Wages Are Like Love by Jeffrey A. Tucker

“The circumstances of time and place are no different for employers and employees.” – Jeffrey Tucker.

All this talk about raising the minimum wage has very little to do with reality. Raising it will not create a single job—if you aren’t earning a wage, making yourself more expensive is not going gain you a job—and will not likely cause anyone’s wages to rise. It’s hard to find anyone who is actually willing to contradict those claims, because they stem from basic price theory: Less of the same good will be purchased at a higher price than a lower price.

The timing is also incredibly bad. Business is already dealing with huge cost increases because of Obamacare. Many businesses are in full protest mode. Plus, employment markets are soft.

Economic growth in general is under downward pressure, with even past growth rates being revised downward. Economic growth is so pathetic now that Janet Yellen, the new head of the Fed, took a page from the Soviet playbook and suggested the bad weather itself is what is to blame—a line still used by Zimbabwe to explain its perpetual woes. It’s a heck of a time to force higher wages on businesses.

But wait. The New York Times has another view.

The writers and editors are arguing for President Obama to increase the minimum wage by executive fiat. And they use a novel argument based on 2013 research published by the Institute for Research on Labor and Employment at Berkeley University. This new research, based on data from many regions and time periods, suggests one clear effect of higher minimum wages. The labor force that remains after the wage hike tends to stick around longer because people don’t tend to move from job to job.

Now, in some way, this conclusion follows intuition. Once a business has trained someone and then gets coerced into paying that person more than he or she would otherwise earn, the business is going to be ever more dedicated to squeezing every bit of actual labor out of the person.

Business is less inclined to hire expensive new people and more inclined to press existing labor for performance. Workers are going to be less willing to risk leaving a crummy job that they are overpaid for doing because the job options have become tighter and muddier thanks to an increased wage.

In other words, higher minimum wages more deeply entrench what has come to be called “job lock.” Whether the employee and employer are happy with the arrangement or not, jobs tend to be frozen in place as a result of less fluid markets. People cling to what is known and what exists—the devil you know. This makes sense. Markets are synonymous with change. The less markets are allowed to work, the more stagnation you can expect in every area of life.

That doesn’t sound so hot, does it? But there’s another way to spin this effect, and The New York Timeseditorial page does its best to provide just such a spin. In fact, the editorial treats all of this research regarding job lock as wonderful news. It shows that “workers were less likely to leave on their own, and managers were more likely to keep the workers they had on staff to avoid the cost of recruiting and training replacements.”

Remarkable, isn’t it? In this rendering, business is saving money by raising wages, so what’s not to like? To be sure, there is nothing wrong with business doing this on its own. Retaining employees is sometimes good and sometimes bad, depending on a forecast of the future. It all depends, and surely it should be up to business and its labor force to make these decisions without bureaucratic fiat intervening.

What the editorial suggests is that higher wages need to be forced on business because otherwise managers would not understand their own interests. Businesses makes thousands of decisions every week regarding inventory, real estate, websites, accounting, product development, marketing, research and development, and vastly more, but, according to the minimum wage idea, they are clueless about how to manage the wages and salaries of their own workforce with an eye to profit maximization. For this, businesses need government to tell them what to do.

Do you see the presumption here? It is that the Department of Labor—not a profit-making firm but one run by people whose wages and salaries are dictated by law rather than markets—is in a better position than the private sector to know what the market demands. That’s implausible on the face of it, unless you fundamentally believe that markets are dumber than governments and that the price system is nonfunctioning.

That lack of basic economic understanding is only the beginning of the frustrations that economists have when looking at these debates. The urge to boost the minimum wage is driven not by economic considerations but political ones. It is a favor thrown toward unions and large corporations—institutions that already enjoy or pay high wages—at the expense of smaller companies or unemployed/marginal workers who have a hard time gaining any kind of foothold in the market.

The minimum wage also provides public relations benefits to politicians who are more readily seen as people who help people live better lives.

The cited research and the editorial are probably right that higher wages mandated by law tend to lock down existing jobs. But how they can argue that this is a good thing is a real puzzle.

In the real world, wages and salaries are like love; they’re complex and personal matters determined by concerns tied to the peculiarities of time and place. So they’re impossible to legislate from the outside without doing harm. For example, it might be to the advantage of a young person to work for very low wages as a way of getting in the door. Or there might be a benefit to working for free as a way of gaining necessary training.

In the real world, there are occasions when it makes sense to accept a much lower wage than you are currently getting as a way of earning a stake in a company on the rise.

Consider the culture of a startup, for example. Most of the workers are working for free or even negative wages in the hopes of creating something wonderful for the future. This has become a way of life for many people who are living in the tech world. They are making a bet that they can apply their own “sweat equity” to create something marvelous for the future. This is not a small issue, since these are the companies creating our future for us. They do not conform to the minimum-wage model of enterprise.

A consistent effort to impose minimum wages would rule out the startups that are creating the new technologies and services that are making the future possible. These startups ignore the law, which is the only way these enterprises work.

Our central planners tell us all what we should earn and what we should pay. In the end, these are intimate details of life that are unique to our lives, to time, to place. Central plans will always miss the mark and end up forcing inapplicable models upon us that do not meet the needs of a free-enterprise economy. That they believe they know is an expression of arrogance and an expression of an underlying belief that force is a better system than agreement.

20121129_JeffreyTuckeravatarABOUT JEFFREY A. TUCKER

Jeffrey Tucker is a distinguished fellow at FEE, CEO of the startup Liberty.me, and publisher at Laissez Faire Books. He will be speaking at the FEE summer seminar “Making Innovation Possible: The Role of Economics in Scientific Progress.”

Florida’s 303 public pension systems are unsustainable

Florida has the third highest number of public pension systems in the United States. According to the U.S. Census Bureau the states with the most public pension systems were Pennsylvania (1,425 systems), Illinois (457 systems) and Florida (303 systems).

The U.S. Census Bureau publishes The Annual Survey of Public Pensions: State- and Locally-Administered Defined Benefit Data, which is a census of all 222 state government pension systems and a sample of local government pension systems. The latest report was published in August 2013.

The six states with the largest amounts of total state and local cash and investment holdings in 2011 (the latest year data is available) were California ($600.0 billion), New York ($319.3 billion), Texas ($192.6 billion), Florida ($157.8 billion), Ohio ($152.4 billion) and Illinois ($127.7 billion) in total holdings and investments. Total holdings and investments in these states comprised just over half (51.2 percent) of total holdings and investments for the United States.

The Florida pension system is overseen by the State Board of Administration (SBA), which was created by the Florida Constitution and is governed by a three-member Board of Trustees (Trustees), comprised of the Governor as Chair, the Chief Financial Officer and the Attorney General.

The basic problem is there are fewer paying into public pensions with a growing number taking funds out of the systems. The report looks at active public pension members versus beneficiaries over time. The ratios of member to beneficiaries are: 1991 2.8 to 1, 2001 2.3 to 1 and 2011 1.7 to 1. Public pension systems are unsustainable.

For a larger view click on the chart.

The Florida Retirement System (FRS) carries the bulk of the public pension system load in the sunshine state. Cities, counties, school boards and public hospital employees pay into this system. According to the MyFRS website, “The FRS Pension Plan funding valuation takes place annually, available December 1st and was 86.9 percent funded, as of July 1, 2012. You can view a chart that compares the plan’s actuarial liabilities to the plan’s actuarial assets for the past five fiscal years. The annual benefit payments to FRS retirees and beneficiaries (shown in white on the chart) are a part of the overall plan liabilities. The market value of the total assets of the FRS Pension Plan is updated monthly.”

The Census Department reports the following public pension data for Florida (in thousands of dollars): Total contributions of $4,993,460, total employee contributions of $349,947, contributions from the state government $875,190, and from local government $3,768,323. Contributions from state and local government means from Florida taxpayers.

According to the report in 2011 Florida’s public pension systems payed out between $20,000 to $24,999 on average.

Defined benefit public pension programs are a growing financial burden for cities, counties, school boards and public hospitals. If one pension system fails Florida taxpayers will be left holding the bag.

RELATED: Florida’s public pensions still bleeding taxpayers

The decline and fall of America’s unions

“Hell hath no fury like a bureaucrat scorned.” – Milton Friedman

Many blame the decline of union membership on Republicans and big business. But is that what history tells us? The answer is: No!

As political power becomes more centralized there is an irreversible decline in the power of unions. It is a cause and effect that cannot be denied or stopped.

American unions began forming in the mid-19th century in response to the social and economic impact of the industrial revolution. National labor unions began to form in the post-Civil War Era. The Knights of Labor emerged as a major force in the late 1880s, but it collapsed because of poor organization, lack of effective leadership, disagreement over goals, and strong opposition from employers and government forces.

Government forces are accelerating the collapse of unions. But how?

Oleg Atbashian in his book Shakedown Socialism writes, “Union perks mean nothing when there is nothing left to redistribute. The Soviets learned it the hard way. The American unions don’t seem to be able to learn from the mistakes of others.”

A recent example is how the unions first supported the Affordable Care Act and are now opposing it.

Townhall.com reported in July 2013, “The leaders of three major U.S. unions, including the highly influential Teamsters, have sent a scathing open letter to Democratic leaders in Congress, warning that unless changes are made, President Obama’s health care reform plan will “destroy the foundation of the 40 hour work week that is the backbone of the American middle class.”

If that’s not bad enough, the Affordable Care Act, if not modified, will “destroy the very health and wellbeing of our members along with millions of other hardworking Americans,” the letter says.

Atbashian uses the example of Poland’s Solidarnosc, an independent union that spearheaded the overthrow of the oppressive Communist regime in 1989.  Why? Because, “…Current [union] perks can only exist in a free and competitive economy that ensures growth and generates wealth – known as ‘capitalist exploitation’ in the lingo of the champions of ‘redistributive justice’.”

Unions are only relevant if they retain their control to collectively bargain for wages and benefits. If the government takes over this role, as it did workplace safety with OSHA, then unions are doomed.

When government becomes the sole arbiter of the social and economic impact of industry, then unions are forced to submit.

Atbashian notes, “The workers are not herd animals, nor are they a separate biological species with a different set of interests. They are as human as anyone else who possesses a mind and free will, and therefore their long-term interests are not different than the rest of humanity. And since the interests of humanity lie with liberty, property rights and the rule of law, this is what the unions should stand for.”

Milton Friedman, in Free to Choose: A Personal Statement, wrote, “The ICC [Interstate Commerce Commission] illustrates what might be called the natural history of government intervention. A real or fancied evil leads to demands to do something about it. A political coalition forms consisting of sincere, high-minded reformers and equally sincere interested parties. The incompatible objectives of the members of the coalition (e.g., low prices to consumers and high prices to producers) are glossed over by fine rhetoric about ‘the public interest,’ ‘fair competition,’ and the like. The coalition succeeds in getting Congress (or a state legislature) to pass a law. The preamble to the law pays lip service to the rhetoric and the body of the law grants power to government officials to ‘do something.’ The high-minded reformers experience a glow of triumph and turn their attention to new causes. The interested parties go to work to make sure that the power is used for their benefit. They generally succeed. Success breeds its problems, which are met by broadening the scope of intervention.”

Friedman noted, “Bureaucracy takes its toll so that even the initial special interests [e.g. unions] no longer benefit. In the end the effects are precisely the opposite of the objectives of the reformers and generally do not even achieve the objectives of the special interests. Yet the activity is so firmly established and so many vested interests are connected with it that repeal of the initial legislation is nearly inconceivable. Instead, new government legislation is called for to cope with the problems produced by the earlier legislation and a new cycle begins.”

The “angel of death” for unions is progressivism, its primary weapon is big government bureaucrats, the anti-union soldiers.

RELATED: 

Union membership declines in 2012 – US Department of Labor

Under Obama, black unemployment back to twice the white rate – PEW Research

Teacher Makes $4 Million Dollars a Year

In this past weekend’s Wall Street Journal, journalist and author Amanda Ripley, profiled a teacher in South Korea who makes $4 million a year. Yes … $4 million. His name is Kim Ki-Hoon and he teaches in one of South Korea’s private, after-school tutoring academies called “hagwons” where his lectures are videotaped then available for purchase on the internet. Mr. Ki-Hoon is paid according to his demand (which, evidently, is pretty high) in what Ms. Ripley calls “a free market for teaching talent.”

These private tutors are essentially “free agents”, meaning they don’t receive a base salary—their pay is based on performance. So, how is their performance evaluated?

Ripley writes, “Performance evaluations are typically based on how many students sign up for their classes, their students’ test-score growth, and satisfaction surveys given to students and parents.”

In South Korea, students truly are the customers. If you are a highly-respected teacher in a hagwon, countless numbers of students will pay for your services, which, as Mr. Ki-Hoon has demonstrated, can become quite lucrative. Most importantly, they are getting results.

South Korean students routinely outperform students in the United States on international tests. However, this wasn’t always the case. Ripley writes, “Sixty years ago, most South Koreans were illiterate; today, South Korean 15-year-olds rank No. 2 in the world in reading, behind Shanghai. The country now has a 93% high-school graduation rate, compared with 77% in the U.S.”

A startling statistic that Ripley uncovers is that South Korean parents spend $17 billion a year on tutoring services similar to Ki-Hoon’s, while American parents spend approximately $15 billion a year on video games. According to Ripley, in South Korea, “if parents aren’t engaged, that is considered a failure of the educators, not the family.”

So, what can the United States learn from high-performing countries like South Korea when it comes to educating our kids? Ripley has embarked on finding the answer to this question in her upcoming book, The Smartest Kids in the World—and How They Got That Way, which will be released on August 13.

Ms. Ripley will be providing keynote remarks at the U.S. Chamber of Commerce Foundation’s upcoming education summit, Connecting the Dots, on September 17 to share what she has learned while researching the book. The annual summit will bring together leaders in business, education, and workforce development to discuss issues which are vital to America’s competitiveness.

EDITORS NOTE: This column is cross-posted with permission from the U.S. Chamber of Commerce Foundation’s Education and Workforce blog.

Milton Friedman wrote, “Education spending will be most effective if it relies on parental choice & private initiative — the building blocks of success throughout our society.” 

Five Florida cities that may be future Detroits

For a larger view click on the map.

WDW- FL reported that one-third of Florida’s cities are in “perilous financial positions“. The reasons: the increasing burden of  growing retirement and medical costs for government retirees coupled with shrinking revenues.

Luke Rosiak from the Washington Examiner did an analysis to determine which US cities have a larger proportion of government workers to population than Detroit. Rosiak used the Census Bureau’s 2011 Annual Survey of Public Employment and Payroll to rank every U.S. city with a population of 200,000 or more.

Rosiak notes, “Remarkably, the Census Bureau excluded from these figures all teachers and education professionals, which make up the largest group of local government employees.”

Rosiak reports, “Detroit declared bankruptcy due in no small part to $3 billion in unfunded public employee pensions owed a sprawling city workforce that kept growing even as the city’s population shriveled, but a Washington Examiner analysis found that 19 major American cities have even bigger ratios of such workers to residents.”

“What’s more, seven of the 19 cities with larger relative workforces than Detroit paid workers more than twice as much as the Motor City did its employees,” states Rosiak.

To view the map with all of the city data click here.

Below are those Florida cities listed by Rosiak (Note: some city government agencies and public school teachers/education professionals are not counted):

TAMPA

Residents per employee   79
Population: 335,709
Employees: 4,244
Annual payroll: $540,168,672
Average compensation: $127,278
 

ST PETERSBURG

Residents per employee   83
Population: 244,769
Employees: 2,943
Annual payroll: $170,042,328
Average compensation: $57,778
 
 

ORLANDO

Residents per employee   85
Population: 238,300
Employees: 2,799
Annual payroll: $338,968,872
Average compensation: $121,103
 
 

JACKSONVILLE

Residents per employee   87
Population: 821,784
Employees: 9,368
Annual payroll: $1,037,019,744
Average compensation: $110,698
 

MIAMI

Residents per employee   101
Population: 399,457
Employees: 3,923
Annual payroll: $479,194,080
Average compensation: $122,149
 
 

RELATED COLUMNS:

New Poll: Detroit Bankruptcy Popular in Michigan

A whole bunch of really depressing facts about Detroit

Did you know this is National Employee Freedom Week?

National Employee Freedom Week is a national effort “to inform union employees about the freedoms they have to opt out of union membership and let them make the decision that’s best for them.” Often that choice is freeing themselves from union membership, becoming an agency fee payer, or identifying as a religious/conscientious objector.

According to the National Employee Freedom Week website:

Because Florida is a Right-to-Work state, Floridians do not have to join or pay dues to any union organization in order to keep your job, salary, benefits or seniority. If you are already a member of a union, you can resign your membership by submitting a written notice to your union. A generic opt-out letter is available here. Florida employees will need their union’s address and contact information.

NEFW recommends that union employees make a copy of their letter and either deliver it in person and receive a stamped copy or mail it with Certified Mail Return Receipt Requested Signature. This protects the employee in case, a union boss “loses” your letter. NEFW also recommends sending a copy of the letter to your employer’s payroll department.

NOTE: State laws can differ depending on your profession, please consult with an employee rights organization if you have questions about your specific situation.

Non-union alternatives:

For Teachers:

Association of American Educators (AAE) – $15 per month membership
Christian Educators Association International (CEAI) – $239 annual membership
Professional Educators Network of Florida (PEN) – $180 annual membership

More Information About Your Rights here are some useful information sites provided by NEFW.

All Employees:

National Right to Work Legal Defense Foundation
Workplace Fairness Institute
Your Rights (Center for Union Facts)
Unions and Union Dues (American Center for Law and Justice)

For Teachers:

Teacher Rights (AAE)
Coalition of Educators Against Forced Unionism

Labor Reform Information, Research, and News:

The Heritage Foundation
Competitive Enterprise Institute
Center for Union Facts
National Taxpayers Union
FreedomWorks
National Right to Work Legal Defense Foundation
Insider Online (The Heritage Foundation)
Labor Watch (Capital Research Center)
Alliance for Worker Freedom (Americans for Tax Reform)
Workforce Freedom Initiative (US Chamber of Commerce)
Education Intelligence Agency

Michelle Rhee Grades Florida Among Top Two States in the Nation on Education Policy

Students First, founded by Michele Rhee, has issued its 2013 State Policy Report Card. No state received an “A” grade. Florida and Louisiana both received a grade of “B”, all other states were graded “C” to “F”. Florida received an A- for Elevating Teaching, a C- for Empowering Parents and a C for Spending Education dollars wisely.

The following outlines the rationale for these grades and why Florida was ranked in the top two nationally by Rhee:

“Florida has established itself as a national leader in putting students first. The state has adopted meaningful educator evaluations, and it requires districts to base all personnel decisions, as well as compensation structures, on classroom effectiveness. Florida is also a model for empowering parents. The state provides parents with useful information regarding school and teacher performance. Parents can also choose from a robust network of public charter schools and a tax credit scholarship program. Florida should provide comparable funding to public charter schools and needs to improve in holding local districts accountable for increasing student outcomes with their investments. The state should also allow mayors to take control of local districts that fail to improve under existing governance structures. Lastly, to ensure career flexibility and sustainability of Florida’s retirement system, it should require teachers to participate in its portable retirement option.”

ELEVATING TEACHING A- (GPA 3.64):

Florida is a leader for the rest of the country when it comes to ensuring effective teachers and principals are identified, retained, and rewarded by districts. Florida requires districts to evaluate educators meaningfully; several key multiple measures are incorporated, including student academic growth, which comprises 50 percent of the overall evaluation. Of importance, Florida mandates that performance drive all district personnel decisions, including placement, layoff, and tenure decisions. The state has already made progress in its implementation as well. Additionally, Florida invests in compensating its teachers through strong performance pay systems and in recruiting top teaching talent though its alternative certification programs. Adopting comprehensive reforms has allowed Florida to lead the country in its efforts to improve teacher quality and elevate the profession.

EMPOWERING PARENTS C- (GPA 1.94):

All families should have the information and access they need to choose high-quality schools for their children, and no student should be forced to attend a low-performing school or be taught by a low-performing teacher. Florida empowers parents by requiring all PK-12 schools to receive annual report cards that include an A-F letter grade based on student achievement and by requiring that parents are notified when their children are placed in the classroom of a teacher who has been rated ineffective. The state should pass parent trigger legislation that empowers parents to sign a petition to turn around a failing public school. Florida allows for the formation of public charter schools that must meet key accountability provisions, but it should allow for multiple authorizers. Additionally, the state should establish a publicly funded scholarship program limited to low-income students in chronically failing public schools and ensure private schools that participate meet certain accountability provisions.

SPENDING WISELY C (GPA 2.0)

Florida allows the state to intervene in academically underachieving schools and districts, but additional governance flexibility, such as mayoral control, is needed. While Florida allows districts to achieve cost efficiencies through multiple management alternatives, it should require districts to link spending data to student outcomes and permit governance changes when funds are mismanaged. Adopting these changes will strengthen Florida’s ability to ensure that resources are spent wisely and that districts are focused on improving student achievement. Florida has made significant progress in teacher pension reform by establishing a fully portable retirement option for teachers. The state should continue its reform efforts by requiring all teachers to participate in its portable plan.

To see how your state was graded click here.

Time for government employee pay and benefit cuts?

President Obama, senior administration officials and public policy advisers have stated that the greatest threat to our national security is our national debt. Our military understands this and the Department of Defense is taking the lead in proposing major cuts in pay and benefits for our military, veterans and their families.

The Center for American Progress led by Chairman John Podesta has called for capping military pay raises, eliminating military health benefits for many retirees who are covered by an employer-provided plan, and reducing the value of military retired pay as well as making military retirees wait until age 60 to start receiving it. These proposals have been embraced by the Department of Defense. It is estimated these changes will save $1 trillion over the next ten years.

Should all government employees at every level show the same commitment and take the same pay and benefit cuts to keep us all from falling off the “fiscal cliff”?

If our soldiers who are on the front lines defending this nation and our veterans who have served honorably can sacrifice cannot every government employee? Should not teachers, our police, firefighters, city, county state and federal employees not do their part as well? Are we not one nation facing the same fiscal future?

Americans for Prosperity (AFP) has recognized government pay and benefits as a priority issue to be addressed during the upcoming Florida legislative session.

The Five for Florida Plan states, “Our politicians must stop making promises that taxpayers can’t afford. We must force them to be honest with us, and make decisions that will protect us now and in the future. We need an honest, transparent retirement plan that works for both hardworking taxpayers and government workers.”

AFP’s Five for Florida Plan reports:

  • Florida’s Retirement System (FRS) serves more than 1 million government employees, making it the fourth largest public pension program in the country. Source: James Madison Institute
  • The FRS is 88% funded, assuming a 7.75% return on investment. Over the last 12 years, the fund has received an average return of 3.3%. Source: James Madison Institute
  • Florida currently has an optional defined contribution plan, however only 16% of employees elect to be enrolled in it, versus the 84% in the pension plan. Source: James Madison Institute
  • Public sector pension programs guarantee a rate of return that is 3 to 4 times higher than what private sector workers are able to earn. Source: The Heritage Foundation
  • The State of Florida currently contributes $5.5 billion per year to the FRS, but would need to double that contribution to $11 billion a year for the fund to remain solvent. Source: James Madison Institute

Changes must come; government must set the example for the rest of us by stepping up to the plate and making the hard decisions to rein in spending in the short and long terms. Government employee salaries and benefits are now coming under greater scrutiny by both liberal think tanks like the Center for American Progress and conservative ones like Americans for Prosperity.

Finally, we are getting somewhere when both of these organizations come to the same conclusions. The question is do our political leaders have the will to do what is needed?

Now is the time for political leaders at the city, county, state and federal government to see the writing on the proverbial “fiscal cliff”.