Tuesday, February 7, 2017

The $15/hour Minimum Wage - A Parable

Unintended consequences of public policy are often glossed over by the public and politicians alike. I can understand the sympathy for a minimum wage. Its proponents simply want all workers to enjoy a comfortable life. However, they rarely acknowledge the downsides of arbitrarily dictating the value of certain work in society. I thought I would attempt to show how raising the minimum wage can result in unemployment or foregone employment with a simple story. This example is not meant to argue that the unemployment rate in a country or state will necessarily go up when the minimum wage is increased. The economy is too complex and there are too many interacting forces working simultaneously to make such a bold claim. However, it should make the ardent supporters of a large increase in the minimum wage understand more fully its impacts on workers, businesses, and customers (i.e. society).

Eddy & Anne's Bake Shop
Eddy and Anne are bakers who met in school and co-own a small baked goods shop. They pride themselves on quality ingredients, hand-mixed batters, and friendly customer service. The shop is open Monday to Saturday from 8:00 am to 6:00 pm. Their staff consists of four bakers and one cashier. The bakers are knowledgeable and hard-working and earn $10 per hour for their efforts. Each baker is allotted one day off per week. The cashier is a young woman, Sally, who takes college classes at night while working 5 days a week at the bakery. Sally earns $8 per hour as the cashier. Eddy and Anne value her interaction with their customers and her positive attitude.
The owners have put up their own money and taken out loans to start the shop. They have chosen a modest annual salary of $50,000 per owner to support their respective families. The total labor costs, including the owners who work in the shop filling in for bakers and the cashier on their off days, amount to about $220,500 annually. The shop makes $364,000 in revenue in an average year and incurs expenses (rent, cost of ingredients, equipment) of $122,000 each year. This leaves a net profit of $21,500 at the end of most years. Eddy and Anne typically pay their staff a holiday bonus of $1,000 per employee. The other $16,500 of profit is stored away in the company bank account to insure against a down year in sales, increases in costs, and/or to invest in new equipment or ingredients.
The state where Eddy and Anne live and work has recently passed a minimum wage law requiring employers to pay $15 per hour to all full-time employees. Every worker at their shop must now be paid at least that amount, given their full-time status. This law alone will increase their labor costs by $67,770 and turn their net profit of $21,500 into a net loss of $46,650.
Eddy and Anne consider many options. They think about reducing their own salaries, but they are already taking modest salaries for entrepreneurs who have risked their own savings. Besides, even lowering their salaries to the new minimum wage would only cut the net loss to $24,700. They reconsider a crucial element of their business: hand-mixing. Customers seem to like the idea of hand-mixing and Eddy and Anne figure they may pay a premium price partly because of this practice. However, to keep their business afloat they reason they can invest in 4 stand mixers and layoff their least experienced baker. The don’t want to sacrifice any of their beloved staff, but the mixers will save time and increase the amount of work each baker can perform. The mixers cost $700 a piece for a total of $2,800, but that will be far offset by the salary of $37,650 that they save by laying-off one baker.
That one change would save the bakery about $35,000 but would still leave it with a net loss. Eddy and Anne think about raising prices, but their customers already pay a premium compared to grocery store baked goods. They worry that increasing prices by the amount they would need to break-even would drive away too much business. And they still would not be operating at their previous profit level.
Eddy and Anne decide that as much as they hate it, they should lay-off Sally as well. She makes the shop a better place, but the owners can’t reason paying nearly twice what they normally would for a cashier. Instead, they decide to split days working at the register and with the bakers. One week Eddy will work 2 days at the register and 3 days in the back with the bakers, then flip with Anne the next week and work 3 days at the register and 2 days in the back of the shop. This last change would reduce their labor costs to $212,950. That would be below the original, pre-minimum wage salaries of $220,480 by about $7,500.

The owners of the bake shop have had to sacrifice one element of operations they considered a competitive advantage over grocery stores. They also had to fire two beloved employees whom they also consider friends. Yet, with the layoffs and use of new equipment they anticipate being able to keep the shop open and operating at the same profit level as usual. The remaining bakers on staff will be $12,550 richer each year, but at the cost of two of their fellow employees’ old salaries. It will be a bittersweet reward for them. The shop will survive and the community will continue to enjoy its treats, but they may not know or understand the costs of the new minimum wage. 

Tuesday, November 8, 2016

WV Employment By Trade

West Virginia is not a state full of coal miners. Until policy leaders and legislators understand this fact, it is worth emphasizing. This is a fact; it is not open for interpretation. The Bureau of Labor Statistics can help quantify the state's workers by sector. At the end of the first quarter of 2016, there were 13,225 workers in WV employed in "Mining." Another 4,770 people were performing "support activities for mining." Combining the two sectors yields 17,995 workers employed directly by mining. That is 3.3% of the private workforce. That is less than 4%. Should the other 523,526 private sector workers in the state be beholden to policies set specifically for this small minority? That is a rhetorical question. The answer is "No."
Not only is coal mining not employing a large share of the private workforce, employment in the sector has been declining for years. You could blame federal policy and the Environmental Protection Agency (EPA) for that, or you could realize the impact of mechanized labor and competition in power generation by natural gas and renewable sources is making coal mining less labor intensive and less important, respectively.

I understand the deep nostalgia of the coal miner and its use as a symbol. But it is a tired and dated symbol in desperate need of retirement. We can do better than exalting minimum wage work with a direct risk of lung cancer.

Monday, October 3, 2016

Taxpayer Return for 2016

This is my late recap of Wallethub's 2016 taxpayer return on investment by state.

Source: WalletHub

There are some very interesting points that can be inferred by looking at this graph. It is striking how clear the political divide on taxes shows up when comparing states. Most states that have relatively low tax rates and worse government services are Republican. Directly opposite that, almost every state that has relatively high tax rates and better government services identifies as Democrat. The exceptions to this rule are: Florida (which is pretty evenly split politically speaking), and Wyoming and North Dakota which both have significant energy revenue to spend on services while being Republican dominated states. These combinations make sense and are understandable to the layman: higher taxes reduce incomes but result in better government services and the preference for higher income or good public services divides along well known political lines. However, West Virginia is one of six states in this graph that suggest its citizens are being taxed at relatively high rates AND receiving poorer public services. Its brothers in ignominy include: California, New Mexico, Arkansas, Delaware, and Alaska. Those are three blue states and three red states, so this is not a political divide - it is simply poor governance. On the opposite end of the spectrum, some citizens enjoy good government services and lower tax rates. Those states are also a mix of predominantly Republican and Democratic citizenry. New Hampshire ranks as the best mix of lower taxes and better services with South Dakota close behind them. Colorado and Virginia seem to do a good job of balancing tax rates and services as well.
Tax rates are easy to measure and rank. Public services are inherently more difficult to quantify and rank and Wallethub's methodology can surely be questioned. (Funnily, WV was ranked #1 in water quality in 2015 yet this year it was not in the top five best. I wonder if that had anything to do with the Freedom Industries spill a couple years ago.) But they do attempt to provide people with a broad indication of what their tax dollars do for their community. For example, Wallethub uses educational rankings as 20% of the total composition of this score. WV has the 16th highest spending rate on education but only the 45th best outcome on a broad measure of education indicators (dropout rates; reading & math scores; SAT & ACT scores; pupil-teacher ratio; school safety). So higher spending on education is not resulting in better educated kids. Hence, either spending does not result in better education outcomes or WV is spending money on things in the education budget that do not aid outcomes. To provide another contrast, Indiana has the fourth lowest spending rate on education and the 12th best ranking.

Source: WalletHub

It is also difficult to determine how much public spending can help economic outcomes. The economic data used for this ranking includes: the unemployment rate; median household income; the annual rate of job growth; the percentage of residents below the poverty line; and economic mobility. Most of these indicators can be good or bad based on preexisting conditions that cannot be altered by state government spending. State funds can create a lot of government jobs, but it cannot exactly spur private business development as politicians like to claim it can. Thus, a state with declining industries will dampen economic outcomes and leave the state with less tax revenue for reasons outside of the government's control.
Infrastructure, which accounts for 20% of the services rank, is the area where spending should most closely result in a better ranking. If you build a new bridge, presumably, you have a nice new and safe bridge. Hence, there is some connection between state spending and the quality of life in a given state. It is more difficult than assuming a one-to-one trade-off though. Higher spending at the state level is no guarantee of better life outcomes for its people.
If you are in one of the states that gets a low return for every tax dollar, and you live in a high tax rate state, there are a few things you can do. One obvious solution would be to move. This is not always possible for a long list of reasons, but given the opportunity it should be considered by more people. Another proactive step would be to vote down propositions to spend more money on education or infrastructure. Politicians may claim that they can spend their way into better outcomes, but if history shows this to be unsuccessful, the electorate should not be swayed by that argument. You could write to your state representatives to protest tax hikes as well. It is a taxpayer responsibility to not allow spending to grow unchecked. Citizens of WV (and Alaska, New Mexico, Arkansas, California and Delaware) should take some, or all, of the steps mentioned here.

Monday, August 29, 2016

Gross Domestic Product - 2016 First Quarter

The Bureau of Economic Analysis (BEA) releases an estimate of gross domestic product (the output of all goods and services) by individual states. For the first quarter (Q1) of 2016, the figures signaled bad news for WV - the annualized (scaled to one year) rate of growth was -2.5%. The economic output contracted from the final quarter of 2015. WV was the only state in Appalachia to suffer negative growth over the first three months of the year, although Kentucky featured a very low 0.4% growth rate that is basically stagnate. Other Midwest states featured negative GDP growth over the same period with Wyoming (-4.9%) and North Dakota (-11.4%) being the hardest hit. The dependence on mining natural resources is the common denominator in states with negative growth. As the BEA notes, "Mining declined 11.1 percent for the nation in the first quarter. The industry subtracted 1.82 percentage points from real GDP growth in Wyoming...and more than 2.0 percentage points from Alaska, North Dakota, and West Virginia, which declined 1.0 percent, 11.4 percent, and 2.8 percent, respectively."
A decline in the mining industry shrunk GDP in WV by more than 2.0% and the total decline for Q1 was 2.5%. Basically, the state's output shrank by the same amount that mining output declined. As bad as that sounds, North Dakota shows a bleaker boom-bust picture. The low price of oil over the last 18 months (at or below $60/barrel) has decreased the revenue from the Bakken Shale. Production in North Dakota has slowed slightly in response, dropping from an average of 34.23 million barrels per month in 2015 to 32.247 million barrels per month for Q1 2016. But mainly it was a drop in the price of oil at the start of 2016 that drove down oil revenue for North Dakota. The decline over in GDP over what mining directly contributed to North Dakota shows how much services are directed at supporting mining in that state.
Meanwhile, WV declined in line with the amount its mining sector declined. There was no "multiplier effect" that subtracted more economic activity due to decreased mining production and revenue. It was a 1-to-1 relationship. Wyoming also fared worse in terms of total economic activity. It is more closely related to WV in that both states are large coal producers. Both states had a decrease in coal production from 2014 to 2015, the decline in WV -14.7%. The production for WV for Q1 2016 was 19,260 short tons down from 27,239 short tons in Q1 2015. Consider that while coal production has been declining, the price of coal exports has remained flat or decreased since 2012. Lower production and less revenue for each unit of coal produced results in less tax revenue and fewer service industries in the state. The natural gas industry has undergone similar duress in WV due to over expansion in the Marcellus Shale, resulting in sustained low gas prices and less production.
With the Northeast, South, West Coast, and a few Midwest states featuring moderate to strong output growth, it is depressing to see negative growth in WV. It is true that output as measured by GDP is not the most important indicator for a healthy society. However, health and welfare are often tied to economic output (be that causation or simply correlation). For a state with a drug abuse problem and unemployment rate in the bottom 25% of the country, contracting economic output is a bad sign (duh, I know). Pundits can decry political opposition to natural resource extraction and blame policies for the decline of the mining sector. But to respond proactively and diversify industries will do more to boost economic output than arguing along boring, banal, stagnant political lines. "Diversifying" is easier said than done. And the mining industry has a large footprint that will not easily be filled by even a few industries. The service sector will always need industry to support it. Barbers, retailers, restaurants, doctors, and more, their work exists to serve the surrounding populace. Finding the next generation of "makers" is a problem for society to solve together. I know I don't have the answer, but drilling holes in the ground is increasingly not what will support the well-being of WV and Appalachia at large.

Tuesday, April 5, 2016

Economics of Discrimination

The late Gary Becker was one of the first economists to examine the economic motivations and consequences of discrimination. He published a book on the topic in 1957. Since then, many students and colleagues of Becker at the University of Chicago and elsewhere have continued to study the topic. There are many pieces to the discrimination puzzle to unpack, but given its current media focus, I thought it was worthwhile to archive some thoughts.
An important distinction in economics is that price discrimination is not always the same as outright bigot behavior. As John List and Uri Gneezy recognize in their 2013 book "The Why Axis," men pay about 20% more for identical car insurance than women. This is based on statistical data that women have fewer driving accidents. You can always call your insurance company and negotiate lower premium payments based on your safe driving history, but otherwise, the insurer will trust the data that says a client is more or less risky and charge him/her accordingly. Another instance of price discrimination is that senior citizens often enjoy lower priced tickets at the movie theater. This may be because they are underrepresented among moviegoers, so the theater does not lose much money, or because the theater makes most of its profits off of concession sales, or because it provides good public relations value to the theater. In both of these instances, people either would not complain about the price discrimination or they would not be successful in changing company practices.
The more opportunistic form of discrimination is harder to spot in markets. One example that List and Gneezy found in their research is quite ugly. They observed disabled men getting estimates for car repair work and compared their price quotes to those of able-bodied men getting the same work done on their cars. The study found, "On average, the disabled men received price quotes that were 30 percent higher than the able-bodied men." The authors go on to note that car mechanics likely tried to get more money out of the disabled because they realized how difficult it is for the handicapped to transport themselves. If vendors feel they have a "captive customer," (like a patron at a amusement park that wants a bottle of water) they will probably charge a higher than average price for goods and services.
But even opportunistic discrimination differs form outright bigotry. Its effects are no less important in market economies. Despite the intention of markets to be free and open to everyone regardless of age, race, gender, nationality, etc. vendors can consciously and unconsciously bias their habits along these dimensions. It can come in the form of poorer service to individuals outside of a merchant's approved social groups or lower job acceptance rates for people outside a hiring company's desired groups. The costs due to bigotry are hard to measure, but the benefits of diversity are documented in various studies. Ottaviano and Peri found that U.S. born citizens benefited economically by living in a city where the share of foreign born citizens was increasing. And Scott Page, a professor of complex systems, has found that bringing together people of diverse backgrounds in an organization increases the rate of problem solving due to the new perspectives it lends. This applies as much to merging workers of different races as it does to merging those who practice different areas of study. Often scientific discoveries occur when scientists from different fields cross into new areas and open up new perspectives on unsolved problems. Hence, the costs of discriminating in the workplace and marketplace can be large.
These findings do not include the possibility that local governments could legalize merchant discrimination against customers and potential employees. But given the research findings noted above, such developments would prove doubly harmful. Humans already have a natural predilection to identify and favor other similar humans. Making economic discrimination legal in the marketplace would only amplify its harmful effects. Much like the public denouncing trade with Mexico, where does discrimination end? Should West Virginians refuse to trade with Kentuckians? Should Kanawha County residents refuse to trade with Cabell County residents? Or should everyone refuse to trade with a person outside his/her household? Obviously by reducing the argument for trade discrimination to an absurd level the flawed logic becomes more obvious. The same type of illogical arguments populate bigotry discrimination in the broader economy. Ultimately, the current research shows that a more diverse society is a more prosperous society.

Wednesday, February 17, 2016

Effect of State Lotteries on Education

Wednesday, November 18, 2015

An Employment Snapshot - 2015

A quick look at some numbers from the Bureau of Labor Statistics can shed light on how the WV job market has been faring since the 2008 financial crisis. Since the first quarter of 2009 the labor force has been shrinking. It fell from nearly 820,000 to about 775,000 participants between 2009 and the start of 2015. That is a decline of approximately 5.5% (about 0.9% per year). However, that trend reversed course drastically in 2015, and there are close to 790,000 people working or looking for work. The bad news of that small uptrend is that there are many more people looking for work than those who have actually found jobs. Gross employment is still down since 2005. There are over 100,000 fewer workers in 2015 than there were in 2005.
In summary, there are more citizens looking for jobs in 2015 and fewer total jobs than in 2005. This can only mean one thing for the unemployment rate. It has risen. The unemployment rate had been on a steady decline since 2011 when the recovery seemed to begin reaching WV's job market. It steadily declined from 8.5% to 6% at the start of 2015. But with the recovery more job seekers are now entering the labor market. Unfortunately, the recovery has been slow and long. Thus, the unemployment rate is back around 7.5% in 2015.
The government, large national chains, health care organizations and natural resources are the main sources of state-wide employment. So the national economy can serve as a fairly good predictor of WV's employment fortunes. Higher environmental standards and lower commodity prices have spelled bad news for the coal and gas industries, so that source of employment will be less promising in the coming years. Government budgets have taken a hit since the financial crisis as lower tax revenues struggled to keep pace with expenditures. Some cuts have been made to state employee insurance policies; I imagine this is one way to protect against layoffs, which are rarely done in government. Stagnant pay and benefits in government and natural resources will hurt the service industry. But since most of the service industry consists of national brands, it will be somewhat immune to lower regional sales in WV. The health services industry will remain a steady source of employment, but for some unsettling reasons - mainly, an ageing and ailing populace.
Employment prospects are always dependent on the individual and his/her level of qualification as well as the demand for workers in a specific industry. But the overall picture for 2015 is this: slightly higher employment, much higher demand for work.