically based.

Think about it.  The 40% number is meaningless.  In fact it is worse than meaningless, it is astoundingly arrogant.  Basically they are saying arbitrarily that 40% of people earning a salary should not be earning a salary.  What do these people do?  What are their alternatives?  What are the other circumstances of the job that might affect them?  What is the value of their benefits?  None of this stuff is considered.  Some arrogant jerk just drew a line and said, below this line all those folks are paid wrong.

California Legislature Is Just A Rent-Seeking Body for Litigation Attorneys

The vast majority of so-called consumer or employee protection laws in California appear to be written with one purpose in mind -- to create more rent-seeking opportunity for lawyers.  While more expensive to comply with than laws in any other state, most of these laws do little to actually make the life of consumers or employers easier.  Are consumers really better off for the myriad of carcinogen warnings one sees in California, or is it just white noise?  Are employees better off because they can sue over having to work through lunch?  In most cases, the answer is "no" or only trivially at best.

But what all these laws have in common is that they give attorneys incredible power to extract money from businesses via any number of extortion techniques.  For example, my company has never lost an employee lawsuit in California, but I have spent hundreds of thousands of dollars of my money to successfully defend such claims (no insurer will cover you for such employee suits without a deductible of at least $25-50 thousand per claim in CA).  How can anyone call this justice?

The only defense we have is to try to take claims to arbitration.  I have no problem paying a thousand dollars of back wages if we made a mistake, but I don't want to pay $50,000 in legal fees reaching that conclusion.  That is the point of arbitration, to pay off employee claims without the long hassle of litigation.  It offers the bonus of paying employees quickly, rather than forcing them to wait through years of legal procedures.

The only folks hurt by arbitration are the attorneys, and of course since they virtually control the California State Legislature, CA attorneys are urging their government lapdogs to ban arbitration of employment issues

When you take a job, should you be required to waive your right to have a future employment dispute adjudicated by the state labor commissioner or in civil court?

That has increasingly become the case for job applicants. Forty-three percent of companies nationwide now require employees to sign arbitration clauses precluding class-action suits, according to the Wall Street Journal. That’s an increase from 16 percent of companies in 2012. It’s paid off for businesses – employee class-action lawsuits have declined 5 percentage points since 2011, saving employers $136 million.

Assemblyman Roger Hernández, D-West Covina, believes mandatory employee arbitration agreements provide California businesses with an unfair advantage in employee disputes. He authored Assembly Bill 465, which would make it illegal to require such agreements as a condition of employment.

The bill passed the Senate Labor and Industrial Relations Committee along party lines on June 10 after a debate over the pros and cons of arbitration.

It is telling that even the supporters cannot point to any study or evidence that employees do worse with their claims in arbitration vs. in the court system.   The only real claim they make is this one, which is hilarious:

“The harm from these kinds of agreements goes beyond the impact on the individual worker. Obviously, no workers should be required to give up such core protections when it’s not knowing or voluntary. But beyond that, this takes away the ability to the state labor commissioner to even know what is happening in these work sites. These arbitration agreements are private, they are individual.

“They do not provide a forum for the state labor commissioner or anyone else to know what is happening and try to find a more systemic solution or to say, ‘Wow, there’s a lot of violation coming out of this one site or employer. Maybe we should consider a more efficient enforcement plan than just each individual worker having to take their claim separately to an arbitrator.’

This is stupid.  First, there is nothing in an arbitration agreement that prevents an employee from reporting his or her issue to the state labor commissioner.  Second, if this really were an issue, a simple reporting requirement of the basic facts of arbitration cases to the state labor commissioner would suffice to solve the problem.

Here is how you should think about this proposed law:  Attorneys are the taxi cartels, and arbitration is Uber.  And the incumbents want their competitor banned.

A few years ago I had a woman file a discrimination case against me, saying her supervisor discriminated against her.  This person did not even attempt to lay out a factual basis for the claim, just said essentially she was dissed.  What made the case a total joke is that the person who was her supervisor was her sister (no more making exceptions to nepotism rules after that one).  The claim went nowhere, but it still cost be $20,000 to make go away.  And the real kicker was the employee's attorney.  This person came to me (actually my attorney) and he said he would drop the case with no payment to the plaintiff if we agreed to give him $X thousand dollars personally.  Basically, the attorney said that if he got paid, but his client did not, he would be satisfied and get her to drop the suit.  This is the racket attorneys have created for themselves in California.