Overcoming Stagnant Wages: Stronger Unions And Higher Minimum Wages Are Not The Answer

Recently, many economists and politicians have expressed concern about stagnant wages and rising income and wealth inequality. Such concerns prompted 20 states and the District of Columbia to raise the minimum wage this year. Some economists, such as former treasury secretary Larry Summers, also argue that steps should be taken to increase the number of workers who are members of labor unions so they can bargain for a greater share of corporate earnings. Strengthening unions and raising minimum wages, however, will do little to help low- and middle-income Americans, and will instead reduce job opportunities for young and inexperienced workers.

Progressive economists, such as Lawrence Mishel of the Economic Policy Institute, argue that low- and moderate-income workers’ wages have been held down by their lack of bargaining power, which is partly the result of reductions in the influence of labor unions and of minimum wages that have not kept up with inflation. The percentage of workers who are members of unions fell by more than half between 1973 and 2007. Union membership in the private sector declined even more. Adjusted for inflation, the minimum wage is now 25 percent below its peak in 1968.

A higher minimum wage would affect more than 15 percent of the workforce directly and another seven percent indirectly. More than 10 percent of those who would be directly affected by an increase in the minimum wage are single parents, and more than half work full-time. If the minimum wage were raised, some workers who now earn more than the minimum wage would also be offered higher wages as firms try to hire them to replace minimum-wage workers.

Unions and minimum wages increase the wages of some workers, but at the expense of others.

Some evidence suggests that unions reduce wage inequality, but most of that reduction is within unionized firms. Higher union wages reduce the number of workers employed in unionized industries. Workers who are unable to find jobs in unionized industries will compete for jobs in other industries, pushing down wages in nonunionized firms.

There is nothing wrong with workers joining labor unions to enhance their bargaining power. The problem is that unions’ ability to bargain for higher wages is the result of laws and coercive practices that limit competition from nonunionized workers. This includes closed shop laws, which require all workers in unionized firms to pay union dues, as well as the threat of strikes, which all too often have been accompanied by violence against nonunion workers who cross picket lines during a strike. During the late 1970s, numerous deaths and millions of dollars in property damage resulted from union violence.

Labor unions have been granted a privileged position in the economy. They are immune from anti-trust laws and injunctions from federal courts. Unions have declined in the United States because many workers no longer agree with the agendas that unions are pursuing or do not think that the benefits of unions are worth the costs. In addition, growing competition, particularly from imported goods, has resulted in unionized firms losing market share and, in some cases, going out of business.

A study by the Organization for Economic Cooperation and Development reports that countries where unions and collective bargaining affect a large percentage of the labor force have higher unemployment rates. If enough workers belong to unions, unions can create an effective wage floor that works like a minimum wage, causing unemployment.

Because they apply to all workers, minimum wages cause unemployment if they are higher than what some workers would be paid in a free market. Firms will only employ a worker if the value of the additional output he contributes exceeds the wage he is paid. Thus, minimum wages result in fewer jobs for inexperienced workers with limited skills. Minimum wages also reduce the incentive of firms to train workers. Many firms will not be willing to spend much on training workers unless they can offset the cost of training by paying lower wages during the training period.

Recent improvements in technology make it easier for firms to reduce employment in response to higher minimum wages or higher wages that result from union bargaining. To avoid paying mandated higher wages, some firms are replacing unskilled workers with robots.

More important than reducing inequality is providing opportunities for the poor and middle class to improve their standards of living. The poor would have more job opportunities if minimum wages were lowered, not raised. Good job opportunities, especially for young and inexperienced workers, are more likely to be found in nonunionized industries, since unions tend to protect older, more experienced workers from competition.

Instead of more regulation of the labor market, entrepreneurs need more freedom to develop innovative arrangements that will offer opportunities, even for workers from disadvantaged backgrounds, to gain the skills and habits needed to succeed in a changing economy.

The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by WesternJournalism.com.

This post originally appeared on Western Journalism – Equipping You With The Truth

The Obama Economic Record: The Worst Five Years Since World War II

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Editor’s note: This article first appeared The Daily Caller.

In spite of the claims by President Obama’s Council of Economic Advisors regarding his administration’s economic accomplishments, the U.S. economy has grown very slowly in the years since the Great Recession of 2008-09. After four years of slow growth, the latest data reveals that the U.S. economy shrank at a 2.9 percent annual rate during the first quarter of 2014.

That figure has been widely reported, but here are some figures that have not been reported, and they are quite eye-opening:

Over the first five years of Obama’s presidency, the U.S. economy grew more slowly than during any five-year period since just after the end of World War II, averaging less than 1.3 percent per year. If we leave out the sharp recession of 1945-46 following World War II, Obama looks even worse, ranking dead last among all presidents since 1932. No other president since the Great Depression has presided over such a steadily poor rate of economic growth during his first five years in office. This slow growth should not be a surprise in light of the policies this administration has pursued.

An economy usually grows rapidly in the years immediately following a recession. As Peter Ferrara points out in Forbes, the U.S. economy has not even reached its long run average rate of growth of 3.3 percent; the highest annual growth rate since Obama took office was 2.8 percent. Total growth in real GDP over the 19 quarters of economic recovery since the second quarter of 2009 has been 10.2 percent. Growth over the same length of time during previous post-World War II recoveries has ranged from 15.1 percent during George W. Bush’s presidency to 30 percent during the recovery that began when John F. Kennedy was elected.

Economic growth is usually faster than normal following a recession as entrepreneurs find more productive ways to employ the resources that were idle during the recession. How rapidly the economy grows and recovers depends partly on whether market forces are allowed to allocate resources, including labor, to their most productive uses. Unfortunately, the Obama administration has pursued several policies that make it harder for market forces to work. These include: bailouts, expansion of entitlement programs, regulation of the economy, tax increases, and huge government deficits.

Bailouts have resulted in capital being stuck in businesses that are either inefficiently run or have failed to produce goods and services that consumers’ value highly. In the absence of bailouts, some firms would have gone bankrupt and the capital reallocated to vibrant firms that are producing what consumers demand in a cost-effective way.

Expansion of government entitlement programs, such as food stamps and unemployment compensation, has reduced the incentive to be employed. The average benefit per recipient of food stamps jumped by approximately 25 percent between 2007 and 2010 due to rule changes. It also became easier to qualify for food stamps. As Richard Vedder points out in a Wall Street Journal editorial, the number of food stamp recipients rose by over 7 million between 2010 and 2012, a period of falling unemployment.

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This post originally appeared on Western Journalism – Informing And Equipping Americans Who Love Freedom

Remembering Gary Becker: A Great Economist

Dr. Gary Becker, who won the Nobel Prize in Economics in 1992, died Saturday at the age of 83. I was privileged to be a student of his at the University of Chicago in the 1980s. He is well known for applying a rational approach to human behavior in a variety of contexts not previously considered part of economics. One need not fully agree with Becker’s approach to benefit from reading some of the articles and books he wrote.

Becker is most famous for his work on the theory of human capital and the economics of the family. He is also well known for his work on the economics of crime and punishment, addiction, and discrimination.

His research begins with the premise that all types of human behavior can be understood using rational choice theory. For example, he explained rising divorce rates as a function of the benefits and costs of staying married. According to this theory, rising economic opportunities for women reduced the benefits of staying married relative to the costs. Before Becker published his ideas, academics considered many decisions—such as how many children to have or whether to commit a crime—to be governed largely by habit or emotion rather than rational choice.

Although he earned his reputation in the economics profession by writing technical books and technical journal articles about a fairly narrow range of subjects, later in his life, Becker started writing articles for popular audiences, beginning with a monthly column in Business Week. Since 1985, in addition to his technical writing, he wrote about a wide range of policy issues including Federal Reserve monetary policy, immigration law, trade policy, and the environment. In his articles written for popular audiences, he analyzed public policy issues in more depth than most other writers.

Like his teacher, Milton Friedman, Gary Becker was a supporter of freedom and free markets. One could certainly disagree with him for being too tolerant of some kinds of interventionist government economic policy. Nevertheless, he was often critical of government intervention in the economy, arguing in support of free trade, deregulation, privatization, and against the Affordable Care Act.

Unlike some other professors I had in graduate school, I never recall Becker using offensive language in the classroom or in private conversation. Although he never said anything to indicate that he was a Christian, some of his students did research on the economics of religion; and he appreciated their work and respected their convictions.

I had great respect for Dr. Becker as a teacher and scholar. In the classroom, he would frequently pick a student and call on him to answer a challenging question. The questions he asked often required the student to apply theory in a new way, not just recall something from the reading. His approach was intense and intimidating, but his former students appreciate the way he challenged them.

His passion for applying economics to a wide variety of contemporary issues was contagious. He influenced hundreds of graduate students at the University of Chicago and took a continuing interest in the work of his former students.

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The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by WesternJournalism.com.

This post originally appeared on Western Journalism – Informing And Equipping Americans Who Love Freedom

Eliminating Poverty And Reducing Inequality: Is A Guaranteed Minimum Income The Answer?

Recently, some commentators have been promoting the idea of a government guaranteed income, where the government would pay a monthly cash payment to every American, regardless of need or merit. A similar idea, the negative income tax, has been discussed by economists for decades. In Switzerland, voters will soon consider a referendum that would require the Swiss government to pay every adult citizen $2800 per month. Although it sounds appealing, a government guaranteed income is a bad idea; and its defenders rely on fallacious economic arguments to support it.

According to proponents, a guaranteed minimum income (GMI) could actually limit the power of the government, since all the bureaucrats who administer existing antipoverty programs would no longer be needed. Those paternalistic programs rob the poor of their freedom and dignity in order to ensure that they are behaving in ways the government approves. By contrast, eligibility for a GMI would be easy to assess so that few government employees would be needed. The savings in administrative costs from eliminating most other government antipoverty programs might make it possible to pay everyone a minimum income without raising taxes at all.

The above argument reflects a misunderstanding of the way our political system works. In particular, government employees who administer other entitlement programs would lobby hard to keep their jobs. Thus, if proponents of a GMI could convince Congress to pass it, few if any other government programs would likely be eliminated, as each could be justified as satisfying some purpose that might not be fully met with a GMI. At a minimum, this new entitlement program would have to be just as generous to everyone as existing programs besides providing income for many who are not eligible for those programs. Thus, a guaranteed minimum income would mean more government spending, necessitating higher taxes to pay for it.

Some argue that this plan will enhance societal stability and make politicians look good in the eyes of the public. Instead of blaming them for the way that the regulations and taxes they have supported contribute to high rates of long term unemployment, many people would view politicians and government officials as benefactors. But this is one of the most significant flaws of such a program.

The more people who view government as a benefactor, the less incentive they will have to produce the goods and services needed for a prosperous economy. Government is not a benevolent provider of everyone’s needs; all the money it spends is coercively taken through taxes that come out of the income or wealth of those who are productive. The more it taxes the productive to benefit the unproductive, the more it discourages the hard work and innovation necessary to produce an abundance of goods and services to satisfy peoples’ needs and wants.

Another argument for a GMI is that technology is eliminating scarcity so that there is no longer enough work to be done by all those who are capable of producing goods and services. To the contrary, scarcity is as pervasive today as it has ever been. Although technology makes it possible to produce given quantities of goods and services with less labor, the lower cost of necessities such as food leaves people with more of their income to spend on other goods that they could not afford in the past such as travel, health care, education, sophisticated forms of entertainment, and the like. Thus, while the demand for labor to produce necessities has declined, the demand for labor to produce other goods and services has increased in an offsetting way.

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The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by WesternJournalism.com.

This post originally appeared on Western Journalism – Informing And Equipping Americans Who Love Freedom