Author: David Kreutzer
Publication Date: November 2007
Topics: Minimum Wage
In a fantasy-football world, everyone is a billionaire and your team never needs to practice. In a fantasy-economics world, the disadvantaged and the poorly skilled can be made richer and happier with wage floors and employer mandates. Although fantasy football has no impact on real football, fantasy economics is often turned into legislation.
With fantasy economics, the minimum wage can be raised to any level as long as companies and CEOs are making money. Do you want a poor person to get a raise? If so, all that needs to be done is to point out that the employer is earning profits or that the CEO makes much more money. Then you enact a higher minimum wage. It’s a lot of fun.
Reality is not as much fun. One un-fun fact comes from a National Assessment of Adult Literacy report, issued this year. It shows that 22 percent of American adults are unable to do tasks as simple as determining the cost of soup and a salad from a menu. Of the adults with this skill deficit, 57 percent do not work at all, and only 14 percent work full-time and make over $500 per week.
In the real-economics world, it’s unsurprising that people who can’t figure out how much their lunch costs don’t get paid much. In the fantasy-economics world, it is simply unfair.
Think of an employee who generates $6.50 worth of output for each hour worked. No employer will pay this person over $6.50. Because reality economics is just as hard on employers as employees, mandating a wage in excess of $6.50 will put the worker out of work.
A real-world case illustrates why: The restaurant industry’s payroll costs are nearly nine times the size of its net profits. With no adjustment in its labor force, a 12 percent increase in payroll would wipe out all profit in this industry. (Note: Congress has already enacted a job-killing 40 percent hike in the minimum wage.)
Of course, when cost of labor goes up, firms cut jobs and hours. Stores and restaurants may simply close during those hours when the traffic no longer justifies the higher labor costs. Or they may hire fewer people for the same work – hotel rooms may not be cleaned as thoroughly or restaurant tables may not be cleared as quickly.
Companies may also try to raise prices to cover the higher costs. But consumers buy less at higher prices, so fewer workers are needed. Finally, businesses may stick us with work: IKEA made us the last person on the assembly line; McDonald’s got us to bus our own tables; Wal-Mart is turning us into our own cashiers.
And the most distressing part is that the least skilled lose their jobs first. This is sad, but true, as study after study confirms.
A Boston University study showed that low-skilled adults were crowded out of the labor market after the 1991 minimum-wage increase. A 2000 study by researchers at Cornell University and the University of Connecticut found that minimum-wage increases burden young adults without high school degrees and young African-American adults with the greatest job loss. This year, research from the University of California at Irvine shows that a 10 percent increase in the minimum wage reduces employment of high school dropouts by 8 percent and reduces employment of African-American teens by 8.4 percent.
The story is the same for mandated benefits. With proposals like the one in New Jersey calling for 10 weeks of paid sick leave, it’s worth restating that old question: Which costs more, a dollar’s worth of fringe benefits or a dollar’s worth of salary? In fantasy economics, fringe benefits come from a bottomless well of profits and never cost workers anything. In reality, a dollar’s worth of benefits and a dollar’s worth of wages each cost the employer a dollar.
Mandating time off with pay or forcing employers to pay for insurance coverage raises the cost of hiring a worker. Since these mandates do not increase the workers’ productivity, something has to give. Usually wages and jobs.
Harvard economists recently found an increase in health insurance costs leads firms to hire fewer workers, decrease hours worked and shift workers from full-time to part-time.
Economists at the University of Michigan and Harvard estimate that a health-insurance mandate for employers puts one-third of uninsured workers at risk for losing their jobs or being moved to part-time positions without insurance.
Pretending fantasy economics works may give activists and legislators warm and fuzzy feelings, but “warm and fuzzy” translates to “cold and hard” for those who see their jobs, wages and hours cut.