Posts tagged ‘wages’

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.

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.

When Corporations Use Social Causes as Cover for Cutting Costs

My absolute favorite example of corporations using social causes as cover for cost-cutting is in hotels.  You have probably seen it -- the little cards in the bathroom that say that you can help save the world by reusing your towels.  This is freaking brilliant marketing.  It looks all environmental and stuff, but in fact they are just asking your permission to save money by not doing laundry.

However, we may have a new contender for my favorite example of this.  Via Instapundit, Reddit CEO Ellen Pao is banning salary negotiations to help women, or something:

Men negotiate harder than women do and sometimes women get penalized when they do negotiate,’ she said. ‘So as part of our recruiting process we don’t negotiate with candidates. We come up with an offer that we think is fair. If you want more equity, we’ll let you swap a little bit of your cash salary for equity, but we aren’t going to reward people who are better negotiators with more compensation.’

Like the towels in hotels are not washed to save the world, this is marketed as fairness to women, but note in fact that women don't actually get anything.  What the company gets is an excuse to make their salaries take-it-or-leave-it offers and helps the company draw the line against expensive negotiation that might increase their payroll costs.

Postscript:  Yes, I understand the theory of negotiation and price discrimination, as used by auto dealers.  One can make an argument that setting prices high (or wages low) and then allowing negotiation by the most wage or price sensitive is the best way to optimize profits, and that Pao's plan in the long-term may actually raise their total compensation costs for the same quality people.  I don't think she is thinking that far ahead.

Learn Microeconomics

We discuss a lot of economic issues on this site, and economics has become pretty much a staple of political discussion.  If concepts such as price elasticity, compensating differentials, or tax wedges leave you scratching your head, this is a great (free) online video series teaching the fundamentals of microeconomics.  Complete this course and you will be way ahead of 99% of politicians and journalists.  Of course, the newspaper headlines will start to drive you even crazier than they likely do today, with their total ignorance of basic economics, but there is a price to everything.

Last week, I was giving my usual introduction speech to some of my front-line employees.  One of the things I said to them is that this was a very low-margin business, which meant that wages were not very high but we try hard to compensate by making the job fun (since all of our employees essentially get to live in campgrounds).  It turns out that Cowen and Tabarrok actually have a lecture on this very topic in chapter 13 of their series.

OK, I Relent: I Will Support A Carbon Tax If Y'all Will Stop the Torrent of Stupid

President Obama is preparing to unleash a Colorado-River-sized torrent of stupid.  He wants to spend tens of billions of dollars on goofy green energy projects that will have an indiscernible affect on world temperatures but will have a very robust effect on some crony bottom lines.   Here is one example:

As part of President Obama’s plans to combat climate change, the White House announced a program on Friday for the U.S. Department of Energy to train 75,000 people to work in the solar power industry by 2020, many of whom will be part of a military veterans jobs initiative called Solar Ready Vets.

Seriously, is the training costs of workers really a substantial portion of a solar installation?

Andrea Luecke, president and executive director of the Solar Foundation, which publishes the annual National Solar Jobs Census, said that Obama’s announcement will not likely increase the size of the solar industry’s workforce but will instead ensure that the industry will be able to find highly skilled workers to fill jobs.

“We’re experiencing difficulty finding more skilled and qualified workers to install and do design work required,” she said, adding that the industry’s workforce has a “skills gap” as well-trained electricians and other workers go back to other construction jobs as the economy gains momentum.

I will translate that trade-group speak for you:  We like to pay our workers less than similarly-skilled construction workers so we lose a lot of skilled workers to higher paying construction companies. This program will not add any net employment to the economy but will help us keep wages lower by increasing the supply of qualified workers.

I can't help but think of Henry Ford, who famously raised the wages of his employees substantially.  The fake story is that he did this so all his workers could buy his product.   The real reason he did this was that he had horrendous labor turnover problems.  Like the solar industry, he was training folks who then left for higher paying jobs.  So he had to raise his wages to retain trained people.  How history would have changed if Ford had instead been able to call Obama and ask him to have the taxpayer pay to feed him with new, trained workers so he wouldn't have to raise his wage rates!

Seriously, did a bunch of technocrats get together and study the whole solar industry and come to the conclusion that solar installation skills were the keystone problem that was holding back the whole industry?  Of course not.  The solar industry will sink or swim based on panel costs and efficiencies.   What happened is someone said, "well the public always seems to like job training programs.  Those poll well."  And then they called the solar crony association or whatever it is called and they said, "sure, we would love to have taxpayers pay some of our training costs.  Thanks, we will be very supportive." And then someone said, "well, won't the Republicans pitch a fit over this?" And then someone had the brilliant idea of making it a veterans program -- "Republicans love soldiers, that will help defuze their opposition."  And an expensive crony giveaway was born.

About 5 years ago I said I would be willing to accept a carbon tax whose proceeds were used to reduce various labor tax rates (e.g. social security).  Substituting an energy consumption tax for a labor consumption tax was probably at least neutral and maybe even a net positive.

Now, I want to come back to that idea.  I don't believe any more than I did then that CO2-driven global warming will be catastrophic.  In fact, I am more confident than ever that while CO2-induced warming is a reality, the sensitivity of temperatures to CO2 levels is relatively low.  But please, I am willing to fully support a carbon tax that offsets some other existing tax if only we will stop all this stupid crony useless green energy stuff.  At least with a carbon tax, the markets will reduce fossil fuel use in the most efficient ways possible.  As opposed to programs like this one that will reduce fossil fuel use not at all but will cost a lot of money.

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)

casselman-minwage

 

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.

minwage

 

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.

Gender Pay Gap a Myth

At first, the link I followed told me this story was from CBS.  I found it astonishing that a major news network would challenge a previously agreed on Obama Administration narrative, and sure enough I found that this was not actually from the people at CBS who are paid to write the news (they are too busy reprinting White House talking points) and is actually from one of their financial bloggers.

Never-the-less, it is a great post that gets at why every serious academic study tends to debunk the 77% gender pay gap myth.   All of it is good but the consistently most powerful point that I tend to use if I am only given time in an argument to make one point is this one:

Despite all of the above, unmarried women who've never had a child actually earn more than unmarried men, according to Nemko and data compiled from the Census Bureau.

Women business owners make less than half of what male business owners make, which, since they have no boss, means it's independent of discrimination. The reason for the disparity, according to a Rochester Institute of Technology study, is that money is the primary motivator for 76% of men versus only 29% of women. Women place a higher premium on shorter work weeks, proximity to home, fulfillment, autonomy, and safety, according to Nemko.

It's hard to argue with Nemko's position which, simply put, is this: When women make the same career choices as men, they earn the same amount as men.

One would think that this quote from Obama's own Department of Labor would be enough to kill this meme:

"This study leads to the unambiguous conclusion that the differences in the compensation of men and women are the result of a multitude of factors and that the raw wage gap should not be used as the basis to justify corrective action. Indeed, there may be nothing to correct. The differences in raw wages may be almost entirely the result of the individual choices being made by both male and female workers."

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.

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.

The Madness of Software Design: Designs that Require Customizing Browser Setting to Operate

We are looking at a number of third-party internet-based software solutions for a range of things from HR onboarding to safety and training management.  With minimum wages and other government-imposed employment costs rising, we are looking for ways to automate anything we can.

We have run into a useability issue on most of this software.  As a note, my employees tend to be 55 years old and older, and so many do not have a firm handle on computer skills.  So stuff needs to be simple and just work.  Unfortunately, no one seems to be willing or able to design a system that works with default browser settings.  In particular, everyone wants to design their software to require popups.  I have no idea why.  But time after time I put a system out for a subset of my employees to test and I immediately get 19 people calling me back saying that it does not work, they can't get in, etc.  The typical problem is that most of this software seems to require that the browsers popup blocker be turned off.  Why in the world would you design software for a feature that 99% of browsers today have turned off by default?  And worse, that require users to change a setting that only exists deep in setup menus most users don't even know exist.  I am pretty capable and it took me some poking around to find the popup options in Chrome.

This makes me totally crazy.  I had a long talk today with my onboarding company trying to explain why getting rid of an hour of HR time with their software at the cost of an extra hour of IT support time for each new employee trying to access the system does not save me any freaking money.  We received access to a training and safety system for free from our insurance company but it took so much of my personal time to get each employee able to successfully log into it that we abandoned it this year, despite it having a lot of good resources in it.  I will tell you guys that despite the world of these business solutions being apparently crowded, there is still room out there for someone who can program a front-end that reliably works with a variety of browsers and systems.

What Is It About California Shepherds?

I saw this by accident on the California FAQ on the state minimum wage.

1. Q. What is the minimum wage?
A. Effective January 1, 2008, the minimum wage in California is $8.00 per hour. It will increase to $9.00 per hour effective July 1, 2014, and to $10.00 per hour effective January 1, 2016.

For sheepherders, however, effective July 1, 2002, the minimum wage was set at $1,200.00 per month. On January 1, 2007, this wage increased to a minimum monthly salary of $1,333.20, and on January 1, 2008, it increased again to a minimum monthly salary of $1,422.52. Effective July 1, 2014, the minimum monthly salary for sheepherders will be $1600.34. Effective January 1, 2016, the minimum monthly salary for sheepherders will be $1777.98. Wages paid to sheepherders may not be offset by meals or lodging provided by the employer. Instead, there are provisions in IWC Order 14-2007, Sections 10(F), (G) and (H) that apply to sheepherders with respect to monthly meal and lodging benefits required to be provided by the employer.

 

What the hell?  The new minimum wage is absolutely appropriate to every industry in California except sheepherding?  It would be interesting to see the political process that led to this one narrow special rule.  The state Speaker of the House's brother-in-law is probably in the sheep business.

This kind of crap is frustrating as hell for me.  We have a labor model that is generally not even considered when politicians are setting labor law, and thus compliance causes us fits.  I would love special labor exemptions for my workers as well, but I don't have any pull in Sacramento.

Postscript:  While most folks think of the minimum wage as a restriction on employers, it is just as much a restriction on workers as well.  I am glad to see the California site acknowledge this:

3. Q. May an employee agree to work for less than the minimum wage?
A. No.

Government Contractors: Get Out of California

Apparently there is yet another executive order with far reaching consequences for government contractors, Executive Order 13673  (does it bother anyone else that we are up in the 13 thousands on these?  Did they start numbering at 1?)  Hans Bader has the details:

A July 31 executive order by President Obama will make it very costly for employers to challenge dubious allegations of wrongdoing against them, if they are government contractors (which employ a quarter of the American workforce). Executive Order 13,673 will allow trial lawyers to extort larger settlements from companies, and enable bureaucratic agencies to extract costly settlements over conduct that may have been perfectly legal. That’s the conclusion of The Wall Street Journal and prominent labor lawyer Eugene Scalia.

This “Fair Pay and Safe Workplaces” order allows government officials to cut off the contracts of contractors and subcontractors that do not “consistently adhere” to a wide array of complex labor, antidiscrimination, harassment, workplace-safety and disabilities-rights laws. Never mind that every large national business, no matter how conscientious, has at least one successful lawsuit against it under federal labor and employment laws, which is inevitable when a company has thousands of employees who can sue it in hundreds of different courts that often have differing interpretations of the law. The order also bans using perfectly legal arbitration agreements, overstepping the President’s legal authority.

I can say as someone who absolutely bends over backwards to be in compliance, it just is not possible to be totally clean.  We have won most all of the lawsuits and actions against us over the years vis a vis labor laws and related charges.  A lot of these are pro forma discrimination charges that some employees in protected groups file automatically when terminated, usually without any evidence of specific discrimination.  We have, to date, won all of these "was he a Hispanic that was terminated rather than he was terminated because he was Hispanic" suits.  We have only lost one case.  To give you an idea of how hard it can be to be 100% in compliance, let me describe it:

We had a government contract governed by the Service Contract Act, which sets out minimum wages to be paid for different types of jobs.  These wages typically are in two parts - a base wage and, if the company does not have benefits, a fringe payment in lieu of such benefits.  For example, it might say that a day laborer must be paid (I will use round numbers for simplicity) $12 an hour base wages plus $4 an hour for fringes.  So we paid the worker $16 and hour and felt ourselves in compliance.  

Then we had a Department of Labor audit.  The investigator insisted that the law required that we break these two payments into two lines on the paycheck.  So instead of having  a paycheck that said 40 hours times $16, it needed to say 40 hours times $12 and 40 hours times $4.  Thus we were found to be in violation and issued a huge fine.  I protested that the law said no such thing -- the law said I had to have a clear paper trail of what I paid people.  It did not say the labor and fringes had to be shown separately on the paycheck, nor did any DOL published regulation require this  (and of course I also pointed out that the intent of the law that someone get paid a minimum amount had been fulfilled).  

Apparently, the DOL had an internal handbook that suggested this as a correct practice, but this had never been tested in court nor embodied in a published regulation.  To impose the fine, my attorney said they had to take me to court.  I said go for it.  The DOL chose not to press the case, and we adjusted our paycheck practices to avoid the issue in the future.  I was happy to comply with this, as stupid as it was, but it was impossible to know it was an actual requirement until I got busted for violating this double-secret practice.  But there it is on my record - VIOLATION!

I will leave it to Bader's article to explore some of the implications of this order, but I want to add some unintended(?) consequences of my own:

  • Government contractors would be insane to operate in California (and perhaps other regulatory hell-holes, but I am familiar with California).  California has a myriad of arcane labor laws (like break laws and heat stress laws) that are difficult to comply with, combined with a legislature that shifts the laws every year to make it hard to keep up, combined with a regulatory and judicial culture that assumes businesses are guilty until proven innocent.  If state labor violations or suits lead to loss of business at the national level, why the hell would a contractor ever want to have employees in California?
  • I have a couple of smaller competitors who have sent employees into the parks we operate who then filed extensive, manufactured complaints to the government about our service, timed to make it difficult on us when we bid against them for the contract renewal.  How tempting will it be for companies to place employees in their rival who then file serial labor complaints to undermine that rival in future contract awards?
  • Companies that do government contracting as a sideline are going to be driven out of the business, reducing the choice and competition among contractors.   Earlier I discussed how 41 CFR 60-2.1  and 41 CFR 60-4.1, also the result of an Obama executive order, drove our company out of our last incidental contracting business (though we deal with the government all the time, it is generally through concession contracts where we get paid by the public, not by the government, so a lot of government contracting law does not apply to these contracts).

Why Private Companies May Stop Taking Incidental Government Contracts

Bruce McQuain has an article on how McDonald's is closing some contract-operated fast food outlets at military bases.  The article speculates that the closures on new government minimum wage regulations for government contracts.

Frankly, I doubt this explanation.  I know something of the world of government contracting, and contractors in these cases routinely just pass on wage increases to their customers in the form of higher prices.  After all, their contracts give them a monopoly of sorts in these bases.

I would like to offer an alternative explanation.

In March, a new regulation took effect that all contractors with anything larger than a $50,000 a year contract with the government must go through an expensive affirmative action planning process for ALL of their locations, not just for the people involved in that particular contract (41 CFR 60-2.1  and 41 CFR 60-4.1)

We don't do government contracting work.  We lease government facilities, but get paid 100% by customers -- since we don't take government money, we are not a contractor.  But there is one exception.  We have a $52,000 a year contract to clean bathrooms near the campgrounds we operate in California.  Basically, we bid this contract at cost because we want the bathrooms cleaned well -- if they are not, it hurts our nearby businesses.

In this contract, we have government-mandated wage requirements under the Service Contract Act.  When these mandated wages go up, we just raise the price to the government in proportion.  No big deal.

We were informed that having this contract, under the new March Obama regulations, now made us liable to go through an expensive and time consuming affirmative action planning process for every location -- of which we have over 120 -- not just for this one contract.  So this one contract was going to force us to create 120 annual written plans and presumably get them approved by someone in the government.  No way.  I might have done it if I only had to do a plan for the contract, but it is just too much work to do this everywhere merely because I have a $52,000 contract on which I make no profit.  So we told the Feds we were dropping the contract.

I think it is very unlikely that private businesses will be accepting government contracts as 5 or 10% of their business any more.   This new regulation just imposes too much cost on the other 95% of the business.  Many will drop the government contracts.

I wonder if this is what is really going on with McDonalds.  A regulatory requirement that applied just to the base operations, like a minimum wage, strikes me as manageable.  But having these three or four contracts drive an expensive requirement to create some sort of affirmative action plan for every location - essentially every one of their tens of thousands of stores, so tens of thousands of plans - that would drive them out of these contracts VERY fast.

Ideological Turing Tests, Climate, and Minimum Wage

Yesterday I was interviewed for a student radio show, I believe from the USC Annenberg school.  I have no quarrel with the staff I worked with, they were all friendly and intelligent.

What depressed me though, as I went through my usual bullet points describing the "lukewarmer" position that is increasingly common among skeptics, was that most of what I said seemed to be new to the interviewer.   It was amazing to see that someone presumably well-exposed to the climate debate would actually not have any real idea what one of the two positions really entailed (see here and here for what I outlined).  This gets me back to the notion I wrote about a while ago about people relying on their allies to tell them everything they need to know about their opponent's position, without ever actually listening to the opponents.

This topic comes up in the blogosphere from time to time, often framed as being able to pass an ideological Touring test.  Can, say, a Republican write a defense of the minimum wage that a reader of the Daily Kos would accept, or will it just come out sounding like a straw man?  I feel like I could do it pretty well, despite being a libertarian opposed to the minimum wage.  For example:

There is a substantial power imbalance between minimum wage workers and employers, such that employers are able to pay such workers far less than their labor is worth, and far less than they would be willing to pay if they had to.  The minimum wage corrects this power imbalance and prevents employers from unfairly exploiting this power imbalance.  It forces employers to pay employees something closer to a living wage, though at $7.25 an hour the minimum wage is still too low to be humane and needs to be raised.  When companies pay below a living wage, they not only exploit workers but taxpayers as well, since they are accepting a form of corporate welfare when taxpayers (through food stamps and Medicare and the like) help sustain their underpaid workers.

Opponents of the minimum wage will sometimes argue that higher minimum wages reduce employment.  However, since in most cases employers of low-skilled workers are paying workers less than they are willing and able to pay, raising the minimum wage has little effect on employment.  Studies of the fast food industry by Card and Walker demonstrated that raising the minimum wage had little effect on employment levels.  And any loss of employment from higher minimum wages would be more than offset by the Keynesian stimulative effect to the economy as a whole of increasing wages among lower income workers, who tend to consume nearly 100% of incremental income.

Despite the fact that I disagree with this position, I feel I understand it pretty well -- far better, I would say, than most global warming alarmists or even media members bother to try to understand the skeptic position.  (I must say that looking back over my argument, it strikes me as more cogent and persuasive than most of the stuff on Daily Kos, so to pass a true Turing test I might have to make it a bit more incoherent).

Back in my consulting days at McKinsey & Company, we had this tradition (in hindsight I would call it almost an affectation) of giving interviewees business cases** to discuss and solve in our job interviews.  If I were running a news outlet, I would require interviewees to take an ideological Touring test - take an issue and give me the argument for each side in the way that each side would present it.

This, by the way, is probably why Paul Krugman is my least favorite person in journalism.  He knows very well that his opponents have a fairly thoughtful and (to them) well intention-ed argument but pretends to his readers that no such position exists.  Which is ironic because in some sense Krugman started the dialog on ideological Turing tests, arguing that liberals can do it easily for conservative positions but conservatives fail at it for liberal positions.

 

** Want an example?  Many of these cases were just strategic choices in some of our consulting work.  But some were more generic, meant to test how one might break down and attack a problem.  One I used from time to time was, "what is the size of the window glass market in Mexico?"  Most applicants were ready for this kind of BS, but I do treasure the look on a few faces of students who had not been warned about such questions.  The point of course was to think it through out loud, ie "well there are different sectors, like buildings and autos.  Each would have both a new and replacement market. Within buildings there is residential and commercial.  Taking one of these, the new residential market would be driven by new home construction times some factor representing windows per house.  One might need to understand if Mexican houses used pre-manufactured windows or constructed them from components on the building site."  etc. etc.

Unionizing NCAA Players: A Simple Question in a Free Society, But A Total Mess In Ours

This week, the NLRB agreed to allow the players on the Northwestern University football team to unionize.   This is one of those issues that is simple and straightforward in a free society and a total mess in our less-than-free society.  Here are a few thoughts:

  1. In a free society, this is a no-brainer.  The Northwestern players are welcome to create an association among themselves and call it anything they like, including "union".  That association is free to try to negotiate with the university for better terms  (they are also free to fail at this and make no progress).
  2. However, it is clear that we are not a free society because the players had to go to the government and ask permission to form this particular type of association.  The reason is that associations called "unions" have been granted special powers and privileges under the law not available to other associations.  There are also a large body of very particular rules for how such associations may conduct business and how other groups (in this case the University) can or cannot interact with it.  It is a very tricky legal and philosophical question whether this package of benefits and privileges should be accorded to a group of college football players
  3. In a free society, the fact that the players don't get paid cash and that their universities make millions off the football program would be irrelevant.  The players freely agreed to the deal (in most cases, playing in exchange for free tuition and perhaps a chance to land an NFL job) so there is nothing inherently unfair about it.
  4. However, in our society, we have all sorts of government interventions.  I consider many of these interventions to be counter-productive, even occasionally insane.  But if one is to navigate such a society (rather than, say, go off and live in Galt's Gulch), I think the principle of equal protection is critical.  Arbitrary government interventions in free exchange are FAR worse when applied unevenly.  From an equal protection standpoint, I think the players may have a good case.
    • The law generally does not allow profit-making businesses (and the NCAA and college footfall are certainly those) to accept unpaid labor.  Many folks who don't deal with the Fair Labor Standards Act every day will say: "players are paid, they get free tuition."  But this is not how the FLSA works.  It counts non-cash wages only in very specific circumstances that are enumerated in the law (e.g. lodging).  Think of it this way -- McDonald's could not legally just pay all its employees in french fries and claim to be compliant with the law.  Also, large numbers of Division 1 football and basketball players never graduate, which shows a fair amount of contempt by players for this supposedly valuable "free tuition" compensation.
    • On the other hand, most college athletics are not profit-making.  My son plays baseball at Amherst College -- it would be laughable to call this a profit center.  I am not sure there are but a handful of women's teams in any sport that generate profits for their school, and even on the men's side money-making is limited to a few score men's football and basketball teams.   But the few that do make money make a LOT.  University of Texas has its own TV network, as do most major conferences.
    • The law generally does not allow any group of enterprises to enter into agreements that restrict employment options.  Google et. al. are getting flamed right now, and likely face criminal anti-trust charges and lawsuits, for agreements to restrict hiring employees from each other's firms.  The NCAA cuts such deals all the time, both severely restricting moves between schools (transfer provisions in Division I are quite onerous) and preventing poaching at least of younger players by professional leagues like the NBA and NFL.   The notion that top players in the NCAA are playing for their education is a joke -- they are playing in college because that is what they have to do in order to eventually be allowed in a league where they can get paid for their skills.
    • Actually trying to pay players would be a real mess.  In a free society, one might just pay the ones who play the most profitable sports and contribute the most value.   But with Title IX, for example, that is impossible.  Paying only the most financially valuable players and teams would lead to 99% of the pay going to men, which would lead to Title IX gender discrimination suits before the first paycheck was even delivered.  And 99% of college athletes probably don't even want to be paid
    • Part of the pay problem is that the NCAA is so moronic in its rules.  Even if the university does not pay players, many outsider would if allowed.  Boosters love to pay football and basketball players under the table in cash and cars and such, and top athletes could easily get endorsement money or paid for autographs by third parties.  But NCAA rules are so strict that athletes can be in violation of the rules for accepting a free plane ticket from a friend to go to his mother's funeral.  When I interview students for Princeton admissions, I never buy them even a coffee in case they are a recruited athlete, because doing so would violate the rules.
    • Much of this is based on an outdated fetish for amateurism, that somehow money taints athletic achievement.  It is hilarious to see good progressive college presidents spout this kind of thing, because in fact this notion of amateurism was actually an aristocratic invention to keep the commoners out of sports (since commoners would not have the means to dedicate much of their life to training without a source of income).  The amateur ideal is actually an exclusionist aristocratic tool that has for some reason now been adopted as a progressive ideal.   Note that nowhere else in college do we require that students not earn money with their skills -- business majors can make money in business over the summer, artists can sell their art, musicians can be paid to perform.  When Brooke Shields was at Princeton, she appeared in the school amateur play despite making millions simultaneously as a professional actress.  Only athletes can't trade their skill for money in their free time.

I am not sure where this is all going, but as a minimum I think the NCAA is going to be forced to allow athletes to earn outside income and accept outside benefits without losing their eligibility.

Back in 2011 I wrote an article in Forbes on this topic

The Regulation Singularity

Yesterday, I came home exhausted.  I have been working late nearly every night for weeks, at a time of year when most of my business is not even open yet (the business is seasonal).  I realized to my immense depression that I have been spending all my time on regulatory compliance.  I have not been pitching new clients or bidding on new prospects or making investments or improving our customer service processes -- though I have ideas for all of these.  I have been 100% dedicated through 14 hour days to just trying to keep up with and adapt to changing government rules.

Break rules, changing minimum wages, heat stress plans, mandatory sexual harassment training, OSHA reporting, EEO reporting, Census reporting, and most recently changing rules on salaried workers that Obama just waived his wand and imposed -- this is what has been consuming me.  I have been trying to roll out a new safety program to the field and can't do it because I keep having to train for one of these new requirements (one learns there is only a limited number of things one can simultaneously roll out to front-line staff).

At some point regulation will accrete so fast that it will be impossible to keep up.  I am going to call that the Regulation Singularity, and for businesses my size, we are fast approaching it.

Prominent libertarian think tanks often rank state business climate by their tax regimes.  I am all for low, sensibly-structured taxes.  But for most of my time, taxes are irrelevant.  We are shutting down businesses left and right in California and it has zero to do with taxes.

Conflict of Interest

By the way, there is a reason for this choice (from an article on why unions are worried about the PPACA)

The second problem is that the 40 percent excise tax on especially expensive plans — the so-called Cadillac tax — is going to hit union plans especially hard. Unlike most people negotiating compensation, union negotiators make an explicit trade-off between wages and other benefits, and the benefit that they seem most attached to is generous health plans. Union plans are made more expensive still because union membership is heavily skewed toward older workers. They are thus very likely to get hit by the Cadillac tax, which takes effect in 2018.

The preference for health benefits over cash compensation makes some sense for tax reasons (as it shifts taxable income to nontaxable income).  And at some level it is typical of union thinking, which is often driven by seniority and by benefits for older workers over younger workers.  But there is another reason for this that is almost never stated -- the unions themselves run many of these health plans.  And because it is priced as a monopoly, the unions often earn monopoly rents on these plans, and use management of large health plans to justify much higher compensation levels for union leaders.  In Wisconsin, ending public union strangleholds on health plan management immediately saved the state and various local school districts millions of dollars when they were allowed to competitively bid these functions for the first time.

Speaking of Crazy Labor Laws

Business gets held liable for the unpaid wages of the previous tenant of the building they are using.

An employer that acquired the assets of a defunct bar and restaurant and continued to operate a restaurant on the same premises was liable for unpaid wages owed to the defunct restaurant’s former employees, the Oregon Supreme Court has ruled. Blachana LLC v. Bureau of Labor and Industries, No. S060789 (Ore. Jan. 16, 2014).

Reversing the Oregon Court of Appeals, the Court found that the Bureau of Labor and Industries (BOLI) did not err in deciding the employer was a successor for state wage liability purposes because it conducted “essentially the same business as conducted by the predecessor,” even though it did not employ any of the predecessor’s employees.

Another Possible Reason for Obama's Minimum Wage Push

Obama's minimum wage push could be an honest attempt to reduce poverty, but since only a trivial percentage of the American work force earns the minimum wage, and most of those are in starter jobs rather than trying to support a family, it does not make a lot of sense.

On the other hand, it could be another cynical payoff to unions that form the backbone of Obama's political support

Organized labor's instantaneous support for President Obama's recent proposal to hike the minimum wage doesn't make much sense at first glance. The average private-sector union member—at least one who still has a job—earns $22 an hour according to the Bureau of Labor Statistics. That's a far cry from the current $7.25 per hour federal minimum wage, or the $9 per hour the president has proposed. Altruistic solidarity with lower-paid workers isn't the reason for organized labor's cheerleading, either.

The real reason is that some unions and their members directly benefit from minimum wage increases—even when nary a union member actually makes the minimum wage.

The Center for Union Facts analyzed collective-bargaining agreements obtained from the Department of Labor's Office of Labor-Management Standards. The data indicate that a number of unions in the service, retail and hospitality industries peg their base-line wages to the minimum wage.

The Labor Department's collective-bargaining agreements file has a limited number of contracts available, so we were unable to determine how widespread the practice is. But the United Food and Commercial Workers International Union says that pegging its wages to the federal minimum is commonplace. On its website, the UFCW notes that "oftentimes, union contracts are triggered to implement wage hikes in the case of minimum wage increases." Such increases, the UFCW says, are "one of the many advantages of being a union member."

The labor contracts that we examined used a variety of methods to trigger the increases. The two most popular formulas were setting baseline union wages as a percentage above the state or federal minimum wage or mandating a flat wage premium above the minimum wage.

Our Business's Response to California $2 Minimum Wage Increase

Well, we have completed our response to minimum wage increases in California.   As a review, California is raising its minimum wage from $8 to $10 (or 25%)  in two steps starting this July 1.  I will confess that in some of these cases the causes are complex, and are not just due to minimum wage changes but also other creeping California regulatory issues (particularly the first two).

  • Suspended operation and closed on large campground in Ventura County that employed about 25 people
  • Suspended investment / expansion plans at two other campgrounds
  • Raised prices everywhere else, on average adding $3 to a $20 camping fee.   (this is inevitable when wages are increased 25% in a business where more than half the costs are tied to wages and margins are around 5%)

The only reason I take the time to write this is that I think this tends to demonstrate that 1) minimum wage increases can have a real economic impact and 2) just looking at job losses after the date the wage takes effect can miss most of this economic impact.

To this latter point, a lot of the impact is not necessarily job losses.  We see lost investment, which perhaps means fewer jobs in the future but there is no way to measure that.  We see price increases, which affects consumers and disposable income.  And we see some job losses, but note that the job losses were 6 months before the law goes into effect.

We are left with a certainty that the minimum wage had a real economic effect but a suspicion that, at least in this case, that effect would not be measured.

By the way, there may also be a lesson here for those who believe that the entire problem in the economy is one of not enough aggregate demand.  In the last month I walked away from a million dollars a year of demand, because it was impossible to serve profitably, in large part due to regulatory issues.

Minimum Wage and Teen Unemployment

The other day, when criticizing an incredibly facile minimum wage analysis in the Arizona Republic, I had meant to observe that since minimum wage jobs are such a tiny (1.5% if include jobs that work for tips) portion of the workforce, one should look at more targeted metrics to assess the effect of minimum wage hikes, such as teen employment.

Kevin Erdmann has such an analysis.  He observes, "Is there any other issue where the data conforms so strongly to basic economic intuition, and yet is widely written off as a coincidence?"

Note that there is still some danger, as I wrote before, in measuring employment effects from the implementation date. Businesses plan ahead an many job losses may be occurring between the announcement and the implementation date.  I know we have made all the job cuts we plan to make in response to California minimum wage increases six months ahead of the actual date the wage takes effect.

Update:  The charts are obviously far from a smoking gun.  That is the nature of economic analysis.  In complex and chaotic multi-multi-variable systems, controlled studies are almost impossible and direct correlations are hard to find, and even when found may be coincidence.  As an employer who hires a lot of summer seasonal employees in parks, I would obviously be a natural employer of teens.  But I no longer do so, and it is important to understand that wages are only a part of the equation.  Another major issue is one of liability.  Increasingly, the legal system makes the employer liable for any action of their employees, no matter how boneheaded or how much the action is against all policy and training.   I have enough trouble with employees that have years of good work history -- I am not really excited about taking a chance on an unproven 17-year-old.

This Just In -- Demand Curves Slope Down

Apparently when prices for things are arbitrarily doubled, the demand for them goes down.  Via the New York Times:

On Monday, about 175 employees of the buffet restaurant in the slot-machine and electronic gambling casino in Ozone Park learned that the restaurant had been closed and that their jobs no longer existed. The casino had received plaudits when, in late October, a labor arbitrator issued a ruling that doubled the average pay of workers.

...

“Everything is done,” said Mariano Cano, 45, a server at the buffet for the past two years. “They just threw us out like dogs. They just gave us a couple of dollars to shut up, and that’s it.”

In October, Mr. Cano’s pay went from just over $5 an hour, plus tips for the drinks he delivered to the tables and dishes he cleared, to around $12, because of the living wage agreement.

This is one of those regulatory overreach paired with corporate cronyism stories, so I won't express any sympathy for the business involved -- it is earning huge rents from insider political deals it cut, and though the NYT does not explain it very well, my sense is that the arbitration requirement on wages was part of that political deal.

But it is amazing to me how much the Left has simply hypnotized itself into believing that minimum wage increases don't affect employment.  If we go back a number of months and look at the article where the NYT announced the arbitration decision, there is not one single mention that there might be some job security issues with forcing a doubling of wages.

Jeannine Nixon looked as if she had hit the jackpot. Ms. Nixon, a customer relations representative at Resorts World Casino in Queens, had just learned that she would be making $40,000 a year, up from $22,300.

“It’s life-changing,” Ms. Nixon, her voice cracking, said on Thursday. “I can finally feel relieved.”

It is amazing to me that it did not even occur to any at the NYT to think that a doubling of worker pay might be anything but a pure bonanza.  I suppose they were blinded by a sense that casino margins were so high (though I find that the public consistently overestimates margins of many businesses, confusing revenues with profits).  Even if the casino is wildly profitable, one had to consider that all activities in the casino were not equally profitable.   Restaurants often have thin margins and 20-30% labor costs.  There is simply no room for doubling them in a business that typically has single digit margins at best (in fact, most restaurants lose money).

There are a number of reasons why people can fool themselves into thinking that minimum wage increases have no effect on employment

  1. The biggest reason is that only about 3% of American workers earn the minimum wage.  So even a large drop in minimum wage job prospects, say by 10%, might only affect total US employment by a few tenths of a percent, a number that might not be seen in the general economic noise.
  2. Minimum wage increases are typically implemented in small steps and announced well in advance.  Looking at employment the day after vs. the day before the actual date of change likely misses most of the effect.  For example, California announced almost a year in advance that minimum wages were going up by 25% in July of 2014.  Our company closed one operation and made substantial reductions in our work force in response, but we made these changes in December 2013, months before the change actually took effect.

Which makes this article in the Arizona Republic by Ronald Hansen one of the worst, most facile bits of economic analysis I have ever seen.

But, at the most basic level, there is good reason to think the minimum wage doesn’t kill jobs.

The minimum wage has gone up 22 times since it was instituted in 1938. There is complete seasonally adjusted data from the U.S. Bureau of Labor Statistics available for 21 of those hikes.

In 15 of those 21 cases, the U.S. economy added jobs in the year after the minimum wage went up.

On 11 occasions, it added more jobs after the hike than it did in the year before the raise went into effect.

This alone suggests that raising the minimum wage isn’t an automatic drag on employment growth.

This is simply absurd for all the reasons I listed above.   I understand how I might find this kind of "analysis" in the comments section of the Daily Kos, but how does one get this past an editor?

This Minimum Wage Conversation is Not a Hypothetical -- I Have It All The Time

Don Boudreax writes:

Here’s a project for all unemployed young people – say, ages 18 through 21 – in America today.  Go to a nearby supermarket or restaurant or lawn-care company or pet store and ask for a job at the minimum wage.  If you are denied, offer to work for $4.00 per hour.  The owner or manager will almost surely decline, saying that it’s against the law.

“Would you like to hire me at $4.00?” you ask.

“Well yes I would” is the answer you’re likely to get in reply.

“So, hire me at that wage.  I’m an adult, I’m sober, and I have no mental issues.  I’m willing to work for $4.00 per hour.”

“You don’t get it, kid.  I can’t hire you at that wage.  I’ll get fined, or worse.  Go away.”

“Ok, I’ll leave.  But no one – including you – will hire me at $7.25 per hour.  What am I supposed to do?”

“Look kid.  That’s your problem.  I’m sorry.  I don’t make the laws, but I gotta follow them.  Go away now.”

I know that this is a realistic scenario because I have this conversation with employees all the time.  Except in my case, applicants are generally not 18 years old but 70 years old.

A bit of background:  My company operates campground and other recreation areas mainly using retired people who live on-site in their own RV's.  Few of my 400+ employees are under 65 and several are over 90.

There are several reasons this conversation occurs:

  • As my employees get older, and perhaps sicker with various disabilities, their work slows down to the point that it falls under our productivity expectations.  Employees may come to me saying they want to stay busy but they know they don't work very fast but they would be happy to work for $5 or $4 an hour if they could just keep this job they love.  (There is a Federal law that allows waiving of minimum wages for disability situations.  We tried it -- once.  The paperwork was daunting and the approval came 7 months after the application -- 2 months after the seasonal employee had already gone home for the year).
  • Many people like to stay busy but face wage caps where they begin to lose their Social Security.  They want to keep their total income under the wage cap.  We try to create some jobs that require fewer hours so they can get their wages down that way, but in many cases we have a limited number of on-site living spots and a fixed amount of work such that each person occupying a living spot must do a certain amount of work to make sure it all gets done.  So at some point we can't give them fewer hours, and then they will ask for lower pay.

I frequently have to tell people I simply cannot pay them less.  They ask if they can sign a paper saying they want to be paid less, and I tell them something like "no, the law assumes you are a gullible rube and that I am evil and infinitely powerful so that if you sign a paper, it just means I forced you to do it."  Which is all true, that is exactly the logic of the law.

People look at me funny sometimes when I say the minimum wage law limits employee rights by putting a floor on what they may charge for their labor.  This is an odd way of putting it for them, because minimum wage laws are generally explained in the oppressor-oppressed model, but it makes perfect sense from my experience.

Understanding "Mix": Is Flattening in Income Growth Due in Part to Geographic Cost of Living Differences and Migration Within the US?

For 20 years, before I liberated myself from corporate America, I spent a hell of a lot of time doing business and market analysis (e.g. why are profits declining in Division X).  I was pretty good at it.  If I had to boil down everything I learned in those years to one lesson, it would be this:  Pay attention to changes in the mix.

What do I mean by "changes in the mix"?  Here is an example.  A company has two products.  One has a 20% margin, and the other has a 30% margin, and both margins have been improving over time because of a series of cost reduction investments.  But overall, company margins are falling.  The likely reason:  the mix is shifting.  The company is selling a higher proportion of the lower margin product.

Here is a real world example:  When I was at AlliedSignal (now Honeywell) aviation, they had exactly this problem.  They were operating in a razor and blades business -- ie they practically gave the new parts away to Boeing and Airbus to put on their planes, because they made all their money selling aftermarket replacements at a premium (at the time, government rules made it almost impossible to buy anything but the original manufacturer's part, so they could charge almost anything for a replacement, especially given that an airline likely had a $50 million plane sitting dormant until the part was replaced).  I routinely would tell managers in the company that essentially our business made money from unreliability -- the less reliable our parts, the more money we made.  Because newer technology, competition, and pressure form airlines was forcing us to greatly improve our reliability (at the same time we were giving stuff to Boeing at ever greater losses), all our newer products on newer planes were less profitable than the old stuff.  As planes aged and dropped out of the fleet, our product mix was getting less and less profitable.

This same effect can be seen in many economic and political issues.  Take for example an argument my mother-in-law and I had years and years ago.  She said that Texas (where I was living at the time) had crap schools that were much worse that those in Massachusetts, her argument for the blue political model.  She observed that average educational outcomes were much better in MA than TX (which was and still is true).  I observed on the other hand that this was in part a result of mix.  Texas had better outcomes than MA when one looked at Hispanics alone, and better outcomes for non-Hispanics alone, but got killed on the mix given that Hispanics typically have lower educational outcomes than non-Hispanics everywhere in the US, and Texas had far more Hispanics than MA.

All of this is a long introduction to some thinking I have been doing on all the "Average is Over" discussion talking about the flattening of growth in median wages.  I begin with this chart:

click to enlarge

 

There is a lot of interstate migration going on.  And much of it seems to be out of what I think of as higher cost states like CA, IL, and NY and into lower cost states like AZ, TX, FL, and NC.  One of the facts of life about the CPI and other inflation adjustments of income numbers is that the US essentially maintains one average CPI.  Further, median income numbers and poverty numbers tend to assume one single average cost of living number.  But everyone understands that the income required to maintain lifestyle X on the east side of Manhattan is very different than the income required to maintain lifestyle X in Dallas or Knoxville or Jackson, MS.

Could it be that even with a flat average median wage, that demographic shifts to lower cost-of-living states actually result in individuals being better off and living better?

For some items one buys, of course, there is no improvement by moving.  For example, my guess is that an iPhone with a monthly service plan costs about the same anywhere you go in the US.  But if you take something like housing, the differences can be enormous.

Let's compare San Francisco and Houston.  At first glance, San Francisco seems far wealthier.  The median income in San Francisco is $78,840 while the median income in Houston in $55,910.  Moving from a median wage job in San Francisco to a media wage job in Houston seems to represent a huge step down.  If you and a bunch of your friends made this move, the US median income number would drop.  It would look like people were worse off.

But something else happens when you take this nominal pay cut to move to Houston.  You also can suddenly afford a much nicer, larger house, even at the lower nominal pay.  In San Francisco, your admittedly higher nominal pay would only afford you the ability to buy only 14% of the homes on the market.  And the median home, which you could not afford, has only about 1000 square feet of space.  In Houston, on the other hand, your lower nominal pay would allow you to buy 56% of the homes.  And that median home, which you can now afford, will have on average 1858 square feet of space.

So while the national median income numbers dropped when you moved to Houston, you actually can afford a much nicer home with perhaps twice as much space.  Thus, it strikes me that there are important things happening in the mix that are not being taken into account when we say that the "average is over".

Of course, while this effect is certainly real, I have no idea how much it affects the overall numbers, ie is it a small effect or a large effect.  Fortunately my son is studying economics in college.  If he ever goes to grad school, I will add this to my list of research suggestions for him.

Postscript:  This exact same discussion could apply to US poverty statistics.  We have one poverty line income number whether you live in Manhattan or Tuscaloosa.  I have always wondered how much poverty statistics would change if you created some kind of purchasing power parity test rather than a fixed income test.