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Wednesday, November 15, 2006

Chance To Be Heard, and Hurt.

Jim Webb, the Senator Elect from Virginia has an editorial in Opinion Journal today entitled "Class Struggle American workers have a chance to be heard". In parenthesis he should have put and hurt.

First, there is at least one part of his editorial I agree with, CEO and other executive pays, and buy out plans have gotten a little crazy. The proposals floating around to have stockholders vote on pay, retirement and buyout packages that exceed certain levels isn't a bad idea. It would bring some accountability back to the boardroom.

On other topics though, Mr. Webb, and his Democratic counter parts have as much opportunity to hurt the average worker as they do to help. They need to tread carefully in the economic world, because what works as a soundbite at a union rally seldom translates into good policy.

US wage stagnation has more to do with the growing global economy than anything the Congress has done in the last 12 years, or 50 for that matter. The nostalgia for the 1950's and 60's, where the US supplied darn near everything to just about everyone is nice; but then so were poodle skirts and saddle shoes, and none of the above are coming back anytime soon.

Economic isolationism isn't an option today like it was forty years ago. Fortunately and unfortunately, we are a global economy. India, China, Viet Nam and Eastern Europe are all developing manufacturing bases that are behind the US on productivity, but have much lower wages and other costs.

Through the early to mid 1990's our productivity advantage was enough to keep most workers wages growing at a fairly healthy pace. However, as the productivity gap has closed, it's put pressure on US companies to reduce costs in other ways to remain price competitive.

That brings us to the Democratic agenda for the workers, all things that sound great at a news conference, but may well have very different results in the real world.

The minimum wage raise that has been promised (and will happen) won't be a huge hit globally to us. Most of the folks in those jobs are in the service sector, though the slight upward pressure on companies that contract cleaning and food service may cause some cut backs in those areas.

It will however, hurt a chunk of the people at, or just above the minimum wage. Most of those jobs are in lower margin industries, such as food service.

Two companies I have daily dealings with, Domino's Pizza and Starbucks both figure out hours based on a rolling cost calculator. During the day the manager can see where labor cost is figuring into the daily margin. When it gets too high a worker gets sent home to lower that cost. The natural result of raising the minimum wage then is less hours for the workers to keep the cost of labor the same.

For the folks just above minimum wage the result of the minimum wage raise, as seen by the left, is that it will cause upward pressure on those jobs pay. The truth is, again because of cost, that it will cause them to stagnate. Every time the minimum wage goes up the number earning it jumps, and stays there for a couple of years. That points to people who were earning at the new level being stuck there. The net effect is a downard pressure on wages, as more are currently earning slightly above the minimum wage than the minimum itself. They get stuck, and have a net downward move.

Easier unionizing also sounds like a great thing, too. Unions generally bring higher wages, and better benefits. But how does a company handle the cost increases? It's not "free money" that the workers get. One way is to raise prices to make up the difference, but that only works to a certain level, then the cost gets too high and consumers go somewhere else.

The other direction, as the UAW and United Steel Workers have found is that jobs go away to keep the labor cost in line with the competition. If you are in the bottom 10-15 percent of workers on the seniority ladder at your company, think hard about a vote to unionize, because that's the group that will go away to keep costs in line.

Finally, health care is another way the worker is going to be saved by the new congress. John Dingell's proposal for a 1.7% tax on you and 7% payroll tax on your employer to try and fix health care comes with a cost (obviously) but bigger to you than that 1.7%.

To keep company margins up that 7% has to be made up, and kept low. Since it's a payroll tax it encourages employers to pay workers less to reduce their tax burden. The two ways are either freezing wages or slowing their growth, or cutting payroll outright. Neither helps the average joe worker, in fact, it puts a bunch of them on the street, increasing the cost to taxpayers for health care, and putting upward pressure on that same tax.

The other pressure such a plan exerts is on those already giving a decent health care package to cut it back to save those costs. Since the feds want to pick up a portion of some costs, employers can (and will) look at that as a reason to cut back in whatever areas the government decides to regulate. The upside is a few extra folks might get to keep their jobs by that cost shifting, but with worse benefits.

Just a few thoughts on how helping the working man may well be hurting some of them too, and that Congress needs to obey the law of unintended consequences. It's one law they can't pass or reject, but just need to respect.

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Blogger shoprat said...

I just ate at Wendy's, and the young lady behind the Cash Register said she lost money with the rise in minimum wage. The owner of a local party store had to lay off two of his part-time employees. It did not work for Michigan.

7:50 PM  
Blogger Crazy Politico said...

I doesn't work anywhere. BLS, and various universities have documented that. However, you can't let facts interfere with politics, we all know that :)

9:44 PM  

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