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07/30/2006

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robert

It is a fundamental law of economics that the more expensive a thing is, the rarer it becomes. This is no less true of jobs as it is for diamonds, beachfront homes, Maseratis, etc. Nonetheless, the effect of politicians "playing to the cheap seats" by passing statist legislation such as this is to hurt those segments of the population they purport to help: those entering the workforce, those with little or no skills, and senior citizens looking to supplement mostly fixed incomes. A business concern, when forced to pay an increased wage to someone unable to provide services equal to the cost of same, will simply lay off workers or not hire them in the first place.

ben

Robert, I believe you have it backards. The rarer something becomes, the more expensive it will be, all other aspects held constant. Diamonds are not rare because they are expensive, they are expensive because they are rare and in high demand. The more expensive labor is, the more people will join the work force. Think about your beachfront home example. If the government mandated that all beachfront property sell for at least $1,000,000 there would be a surge in new building. But, there would be a contraction in demand. Thus we would be left with a lot of unoccupied beachfront homes.

Lawrence Indyk, University of Kansas School of Law

Besides what the economic effects will be, the other relevant question is, "If they think this is such a good idea, then for what economic rationale would the city of Chicago not just raise the minimum wage for all workers in all stores, regardless of total revenues or floor area?" Is a low-skill or entry-level worker at a store with 89,000 square feet or 900 Million in annual revenues less deserving of a "living wage" or whatever poverty relief the Aldermen think this will accomplish?

The only rational basis would seem to be an implication that the big boxers with these particular characteristics are more "exploitative" of their workers than smaller firms - which truly could not afford to pay any more. In other words, that the ratio of big-box total derived productivity from their labor to the average compensation is much higher than average, and this gap is almost entirely siphoned off into above average corporate profits and not into reducing prices. One would further imply that the only way the big-boxers can get away in a competitive labor market is that they abuse their market share and bargaining power, an abuse which is reasonably met with government regulation.

So, the unspoken argument might have gone, compelling them to pay their workers more would only "normalize" their employees compensation relative to their productivity by curtailing market abuse, while not significantly curtailing the corporation's ability to make reasonable profits, and without much raising of prices.

The problem is, of course, that none of those arguments were actually made, and even if they would have been - evidence to support them would have been lacking. Big Boxes aren't much different economically from small boxes except that their economies of scale allow them to lower prices. And unless one can support one of the accusations above, then it's hard to see what the rational basis for the distinction in the wage law. Instead, it seems quite likely that the law is almost entirely motivated by special-interest politics and a growing ugly fashion of irrational, passionate hatred of this country's large retailers.

stuart

"...only $15,500 a year. This is a pittance, though if the minimum-wage employee's spouse is employed at a significantly higher wage, the family's income may not be at a hardship level."

This is hilarious. Poor Americans! Such hardship!

N.E.Hatfield

I've always heard that the reason that "big box stores have never located in or near the inner city in the past, is because of the fear of pilferage and subsequent profit loss due to employees trying to compensate for low wages and lack of benefits. Perhps an increased wage scale will solve this problem.

News Flash! Wal-mart to take a billion dollar write off from its closing of its stores in Germany and Korea due to lower cost competition. Something "smells in Denmark" when a company can take a such a large write-off, but it can't provide basic health insurance to its employees in a nation that is dependant on private insurance. Perhaps this is one of the motivations behind the Council's action.

robert

Dear ben:
You'll forgive me but I was inartful. I meant to say that the higher the cost of a potential employee's services, the less likely an employer would be to hire that potential employee.

Vorn

Posner's point about using the earned income credit to combat poverty is, of course, correct from an economic perspective. However, from a political perspective, is it practical? We have large deficits and have not even come close to fully financing the tax cuts (such as the estate tax) and other spending already engaged in by the Federal government. A significant increase in the earned income tax credit would be very expensive, wouldn't it?

So, the question is, assuming that an increase in the earned income tax credit is not politically feasible, what is a second-best strategy for combating poverty?

Arun Khanna

Re: Becker's comprehensive analysis leaves me with little to add, especially as I am not permitted to comment publicly on the constitutionality of the "big box" ordinance because (if it does go into effect) its constitutionality is likely to be challenged, and in my court to boot.

What so special about bix box retailers? Why single them out?

Haris

Arun
The Judge can't comment on this ordinance or any other ordinance in Chicago because it might come up in his court. But here's what's special about "big box" stores: they are perfect scapegoats. They are large, often multi-national corporations who dominage huge chunks of their respective markets. They are profitable and cost-conscious. In essence, they can be blamed by many people for many things for which they are not responsible.
In this particular case, big box stores are being blamed for a city's failing to educate its citizens and improve their job prospects, and to attract high-paying jobs. These two issues are related, as good jobs often go where qualified workers already live. But because Chicago [and, to judge from the nationwide anti-Walmart movements, many other places] has largely failed to provide such opportunities for its citizens, it is basically shifting the blame towards large private companies for "paying too little."
My general response is, if you're not happy with the wage Wal-Mart is paying, don't work there and work someplace else. I hear there's a shortage of teachers, nurses, biotech specialists, clean energy technicians, and starting pitchers. The usual response is that there is a shortage of other places to work, and that the people affected by this aren't qualified for the jobs that are in demand. Oddly enough no one seems to be outraged by that.

N.E.Hatfield

Harris, you sem to be overlooking the fact that modern business especially large multinationals now operate on "gaming" the system. There once was a "quid pro quo" between governmental regulation and business practices, especially within the tax code. Unfortunately, this quid pro quo has broken down and the system is being "gamed" in order to maximize returns. If the Federal or State government can't or won't step in to correct the abuses, then the Local must. If only to protect the Public's interest and commonweal.

J. Morgan

Vorn,

I would like you to google a study done by Dan Miller a few years back at the Joint Economic Committee. Its thesis was that it is more expensive for the govn't to collect the estate tax than the revenues the tax generates. Thus, leading to the assertion that the only reason it survives is to punish success.

Ben,

You said, "The more expensive labor is, the more people will join the work force." This is true, but will there be jobs for them when they get into the workforce?

Greg Wass

That the Chicago City Council is attempting (whether it works or not) to "exploit" the profitable big box stores seems to me to be a minor point of the new ordinance.

There are two basic reasons Chicago (and other big cities) might oppose the stores--neither of which is "economic" (in this blog's sense of allowing market mechanisms to operate freely):

1) The big boxes are designed around the car. Big box stores generate more auto traffic, create more pollution and increase paved area. They are unfriendly to pedestrians and to those dependent on public transportation. They encourage longer shopping commutes and exact a social cost that exceeds the savings to consumers. WalMart in particular was known for not locating in an urban area unless a city created a TIF district--with the resultant government expenditures on infrastructure and drain on the local tax base (including, primarily, property taxes for schools) for 20+ years.

2) The big box stores don't provide affordable health care to their employees, driving many onto Medicaid rolls at a significant cost to hospitals and states. While Illinois has not published a study of Medicaid claims by big box workers, many other states have. In several states, Wal-Mart employees account for more Medicaid claims than those from any other company.

In short, when the market economy forces cost onto the public sector, the public sector fights back the only way it knows how.

Dee

I can speak at least on the issue of my economically illterate Alderman, Vi Daley (43rd Ward). She has been on a crusade against the so-called "big box" retailers on the grounds that they harm the mom-and-pop shop in the local neighborhoods, which are no longer there to cater to her upwardly mobile voting bloc who are in charge of the local neighborhood associations. (She is also pushing for ordinances to limit the number of banks coming into retail areas on the same theory that they drive the rent up).

Her logic, of course, is utterly wrong. What hurts the mom-and-pop shops in the city are ever-spiraling property costs, property taxes, and regulatory burdens that "big box" retailers can easily finance, but small business owners cannot.

My own little commercial area on Armitage Avenue has lost the larger hardware store, boutique clothing stores, the florist, the dry cleaner, to be replaced by retailers backed by large chains.

I shake my head when people use the "big box" retailers as the scapegoat for this occurrence. People who have never run a business just do not get how thin on margins most such retilers operate.

What kills the margins of the florist is not the guy who picks up flowers at the big-box grocery store; what kills the profitability of the hardware store is not the person who picks up paint from Home Depot; and what kills the dry cleaner is not the availability of cheaper detergent from Target. It is the city that hikes the property taxes up by 20% every three years, adds on building regulations that are more costly, and ups gas taxes so that your profit continues to erode and erode. Add in the general city hassle factor, and yeah, it makes more economic sense to close your doors and go work for a guaranteed paycheck then carry on the risk of the mom and pop store.

Anyway, that is just what is driving our local Alderman. I'm sure in other parts of the city it is misguided populism...

N.E.Hatfield

Dee, Without the "misguided populism" most of us would still be "picking cotton" or "chopping cane" for the rags on our backs and the thin gruel in our bellys. If we were lucky. Be glad there are those who still stand up to exploitation in its many and myriad forms.

Haris

NE
I won't defend this country's record on minorities, if that's in fact what you're referring to. I don't think anyone would defend it. But to compare discriminatory laws, passed by voters and backed by the force of the state, with big retail chains is a huge stretch. Last time I checked, working for Walmart and Best Buy was strictly voluntary [nevermind the off-the-clock work lawsuits: workers are winning them, from what I hear], and shopping at these stores is voluntary as well. If you aren't happy with the wages they pay or the benefits they do or do not provide, don't work there. Work someplace else. If you think they ruin your neighborhood, don't shop there. Shop at the small businesses that benefit from this. If this is what local people truly want, there would be no reason to pass the law. It would just happen.

Now if you'll excuse me, this blog has instilled in me the urge to go and watch You've Got Mail.

Nelson

Greg writes...
"There are two basic reasons Chicago ... might oppose the stores:

1) The big boxes are designed around the car... WalMart in particular was known for not locating in an urban area unless a city created a TIF district..."
Ok, if Wal-Mart isn't locating there, then why pass the ordinance? Why not just *not* create the TIF district?

"2) The big box stores don't provide affordable health care to their employees..."
And the "small box" stores do? If an ordinance is needed to provide health care (and if this compulsion is desired) then make it apply to *all* businesses. Don't target out the few that you have personal preferences against. What's good for the goose is good for the gander as they say.

N.E.Hatfield

Harris, Hit a nerve did I? Ever been to the inner city? Jump to a new job, but where and at what? They certainly can't take the Metra or RTA to Mexico, S.A. or the Orient. Needless to say; Saks, Bloomingdales or Needless Markup downtown certaily won't hire them and they ain't got the clout to work for the city. ;)

Haris

"Jump to a new job, but where and at what?"

NE, thanks for making my point. Big Box stores are taking the blame for a city and a state and a country that can't provide enough good jobs and skilled workers to fill them and has ended up with people whose choice is to work at WalMart or not work, or be one of the lucky few that's hired at the higher priced small businesses. If people want to complain, they should ask for better schools to give them the skills to get in-demand jobs, not for ordinances that just pass the responsibilities to big stores.

N.E.Hatfield

Harris, Contrary to popular belief, there are large sectors of the nation and economy that don't have the academic abilities, no matter how much education is crammed down their throats. Education is not the cure all that some seem to think. Yet, cheap low cost products produced by the low skilled continues to flood into the market. Corroding and forcing once higher paid production jobs out of the U.S. and into lower priced labor markets.

The cheapest cost/lowest cost mind set and business practice is extermely corrosive and not too mention destructive of the basic economic order that has developed over the years. And who is the practioners and who are the victims?

Perhaps, you ought to read some Rohatyn.

David

I hate to say that it's typical, but it is, for Judge Posner to reflexively oppose the "big box" ordinance without truly engaging the reasons why states and cities have proposed and passed similar laws. I, too, will focus only on the policy and will not engage any constitutional arguments. Though the constitution seems to me a non-issue, as the ordinance would surely pass "rational basis" review. Whether it conflicts with ERISA seems the more complicated problem.

Cities and states are critical of big box stores (specifically Wal-Mart, as Cosco pays employees far more), because they impose huge costs on state and local governments. Traditionally, large cities have been served by smaller retailers, which charge customers more but also pay higher wages. "Big box" stores like Wal-Mart can offer cheap products for two reaasons: first, by economies of scale and bulk buying from wholesalers, and, second, by paying low wages. Their low prices drive out the competition (perhaps this should merit antitrust review?), and soon, half the retail employees in town work for Wal-Mart. The size of Wal-Mart alone, as a corporation, is truly staggering.

As Judge Posner notes, a full-time Wal-Mart employee makes about $15K per year. As he admits, that is a "pittance," and in cities with high costs of living, it is even worse. Thus, a typical, minimum wage Wal-Mart employee probably receives public assistance as well as Medicaid. Notably, Wal-Mart does not give health benefits to many employees, counting on the fact that the state will pick up the tab through Medicaid.

States and cities have a strong financial interest to ensure that someone who works 2000 hours per year is self-sufficient and is not a burden on the taxpayers. If Wal-Mart is forced to pay $10 per hour and provide a few benefits, jobs will most likely not be lost. Rather, the company will compensate by raising prices. True, customers will pay a bit more for products. But they will also pay less in taxes, because the jobs created by Wal-Mart will be contributions to the economy instead of burdens on taxpayers.

In short, minimum wage jobs at Wal-Mart are subsidized by the government, particularly by Medicaid. Local governments have good reason to take meaasures to end that subsidy.

Thus, I ask Judge Posner and Prof. Becker: please address that, instead of giving us the tired old line that mininum wage laws cost jobs.

Haris

"In short, minimum wage jobs at Wal-Mart are subsidized by the government, particularly by Medicaid. Local governments have good reason to take meaasures to end that subsidy."

This is largely true. However, if the ordinance were to pass, these workers would still be subsidized - this time by the customers of the store, who have to pay higher prices. Rather than paying taxes which the government channels to those working at Walmart through social services, customers [who are also taxpayers, mind you] now pay extra money to Walmart which then channels it to its employees through higher wages. This is, in effect, a tax on people shopping at Walmart. This ordinance just shifts the tax burden from the general population to Walmart customers. Narrow tax bases such as this encourage substitution, so that those who would have shopped at Walmart may be induced to shop elsewhere, but since most other stores have equally high or higher prices, the customers will end up paying more. While the above statement is correct, it's import to remember that setting a wage floor will always result in someone subsidizing an activity, or a reduction in that activity. In this case, that means means shifting in the costs of subsidy from taxpayers to customers, or a reduction in the number of jobs at big box stores. In a democratic system, which Chicago might be, either one of these choices are fine with me. It's just important to note who benefits and who loses from such proposals.

Jeff

1) If minimum wage increases are good, then let's just raise it to $100/hr so we can all be rich.... right?....

2) Someone said big box stores increase auto traffic. Well then which scenario causes more traffic:
a) I drive to walmart, buy what I need, then drive home.
b) I drive to one store for groceries, another store for tools, another store for flowers, another store for beer, etc, etc?

Shawn

I am surprised that neither Professor Becker nor Judge Posner took the opportunity to put the matter in historical perspective. Each has been a keen observer for long enough to do so.In most countries similar to the United States, provision of health care is (1) considered a government function and (2) publicly provided. There is likely some causation running from (1) to (2).In the United States, health care was essentially self-pay until the mid-20th century. Then, favorable tax treatment combined with an exemption on group insurance premiums from wage and price controls in a tightening labor market and, voila - suddenly the most productive members of the US economy are often covered under group policies through their employers.Toss in the fact that those group insurance policies solve one of the insurance market's two big inherent problems (adverse selection, check; moral hazard, still an issue), and the result shows remarkable stability.Flash forward to 1965. LBJ signs Medicare into law, putting the highest-use customers of medical services on the same model that the rest of the "western" world uses for all citizens. And there you have it. Today's median-aged US native-born citizen was born about 1971, and the vast majority of Americans think it quite normal that you get your health coverage from your employer (or from your spouse's or parent's employer) until you turn 65, when the government jumps in.So how does this start to rupture? Well, for one thing, some of the stability has come out of the system because the cost of providing healthcare has grown way faster than inflation (substitution aside, no big deal) and way faster than GDP (big deal). Exacerbated by the poor cost control one expects when two parties (doctor and patient) decide what a third party (big, mean insurance company) will pay, prices have increased to the point where not only are the absolute amounts a large part of compensation, but insurer must account for the reduced effect of group coverage in eliminating the adverse selection problem.And so employers reduce or drop coverage and put more of the burden on the employees - whether through employee-paid premiums or higher copayments and deductibles. But the result looks like a breach of the social contract - the unwritten terms of which are that you get your health coverage from your employer (or from your spouse's or parent's employer) until you turn 65, when the government jumps in.As I see it, Maryland's legislature tried, and Chicago's aldermen are trying, to reduce the old social contract to writing at a time when the terms of the old deal don't work for one of the parties.

Anonymous

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Anonymous

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