The Good Intentions Road Construction Company (Minimum Wage Edition)

I really hope this article isn’t true. The gist of the article is that as part of minimum wage hike executive order President Obama is about to sign, the President is including physically and mentally disabled workers in the hike of wages to $10.10 for all federal contractors. As the article states:

Under a government program that dates back to 1938, employers could pay certain disabled workers subminimum wages — sometimes for a fraction of the prevailing minimum wage.

But with Obama’s executive order, that practice will be discontinued with disabled workers laboring under federal contracts in the future.

“Under current law, workers whose productivity is affected because of their disabilities may be paid less than the wage paid to others doing the same job under certain specialized certificate programs,” according to a White House memo detailing the order. “Under this Executive Order, all individuals working under service or concessions contracts with the federal government will be covered by the same $10.10 per hour minimum wage protections.”

Some readers may think “Isn’t that a great thing for disabled workers? Those who work for federal contractors will now get paid not only the same as others, but 39% higher than the current minimum wage!” The problem is hinted at in the last paragraph of the article–which is of course phrased in a way to make it look like only greedy exploiters of the disabled disagree with this move:

Operators of sheltered workshops say that including 14(c) workers in Obama’s minimum wage hike would inevitably lead to many disabled people being pushed out of work.

My question is does anyone who has any economic background seriously think that this will result in anything other than most disabled people working for federal contracts losing their jobs? If they had say increased the minimum wage for disabled people only by the same 39% as the increase for other workers, it might not be so bad. But by making disabled workers just as expensive now as non-handicapped workers, you’ve increased their effective cost even more. With unemployment levels where they are now, if you’re going to be forced to pay everyone the same $10.10, what incentive do you have to get any but the best workers for the job? Especially when you’re being forced to pay wages higher than comparable non-federal jobs, thus attracting tons of job applicants from those fortunate enough not to suffer from physical or mental handicaps.

While for non-disabled workers, you might be able to make a case that somehow minimum wage increases won’t lead to unemployment, I don’t think any economist with any shred of intellectual honesty could think that this won’t lead to huge dis-employment effects for one of the most vulnerable groups in society.

I know the president means well. He’s never shown himself to have any sort of clue about economics, but I don’t doubt his good intentions. It’s just unfortunate that so many disabled people, who already have a tough enough life as it is, are likely going to lose their livelihoods just so the president can feel good about himself, and score political points with his fellow economic illiterates in his base.

The one saving grace of this travesty is that private companies that don’t work on federal contracts aren’t currently effected by this executive order. I sincerely hope for the sakes of the disabled, that those companies who do go out of their way to provide disabled workers a job can soak up the jobs that are going to be lost due to this misguided executive order.

[Update: 7:30pm]

In addition to the likely severe dis-employment effect we’re likely to see for workers with disabilities, I wouldn’t be surprised if we saw some of the following moves in the near future:

  1. An increased equal opportunity crack-down by the government on firms that reduce the fraction of their labor provided by workers with disabilities.
  2. Executive orders mandating quotas (or increasing quotas) for the percentage of disabled workers federal contractors have to employ.
  3. Subsidies (or increased subsidies) for companies that employ more disabled workers.

None of this should be too surprising. Government price controls like this almost always lead to more and more interventions to paper over the mistake made by the first intervention.

11 Comments

Filed under Economics

11 Responses to The Good Intentions Road Construction Company (Minimum Wage Edition)

  1. George Turner

    Why should the administration expect any kind of disemployment effect when we pay a mentally challenged person $230,000 a year to be Vice President?

  2. Bob Steinke

    You are right that the minimum wage has side effects, but I would be curious about how you feel about the underlying philosophy that anyone who works full time deserves a living wage, and if you agree with that what would you do instead?

  3. Jonathan Goff

    Hey Bob, welcome to my new blog!

    In answer to your question, I don’t think I agree with the underlying philosophy that “anyone who works full time deserves a living wage”. I think it depends entirely on the value of the work they’re performing and the cost of alternate ways of getting that job done (other employees, robots, etc). I think that if I knew someone who was working hard but not able to support themselves, I’d privately and voluntarily do what I could to help them. But I don’t think we should use price controls on labor just because in some cases people don’t make enough on one 40hr/wk job to support themselves. Don’t get me wrong, I like programs (especially privately-run, voluntarily funded ones) that help people gain the skills to climb out of poverty. I don’t like the idea of people who have insufficient to meet their needs. I just don’t think that creating distortions in the labor market is the best way of solving the underlying problem of poverty–in fact I think that on net minimum wages increase the prevalence of poverty.

    ~Jon

  4. born01930

    Besides, who decides what is a “living wage”? Its vastly different comparing NYC to Mayberry. I hate the idea of the “company store” type wages but what has happened now is it is better to be on the dole than work.

    An interesting and relevant view:

    http://youtu.be/NxBzKkWo0mo

  5. Bob Steinke

    I think there’s several dimensions to the question of whether a person working full time deserves a living wage. I’ll start with the easiest one. If someone cannot earn a living wage because they were disabled from birth how can it possibly square with equal opportunity for us to say, “Tough luck, you’re on your own.” This person was given a body or mind that is incapable of creating enough value to support them while other people were given a more capable body or mind. They didn’t have any control over this. They didn’t do anything wrong to deserve it. They were just unlucky in the birth lottery.

    This is quite simply a lack of equal opportunity and we have a responsibility to fix this inequity. If we can do it with voluntary charity, great, but if voluntary charity doesn’t have resources to help everyone then it is not immoral to force everyone in society to contribute to cover the cost. In fact, it would be immoral not to because the disabled have a right not to suffer this unequal opportunity.

    Now, in general our society does this already. The programs are patchwork, mostly at the state level, and there can be long waiting lists, and there’s debate over what quality of life is owed to people in this situation, but our society won’t leave someone with down syndrome to live on the street and starve.

    I do agree that minimum wage is not the best way to help in this situation. A better solution is programs like group homes that guarantee they get the basic necessities and then let them work at whatever wage they can earn, or for some who can live on their own perhaps a guaranteed stipend that is reduced fifty cents for each dollar they earn. This tries to avoid perverse incentives, and if they can earn twice the stipend then they don’t get any because their disability obviously isn’t preventing them from earning a living.

    So for this case I agree that minimum wage isn’t the right solution, and our society is already solving the problem in other ways, but it would have been nice to have a token sentence in your post that society does have a responsibility to help in this case even though minimum wage isn’t the right way to do it.

    I’ll come back to comment about other cases.

    Bob

  6. born01930

    Bob,

    I think we have to make a distinction between those who are physically able to work and those who are not. My comment and thoughts about the minimum wage are assuming physically and mentally able to work.

    Concerning housing…the projects come to mind. Not a very good outcome there.

  7. Bob Steinke

    So, yes, I did cherry pick the easiest case for my earlier comment, but what about a non-disabled, fully capable adult who is working full time and isn’t being paid a living wage? (*What is a living wage? See below.)

    There is this idea that negotiation in a free labor market will always result in an employee being paid exactly the amount of value he or she creates. This is a myth based on a naive concept of how negotiation works. The value that an employee creates is an upper bound on how much the company is willing to pay, but it is not the lower bound on what the employee is willing to accept. That depends on the employee’s next best option. What will happen if she or he doesn’t get the job? Between those two bounds the deal actually reached depends on bargaining power. For various game theory reasons employers have more bargaining power than employees.

    Consider the case of fruit pickers in California during the great depression (depicted in “The Grapes of Wrath”). There were many workers for every job, and those who didn’t get the job had no prospect of getting a different job elsewhere, no government social safety net, and the voluntary charity social safety net was stretched beyond its limits. The workers who didn’t get the job faced homelesness and a real prospect of starvation.

    As long as the fruit growers offered something marginally better than homelessness and starvation they could fill their jobs with workers. How much value the employees created had absolutely no relation to how much they got paid.

    Now, that’s an extreme example, but it shows that the idea that workers always get the value they create is a myth. It just simply isn’t true. Anyone trained in negotiation will tell you, don’t think about what would be fair or how much someone else brings to this deal. Think about their next best option. What would they lose if this deal doesn’t go through. Offer something slightly better than that and they might accept it even if it is obviously unfairly slanted in your favor.

    I’m not saying that negotiation never reaches a fair result, but it doesn’t always, and in practice it is more often slanted in favor of employers and against employees. And that problem is most severe at lower salaries where employees have fewer specialized skills and are more interchangeable.

    So I look at a living wage as a sanity test. If someone is working full time and can’t afford the basic necessities of life, which situation is more likely:

    A) They really are such a terrible worker that they aren’t creating that much value.

    B) They really are creating that much value, but are getting paid less than their fair share.

    Now if you look, I’m sure you could find an example of case A, but I bet for every one of those there are several examples of case B. So here’s what I think of the minimum wage:

    1) Employees getting paid less than their fair share is a real problem that we really should be trying to solve

    2) Minimum wage is a ham-handed way to solve that problem, but

    3) If we can’t think of anything better, it is better for our society to have a minimum wage than not to have it.

    *As far as what constitutes a living wage I mean the basic necessities of life (food, clothing, shelter, and yes health care) at a level that befits the dignity of a human being. I’m not talking about Charlie and the Chocolate factory where they have to sleep four to a bed and Charlie gets one chocolate bar per year. I’m talking about a level that would be considered above poverty in the society that it is in.

    Yes, minimum wage would be relative to the economic conditions in a particular time and place, and yes, we probably should have many different minimum wages for different cost of living in different places. The article that born01930 linked to seemed to be saying, “That would be hard so we shouldn’t do anything at all.” I think that reasoning is silly. If we have a responsibility to try to fix an unfairness that responsibility doesn’t go away just because it is hard. It just means we have a responsibility to try our best, not throw up our hands and give up.

  8. born01930

    Bob,

    What you allude to was first proposed by Marx. History has shown how well that works.
    I certainly don’t have the answer as to how we can take care of everyone, but the market economy has better results than central planning.

  9. Bob Steinke

    born01930,

    I find your response unsatisfying. I presented several specific points and presented evidence to support them. You didn’t respond to any of my points or refute any of my evidence. You just painted with a broad brush, saying essentially, “What you are proposing is exactly like communism and communism failed therefore you are wrong.” I think you need to refute my specific points. I’ll summarize them here:

    1) From what he said, it appears that Jon believes in the premise that free markets always result in employees receiving a salary equal to the value they create, a premise that is widely believed in neo-classical economics.

    “I don’t think I agree with the underlying philosophy that ‘anyone who works full time deserves a living wage.’ I think it depends entirely on the value of the work they’re performing”

    2) I believe that premise is wrong. To prove this, I presented evidence about employment during the great depression and how trained negotiators are trained to negotiate.

    3) Now, it only takes one counterexample to prove a premise isn’t always correct, but in fact I believe it is incorrect in a significant number of cases in our economy today. I haven’t yet presented a large enough body of evidence to conclusively prove this further point, but that’s partly due to not wanting my posts to get too long. If this is really the point where you disagree with me, if you believe it isn’t true 100% of the time, but it is true 99.999% of the time, then we have something we can discuss further and examine more evidence.

    4) If point #3 is true then I believe it is a strike against the claim that a free market is a perfectly fair system.

    Notice, up to this point I haven’t actually proposed doing anything. I argued some questions of fact, “Do employees actually get paid the value they create or not?” and made a value judgment, “If getting the value they create is what employees deserve and free markets don’t do that then that is an unfairness in free markets.” But I haven’t yet said that we shouldn’t use free markets, or even that we should do anything about it at all. Even if you think everything below is proposing communism and is refuted by your prior glib rejoinder I would still be interested to know what you think about these first four points.

    5) I believe we have a responsibility to try to fix this unfairness.

    6) I believe that a living wage is a good sanity test to identify cases where people are receiving less than they deserve. I find it hard to believe in a country as rich as ours that a non-disabled person working full time and putting forth an honest effort would actually create less value than that. Notice that I am not proposing that they deserve a living wage because “To each according to his needs.” In fact, I am accepting the fairness criteria that the value they create is what they deserve. I’m just proposing a living wage as a good, not perfect but good, way to identify people who are not receiving the value they create.

    7) I believe that the minimum wage does help these situations and even though it has side effects the net result is more good than harm.

  10. Chris from MN

    Two thoughts:
    1) the reason we care about this at all is that the minimum wage has decreased in real terms even as GDP per capita has grown in real terms. The median American male has seen wages actually slightly decline since the late 1970s. In spite of vastly greater productivity. This breaks the social contract we have with capitalism that a rising tide floats all boats. Lots of people make near minimum wage (though making EXACTLY minimum wage isn’t as common). Lots of people (not you) seem to think they had it harder when they were younger and entering the workforce, not realizing that in real terms, the minimum wage is significantly lower than it was in years past. So we care because it seems like a lot of people are getting a more raw deal than in the past and because of rising inequality. And we only care about inequality because extreme inequality can mean a small group ends up owning most of society’s capital resources (like especially land), which reduces real freedom for the vast majority of people. Also, it perverts our republican values of democratic institutions. I.e. We’re steering toward Old Europe not the Jeffersonian ideal of America.

    Which brings me to my last point:
    2) I think the MOST important thing in politics today for our country is for us to cultivate a sense that we’re all Americans, here. Our political system will always be broken unless we have some shared sense of purpose. Both liberals and conservatives alike contribute to this. With Obama in the White House (instead of Bush), the conservatives are seriously going at it, though. I’m normally not one to engage in the false equivalency of both sides, but…. Liberals did much the same with Bush and Reagan. This has to stop. We need to have our disagreements without always threatening to move to Canada or secede. Our grandparents knew this better than us after facing down truly horrific threats. So yes: we’re Americans, and Obama is /your/ President just like Bush was /my/ President. But even more important is to understand we’re Americans. If we understand that and have some empathy and respect for one another’s opinion, then I barely even care what policies end up passing.

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