Tag Archives: political economy

Minimum Wage

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…and costs to the consumer as well as the worker….

California is about to raise its minimum wage to $10/hr.  Washington (the state, not the capital, so far), has a current minimum wage of $9.19/hr, and that’s tied to inflation.

However, neither labor nor the wage paid for it occur in a vacuum.  Labor is required to produce the good or service being sold, and the wage paid the laborer—whether CxO or line worker—has a direct impact on the minimum price the producer must charge for that good or service in order to stay in business.

Labor costs amount to about 10% of the cost of a car sold to you at the dealership.  Not many cars are produced in California—or Washington—though, so minimum wage increases in these two states won’t impact the prices Californians or Washingtonians must pay for their cars.  Labor costs in the restaurant industry, though, run to 25%-30% of the cost of the meals sold, with the high end coming in sit-down restaurants, the low end in fast food restaurants.

Labor costs as a per cent of the cost of the the end product or service being sold vary widely across industries (vis., auto vs restaurant); I’m going to focus on the restaurant industry for illustration.

California’s rise in its minimum wage, a 25% increase over its existing $8/hr minimum, will have a commensurate impact on the cost of meals bought in these places.  In a sit-down restaurant, that increase in cost can amount to meal price increase of 7.5%.  Factoring in the impact on the business’ payroll taxes for Social Security and Medicare/Medicaid (and eliding the payroll tax that California charges), we get an additional labor cost increase through those taxes (7.65%) of 1.9%, for a total labor cost increase in the price of a meal of 9.4%.  That’s what consumers can look forward to in the inflation of their price for a relaxing dinner out.

Here’s where the tie to inflation comes in: Washington’s tying minimum wage increases to its inflation guarantees that that state’s inflation will be higher than it otherwise would: by that state’s labor cost impact on the prices of goods and services sold there.  This feeds back into its mandated inflation-driven rising minimum wage.  And the vicious circle is up and running.

Of course there are other ways California restaurants can deal with a 25% increase in labor costs.  In order to hold down the total cost of their labor force and thereby keep their meal price increase down to something more marketable, they can either eschew hiring the additional labor with whom they were considering expanding (and not expand), or they can lay off existing workers, or both.  Either way, the restaurants end up using fewer workers to do the same amount of, or more, work.

It’s important to note at this point that food service companies can function very well with low-skill—minimum wage—labor, while other industries (vis., auto assembly) need skilled labor, pay commensurately higher wages, and so are little impacted by minimum wage requirements.  It’s the low-skill, low-wage worker that’s hurt by minimum wage laws, yet it’s these guys who need to get that first job so they can start accruing the experience and training and skills necessary to get better jobs.  Or that need this second job so they can save a little, put a little by for their kids’ college, and so on.

Government-mandated minimum wage increases are job killers.  And they kill the jobs with the greatest marginal value for a nation’s economy and for the individual worker: the low-skilled worker on the cusp of having a job at all.

Be More Like Europe, Again

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Maybe this Obama meme isn’t so far off the mark, after all.  Here’s another example worth looking hard at.  The UK is privatizing its heretofore government-run Royal Mail service, selling a majority stake to the private market.

Royal Mail’s history dates back to 1516 when King Henry VIII ordered the creation of the first national post service.  In recent years, however, the company has battled with the rise of the Internet and email, leading to losses in five of the last 12 years and the loss of more than 50,000 jobs.  It now handles about 58 million letters and parcels per day, down from 84 million five years ago.

Business Secretary Vince Cable said the privatization would allow the Royal Mail to continue operating for six days a week, with a “one-price-goes-anywhere” service.

Does any of that sound familiar?

The UK isn’t alone in this, either.

Austria, Germany, and the Netherlands have all privatized their postal services in part or fully.  In June, Belgium’s postal service Bpost raised €2.9 billion ($3.7 billion) in an IPO.  By contrast, the US Postal Service is still government-owned.

And the USPS still is losing money hand over fist.

Be More Like Europe

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Maybe we should, at least in one area.

The Strasbourg-based European Parliament passed an amendment to limit the amount of transport fuel, such as gasoline and diesel, that can be obtained from food and energy crops to 6% of total energy consumed for transport by 2020, from 10% previously. … The new limit is meant to ease concerns about the amount of agricultural land that is turned over to growing crops for biofuel use….

There shouldn’t be any requirement, but this is certainly a step in the right direction.

Corinne Lepage, the lawmaker driving the legislation [says] “Taking indirect land-use change into account is important for the integrity of the EU climate-change policy.”

Because, among other concerns, “food prices could rise if crops are diverted from the dinner plate to the fuel tank.”  Our…environmentalists…need to understand this.  It diverts, here in the US, actual food crops—like corn—from the mouths of our poor to the gas tanks of “environmentalists'” cars.  And it jacks up the costs of food crops that substitute for corn.  And it jacks up the price of food that eats corn—like cows, pigs, and chickens.

Be like Europe.  At least in this.

The Recovery that Isn’t

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In a recent piece in The Wall Street Journal about post-Panic borrowing increases, James Sterngold and Matt Wirz had an interesting graphic showing the evolution of the US economy from just prior to that Panic to today.  Excerpted below is the part of that graphic indicating the jobs market evolution.

The graph is hard to read; here are some highlights:

  • More than 21 million Americans wanting a job at the 2010 peak, over 18 million still in that strait today.
  • Just under 16 million Americans out of work for at least 27 weeks (over 6 months), still nearly 12 million in that strait today.
  • Dropping out of the market due to discouragement in finding work—of any sort—peaking at over 1 million per year and still nearly that today.
  • Labor force participation rate near a 35 year low.

And there’s this, which takes a longer look at that last bullet:

Notice that bit on the right: after the Panic’s official end, participation rate continued to plummet.

As the WSJ points out,

If the participation rate merely returned to what it was at the end of the recession, nearly four million more Americans would be collecting a paycheck.

Had our recovery progressed as a normal one does, we’d be here:

A normal recovery coming out of a downturn as deep and steep as the Panic of 2009 typically sees growth rates of 5%-6% per year, or more.  This Obama recovery has been 6.7% over the entirety of his term in office—nearly five years.  Had we seen a normal recovery (and using a pessimistic 5%/year growth rate), we would have reached today’s unemployment rate after a bit over one year—late 2010—and we would have been back to full employment (in the range of 4.8%-5.5%) in just under 2 years—two years ago.

Had our recovery progressed as President Barack Obama promised it would when he was stumping for and signing the massive 2009 Stimulus Bill, we’d be here:

He promised in 2009 a 5.5% unemployment rate by a couple of years ago.  How many new jobs would have been created had we actually reached his promised number?  In December 2009 (some six months after the nominal end of the Panic of 2009), the civilian labor force was 153 million, of which 137.8 million Americans were employed, a 10% unemployment rate, according to BLS statistics, and using round numbers.

In August 2013, again using BLS numbers, the civilian labor force was larger, at 155.5 million (and it had a smaller participation rate than in 2009, but we’ll gloss over that for now).  There were some 144.2 million Americans actually employed.

However, a 5.5% unemployment rate corresponds, if my 1st grade arithmetic serves me well, to 94.5% of the civilian labor force actually employed: 146.5 million Americans.  Again consulting my 1st grade arithmetic book, there are some 2.3 million Americans that should be employed but aren’t—because Obama’s proudly proclaimed policies have come up short, and we aren’t anywhere near 5.5% unemployment.

Finally, there’s this:

Current population: 313.9 million
Current civilian labor force: 155.5 million
Current labor force participation rate: 63.2
Current unemployment rate: 7.3%
Employed Americans: 144.2 million
Unemployed Americans: 11.3 million of those looking for work

2007 population: 301.1 million
2007 civilian labor force (last full year before the Panic): 153.1 million
2007 labor force participation rate: 65.8%
2007 unemployment rate: 4.6%
2007 Employed Americans: 146 million
2007 unemployed Americans: 7.1 million

Over the last six years, our population grew by 4.3%; our labor force population grew less than that, at 1.6%; our employed population shrank by 1.2%; and our unemployed population grew, a lot.  We’re not even keeping up.

Yet despite these obvious failures of Progressive policies, Obama and his Senate counterparts threaten to shut down our government and blow up our national credit rating and with it our economy, if he’s not allowed to have more spending increases, yet higher taxes, and a yet higher debt ceiling so he can borrow to pay for his spending (because he knows higher taxes won’t cover it; he just wants the higher taxes because…well, just because).

Obamacare and Taxes

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Casey Mulligan has looked into this in a paper he has at the National Bureau of Economic Research titled “Average Marginal Labor Income Tax Rates under the Affordable Care Act“.  The full paper can be had through the NBER for five bucks.

Mulligan summarizes his paper here, on his blog supply and demand (in that order).

My summary of Mulligan’s summary is his comparison of Obamacare’s impact on our marginal tax rates with the impact of a couple of other programs and his comment on the impact of Obamacare on our take home pay—the part of our paychecks we actually get to use for our own purposes.

Several SNAP (formerly food stamp program) expansions in combination were a quarter of the ACA’s magnitude.  In terms of its impact on average marginal tax rates, the ACA hike is almost double the effect of permanently increasing unemployment benefit payments to 99 weeks from a baseline of 26 weeks[.]

And

[Obamacare] has not been introduced into a tax-free economy, so its marginal tax rate hikes add to marginal tax rates already in effect.  I estimate that, by 2015, the average marginal after-tax share among household heads and spouses with near-median weekly earnings will have fallen to 0.50 from 0.60 in 2007, largely from the ACA but also from other expansions in safety net programs.  That is a massive 17 percent reduction in the reward to working—akin to erasing a decade of labor productivity growth without the wealth effect….

That is to say, in just two short years—immediately on implementation of Obamacare—our median income wage earner will see his take home pay drop 17%, from 60% of his paycheck (already too small a portion) to a miniscule 50% of his paycheck.  As Mulligan notes, that is an enormous penalty to pay for the opportunity to work for one’s living.

Keep in mind, also, that the median weekly income in the US as recently as 2012 was the princely sum of $775.  This works out to a skosh over $40,000 per year.  It’s hard enough to feed, cloth, and educate a family on three-fifths of that.  Think about trying to do it on only half.