Sunday, July 16, 2006

Should Iowa Raise the Minimum Wage?

Bob works as a carpenter’s assistant for Splinter Woods, a home builder. Bob’s main job is to sweep up the sawdust with a push broom. Bob is a high school student who is paid minimum wage of $5.15. At the beginning of the day, Bob is full of energy and good humor and keeps the shop area clean. By the end of the day, Bob is tired and some of the energy that was there in the morning has faded. If the minimum wage is increased, how will this affect Bob?

Every month the Bureau of Labor Statistics, BLS, calculates the Consumer Price Index, CPI, a measure of prices for goods that the average family buys. The May CPI was 193.6 which means that Bob’s real wage is closer to $2.67. Proponents advocating raising the minimum wage point out that the buying power of the minimum wage is the lowest since 1968. Legislators are pushing to increase in the minimum wage to give a living wage for the two million workers earning this wage.

Minimum wage earners tend to be young and work in food service or service occupations. Most are part-time workers and female. More white than black are employed at minimum wage.

By my calculations, Bob’s wage would have to be raised to about $10 in order for his wage to buy goods that are inflation adjusted. The AFL-CIO recommends that the minimum wage be raised to $7.25. If the minimum wage rate is raised, what will happen to Bob?

The carpenter who hires Bob will now wonder if Bob is worth the wage he is paid. If the carpenter buys a Shop Vac for a $100, the carpenter can effectively pay for Bob after a couple of days work. Or, as the data suggests, Splinter can hire Bob for an hour a day to use the Shop Vac to clean up. In other words, Splinter will substitute equipment for labor because now that labor is more expensive, machines that used to be more expensive are suddenly profitable to use. Even though it takes no special skill to operate a Shop Vac, using machinery in particular usually does. As employers start using more machinery for labor, the wages for skilled workers will increase and the demand for minimum wage workers will drop. Workers will find that they are working fewer hours. The effects don’t stop there.

As minimum wage earners lose their jobs or have their hours cut, they will start to look for jobs anywhere they can find one even in illegal markets like the ones you find many illegal immigrants. As more and more displaced workers enter the market, the wages in these areas actually decrease. So the wages in skilled jobs increase while the wages in the unskilled or illegal market decrease.

Increasing the minimum wage has unintended consequences of increasing the wage disparity between the skilled and unskilled workers. A vicious spiral of income disparity grows. I call this the Foghorn Leghorn Law. Foghorn, the big Looney Tune rooster always rushes in to help Henry Hawk and ends up doing more harm than good. Is it ironic that a law actually increases lawlessness? Is this what our legislators want?

Some employers are also hurt. Say you are an owner of a factory that makes Ropeless Jump Ropes. You pay your workers at a wage rate above minimum wage, say $8 per hour. If the minimum wage is increased, then the wages you pay your workers has relatively decreased. Suddenly, a law has exerted upward pressure on the wages you pay. Your employees might become dissatisfied as they mistake an increase in the wages in minimum wage occupations for an increase in the values employers place on employees in these occupations. They will feel robbed.

In Barbra Ehrenreich’s book, Nicked and Dimed, she writes about minimum wage workers who work two jobs. Many of these workers clean their uniforms in bathroom sinks and find economical ways to commute to work. These workers are not lazy. I teach my students that there is dignity and respect in every job. Raising the minimum wage will benefit some workers. However, increasing the minimum wage will also have unintended consequences that hurt the very workers that the law was intended to help.

Thursday, July 13, 2006

Do Immigrants Take Jobs Way From Americans?

About 32% of Americans surveyed in an opinion poll believe that illegal immigrants take jobs away from domestic workers. The results are from polls conducted by major media giants like Fox, New York Times, Washington Post, and Time Magazine.
I think the polls presented a question that respondents had to answer “yes” or “no” and, therefore, presented the respondents with a false dilemma. The correct answer is that illegal immigrants take jobs away from domestic workers, but they do not take jobs away on a one to one ratio. In other words, if there are 10 illegal immigrants, there are not 10 displaced domestic workers. An example will help clarify.

Smoking Joe Camel hires workers for his second-hand smoking grinding business, Grinders. Joe hires both immigrant and native labor. Joe doesn’t want his labor just standing around blowing smoking rings because non productive workers will have his profit go up in smoke. Smoke grinding doesn’t take any special skill, but has some unpleasant aspects. You have to inhale smoke. Your clothes always smell. Up to a point, Joe will hire more workers when the wage is lower. As the wage increases, Joe makes less profit on each employee. So as the wage increases, Joe hires fewer employees.

Smoking Joe knows how much his customers are willing to pay and how productive his employees are. If Joe has to cough up $15 for a worker, Joe will hire only one worker. Joe will hire four workers at $10, and seven workers at $5. Right now, the current wage is $5 so Joe hires seven employees of which two, Alex and Bob are native to North America and five are illegal immigrants.

Now suppose the country gets hard on illegal immigrants and we repatriate those five illegal workers. How many workers will Grinders hire now and what will be the wage rate?

Grinders will hire two more native born workers, Carrie and Daniel at a wage of $10 each. The new wage will only attract two more Americans into the industry but 5 foreign workers will be lost. Less workers also means less is going to be produced. How does this work?

Have you ever walked on a surface with changing slopes? When you are walking on flat ground, each step you take moves you forward by the entire length of the step. When you walkup a hill, you can’t take as big of steps. When you take a step you might only go up half. The same analogy can be used when workers are paid a graduating wage. If everyone is paid the minimum wage, then foreign workers will take jobs away on a one to one basis because it’s like running on a flat surface. When the wages are allowed to increase to attract more labor, then it’s like running up a hill. Immigrants do not take jobs away on a job by job basis when wages are paid by ability, schooling, and other investments into productivity.


If we build a wall to keep foreign labor out, will jobs go overseas? It could be that American labor is in direct competition with foreign labor anyway. Suppose that two workers are hired to dust. One of the workers, Wilt, is seven-foot tall. The other worker, Bill is five-foot. They are both able to dust, but Wilt doesn’t need a ladder to reach the high parts. Wilt will be able to dust more because he has a natural height advantage.

It could be that America is in direct competition with foreign labor in which the foreign workers have a natural advantage. Perhaps foreign labor has a skin less sensitive to sunlight. Maybe the foreign labor has a natural mathematical aptitude. These laborers would find themselves in occupations that take advantage of their natural endowments.

Building a Berlin wall will not prevent jobs from leaving the country when the jobs leaving the country can be completed by workers with a natural affinity in those occupations. Lou Dobbs, a CNBC reporter and author of “Exporting America” believes that 14 million middle class jobs will leave the country. Dobbs cites Manufacturing and tech support services like Dell help as examples.

Deporting illegal immigrants will not create more jobs for Americans on a one to one basis because employers will have to pay a higher wage to domestic workers. If consumers in the United States want to pay more for everything they buy, then deporting illegal immigrants is a good idea. Given the rate the economies of Mexico and the United States are expanding, eventually the wages in both countries will equalize and immigration will not be an issue.

Sunday, July 02, 2006

Is It True Foreign Labor Will do the Jobs Americans Won't?

When Emmy Award-winning news anchor, Jorge Ramos was interviewed about undocumented workers, the author of Dying to Cross, said, “I doubt that many Americans would like to do the jobs that undocumented immigrants are doing. Just recently, I was in Immokalee, Florida, and saw hundreds of workers picking up tomatoes. I did not see a single American.”

Are Americans unwilling to pick tomatoes? Is it true that undocumented workers are willing to do the work that Americans will not?

Say you want to hire a babysitter. After calling around to several sitters with no luck, you might say, “Kids these days just don’t want to work.” You would be incorrect. Sitters today don’t want to work at low wages. So why are wages to high in the United States? Take the case of Alex, the babysitter you just called.

Alex is a high school student who will sit. She is always on time. She refuses to let the children watch television. Instead, she makes creative projects that challenge the children’s creativity. Often, she reads to the children and takes them for walks. Alex also works a job, maintains a perfect grade point, is active at her church, helps around the house, and wants an active social life. When I call Alex to sit, she has to make a choice on what she’s going to give up. In order to attract the quality of sitter I want for my children, I have to pay her enough to divert her from her other activities. At a low wage per hour, the wages aren’t enough to induce her to give up her day. I have to increase the wage rate that I pay her.

The same is true for American workers. Workers in the US are highly skilled and educated. In order to induce American workers to work in traditionally low skilled areas I have to raise the pay. So it isn’t true that Americans are lazy or just don’t want to work. It isn’t true that foreign laborers will do the work Americans will not. What’s true is that the wages are not high enough in traditionally low-wage occupations to attract American labor.

Jason has the dirtiest room I’ve ever seen.. Jason is a college student, plays the air guitar for a band, and works a full-time job. You can tell how long it’s been since the room has been cleaned by the strata of newspapers and Rolling Stone magazines on his floor. In order to clean his room, he’ll need to vacuum, dust, wash, throw out stuff, make the bed, paint the walls, climb a ladder to remove the cobwebs, wash the windows, empty the trash, and rearrange. His room is so dirty that you wipe your feet off when you leave the room. I remember when Saddam called him and wanted to use the dirty from his room to build weapons of mass destruction. The room is scary it is so dirty even water is afraid to go into the room. Is this job so distasteful that it’s a job only undocumented laborers would perform?

Suppose I go talk to Jason who is studying his physics book for a test tomorrow. His brother is playing a game on the Xbox. I tell Jason that his room is so dirty that I saw the swamp thing sleeping in his bed. I tell him the room smells so bad that the dog holds his nose when he walks by his room. I ask him how much I would have to pay him to get him to clean his room. His brother, Juan, who’s just wasting time playing a game, turns an ear. Jason tells me that he’s busy. He also says he’ll clean the room when he gets time. If I want him to clean the room now, I’ll have to pay him. Since he as a test tomorrow, the more work I want him to do the more I’ll have pay for each additional hour I want him to work.

If I want him to make the bed, it’ll take a half hour. He’ll make the bed for a dollar. If I want him to vacuum the room I’ll have to pay him another dollar. If I want him to dust, I’ll have to pay him two dollars more because his time spent cleaning could be better used studying. If I want him to clean the whole room, it’ll take him seven hours, and he wants $80 to do that. It’s not that he won’t clean his room, it’s just that he’s busy preparing for a test and I won’t pay him enough to divert him from study.

His brother, Juan, hears us talking. Juan says,” I’m not doing anything. I’ll make the bed and vacuum the room for a dollar. I’ll clean the whole room for $50.” So I hire his brother to clean the room because Juan will do more labor for less money. Juan makes money, Jason gets to study, and I get the satisfaction of seeing the room cleaned. Everyone benefits.

In the United States, wages are high because Americans have plenty of uses for their time. In other words, time is scarce. In order to induce Americans to give up leisure time, and pursue other profitable uses of their labor, the wage rate has to be high enough to attract American labor. In South America wages are less than in the U. S. Even jobs like picking tomatoes pay more in the U. S. than in Mexico. It’s rational to conclude that immigrants looking to get the most for their labor will migrate to the U. S. in search of a higher wage rate. These immigrants are not doing the jobs Americans will not. These immigrants are working in low wage jobs since Americans have so many uses for their time and don’t think it’s worth it.

When Jorge Ramos said, “I did not see a single American,” picking up tomatoes it’s not because North Americans can’t do the work or won’t do the work. It’s because the wage rate is so low that North Americans would rather go to a movie or work another job that pays more. Immigrant labor is a complement to U. S. labor in that by working together we all benefit.