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“Creating Jobs” Will Hurt the Economy by T. Norman Van Cott

How many jobs would the Keystone Pipeline project create? Political reporter Tom Murse points out that the answer is a matter of dispute. “Supporters argue that the Keystone XL pipeline would create tens of thousands, if not hundreds of thousands, of new jobs.” But critics “claim those numbers are wildly inflated,” Murse writes.

Both sides assume a higher number would make the project better for the economy. Both sides have it backwards.

Home Economics

The value of work is easy to grasp at the most domestic level: your own home.

Being a homeowner isn’t easy. Among other things, you always seem to have more chores to do than time to do them. The chores are not ends in themselves. Rather, they are means to an end — in this case, making a home and yard more livable or aesthetically pleasing.

Opting to do a chore yourself — “insourcing” in current parlance — isn’t costless. You lose the opportunity to enjoy the fruits of your other labors. For example, you could tackle different chores, spend more time with your family, or work extra hours in the marketplace, increasing your income. Hiring someone else to do the chore — that is, “outsourcing” — isn’t costless, either. It means you can’t buy other things. Costs represent sacrificed alternatives.

The rule when it comes to home ownership isn’t rocket science. Tackle those chores whose ends you value more than their cost. If your water softener breaks, and you value having softened water more than what it would cost either you or the plumber to repair it, then hire the plumber if his cost is less than what it costs you to fix it yourself. (Don’t forget to count the work time you’ll be giving up to act as your own plumber.)

By outsourcing the repair work, you will have “lost a job,” but your standard of living will be higher. By how much? The difference between your cost and the plumber’s cost.

Added household chores — that is, “gaining jobs” — are anything but a blessing. Chores represent hurdles between you and that more livable, aesthetically pleasing home and yard. Each job represents something you’re going to have to give up before your house is the way you want it. “Gaining jobs” to achieve a given objective is synonymous with worsening your situation, not improving it.

The Rule Writ Large — The Case of the Keystone Pipeline

What is rocket science for many is the ability to recognize that the rule for individual households extends to the national household, as we can see in the case of the Keystone Pipeline controversy. The project, which has been a political football for several years, would transfer oil from Canada to the Texas Gulf Coast. The project’s desirability is associated with the number of jobs required for the pipeline’s construction and maintenance. The more jobs created, the more desirable the pipeline, it would seem.

All involved in the discussion fail to apply lessons for individual households to the national household. Pipeline jobs are part of the cost of getting oil from Canada to the Texas Gulf Coast. They are not part of the benefits. The fewer jobs created, the better. Indeed, in the best of all worlds, there would bezero jobs required to transfer oil from Canada to the Texas Gulf Coast. That way, we could get the oil transferred without having to give up anything!

Pipeline proponents who note a large number of required jobs are unwittingly arguing against the project, just as opponents who cite a small number of jobs are unwittingly arguing in its favor.

Beyond the Pipeline

This failure to apply the simple rules for individual households is not restricted to the Keystone Pipeline issue. It pervades economic, business, and political discussions. Government programs come packaged with estimates of the number of new jobs the programs will supposedly create. The more jobs, the merrier. That’s the political refrain. Likewise, state and local economic development bureaucrats tout the number of jobs associated with business relocations or expansions.

One has to wonder whether those who peddle this more-jobs nonsense apply it to their own households. I bet not. Fewer chores, not more, make their homes more enjoyable. National households are no different. Or as Adam Smith put it in his classic, The Wealth of Nations, that which “is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.”

T. Norman Van CottT. Norman Van Cott

T. Norman Van Cott, professor of economics, received his Ph.D. from the University of Washington in 1969. Before joining Ball State in 1977, he taught at University of New Mexico (1968-1972) and West Georgia College (1972-1977). He was the department chairperson from 1985 to 1999. His fields of interest include microeconomic theory, public finance, and international economics. Van Cott’s current research is the economics of constitutions.

We Pay Millions to ‘Ghost Teachers’ Who Don’t Teach by Jason Bedrick

The Philadelphia school district is in a near-constant state of financial crisis. There are many factors contributing to this sorry state — particularly its governance structure — but it is compounded by fiscal mismanagement. One particularly egregious example is paying six-figure salaries to the tune of $1.5 million a year to “ghost teachers” that do not teach. Pennsylvania Watchdog explains:

As part of the contract with the School District of Philadelphia, the local teachers union is permitted to take up to 63 teachers out of the classroom to work full-time for the Philadelphia Federation of Teachers. The practice, known as “release time” or “official time,” allows public school teachers to leave the classroom and continue to earn a public salary, benefits, pension and seniority.

These so-called ghost teachers perform a variety of jobs for the PFT, serving as either information officers for other teachers or carrying out the union’s political agenda.

“Teachers should be paid to teach,” attorney Kara Sweigart, who is arguing ghost teacher lawsuits for the Fairness Center, a free legal service for employees who feel they’ve been wronged by their unions, told Watchdog.

“At a time when school districts are hurting financially, districts should be devoting every tax dollar to support students,” she said, “not to pay the salaries of employees of a private political organization.”

According to public salary data available through Philadelphia city agencies, the school district is paying 16 ghost teachers $1.5 million this year. All of them are making at least $81,000.

PFT Vice President Arlene Kempin, who has been on release time since 1983, is among the highest paid at $108,062. Union head Jerry Jordan, who has also been on release time for more than 30 years, is earning $81,245, according to district payroll logs. The 16 ghost teachers on the books this year are making an average salary of almost $98,000.

The “ghost teacher” phenomenon is far from unique to Philly or even the education sector. Such “release time” subsidies for ghost teachers, policemen, firefighters, and bureaucrats of all stripes are common features of public-sector union contracts nationwide. Last month, a Yankee Institute report found that Connecticut provided unions with $4.1 million to subsidize 121,000 hours union-related activities, “the equivalent of more than a year’s worth of work for 50 full-time employees.” Meanwhile, the Goldwater Institute in Arizona is in the midst of a lawsuit against the city of Phoenix for unconstitutionally providing millions of dollars in release-time subsidies.

According to the most recent report from the federal Office of Personnel Management, the federal government paid more than $157 million in 2012 for federal employees to work for their unions for a total of 3,439,449 hours. And those are just the direct costs.

In his book, Understanding the Teacher Union Contract: A Citizen’s Handbook, former teacher union negotiator Myron Lieberman explained how difficult it is to account for the full amount of subsidies that taxpayers provide to the unions:

Most school board members are not aware of the magnitude of these subsidies. In school district budgets, the subsidies are never grouped together under the heading “Subsidies to the Union.” Instead, the subsidies are included in school district budgets under a variety of headings that may or may not refer to the union…

School districts pay for these subsidies from a variety of line items in the district budget: payments to substitute teachers, teacher salaries, and pension contributions, among others.

In most situations, the union subsidy is lumped together with other expenses paid for under the same line item; for example, the costs of hiring substitutes for teachers who are on released time for union business may be included in a budget line for substitutes that also covers substitutes for other reasons, such as replacing teachers on sick leave, personal leave, maternity/paternity leave, and so on.

Taxpayer dollars allocated for education should be spent on items and activities that assist student learning, not to promote the interests of private organizations (especially when their interests often collide with the interests of students). Union work should be paid out of funds the unions collect through dues and donations, not funds expropriated from unwilling and unwitting taxpayers.

Cross-posted from Cato.org.

Jason Bedrick

Jason Bedrick

Jason Bedrick is a policy analyst with the Cato Institute’s Center for Educational Freedom.

Grade Inflation Eats Away at the Meaning of College by George C. Leef

The Year Was 2081 and Everyone Was Finally Above Average.

Every so often, the issue of grade inflation makes the headlines, and we are reminded that grades are being debased continuously.

That happened in late March when the two academics who have most assiduously studied grade inflation — Stuart Rojstaczer and Christopher Healy — provided fresh evidence on their site GradeInflation.com that grade inflation continues.

The authors state, “After 30 years of making incremental changes (in grading), the amount of rise has become so large that what’s happening becomes clear: mediocre students are getting higher and higher grades.”

In their database of over 400 colleges and universities covering the whole range of our higher education system, from large and prestigious universities to small, non-selective colleges, the researchers found not one where grades had remained level over the last 50 years. The overall rise in grades nationally has brought about a tripling of the percentage of A grades, although some schools have been much more “generous” than others.

Or, to look at it the other way, some schools have been much better than others in maintaining academic standards. For instance, Miami of Ohio, the University of Missouri, and Brigham Young have had low grade inflation. Why that has been the case would be worth investigating.

In North Carolina, Duke leads in grade inflation, followed closely by UNC. Wake Forest is in the middle of the pack, while UNC-Asheville has had comparatively little.

But why have American colleges and universities allowed, or perhaps even encouraged grade inflation? Why, as professor Clarence Deitsch and Norman Van Cott put it in this Pope Center piece five years ago, do we have “too many rhinestones masquerading as diamonds?”

Part of the answer, wrote Deitsch and Van Cott, is the fact that money is at stake.  “Professors don’t have to be rocket scientists to figure out that low grades can delay student graduation, thereby undermining state funding and faculty salaries,” they observed.

It might surprise Americans who believe that non-profit entities like colleges are not motivated by money and would allow honest academic assessment to be affected by concerns over revenue maximization, but they do.

But it is not just money that explains grade inflation. At least as important and probably more so is the pressure on faculty members to keep students happy.

History professor Chuck Chalberg put his finger on the problem in this article in the Minneapolis Star-Tribune.

Chalberg writes about a friend of his who had completed her Ph.D. in psychology and was working as a teaching assistant to a professor and graded the papers submitted by the undergraduates “with what she thought was an appropriate level of rigor.” But it was not appropriate, she soon learned. The professor “revised nearly all of the grades upward so that were left no failures, few C’s, and mostly A’s and B’s.”

Had she underappreciated the real quality of the work of the students? No, but, Chalberg continues, “the students thought that they were really, really, smart, and would have been quite angry and thrown some major tantrums if they got what they actually deserved.”

Thus, giving out high but undeserved grades is a way of avoiding trouble. That trouble could come from students who have an elevated and unrealistic view of their abilities and will complain about any low grade to school officials.

It could also come from their parents, who have been known to helicopter in and gripe to the administrators that young Emma or Zachary just can’t have a C and if it isn’t changed immediately, there will be serious repercussions.

Another possibility is that faculty will give out inflated grades to avoid conflict with those school administrators.

Low grades affect student retention and at many colleges the most important thing is to keep students enrolled. Back in 2008, Norfolk State University biology professor Stephen Aird lost his job because the administration was upset with him for having the nerve to grade students according to their actual learning rather than giving out undeserved grades just to keep them content. (I wrote about that pathetic case here.)

Could it be that students are getting better and deserve the higher grades they’re receiving?

You’d get an argument if you ran that explanation by Professor Ron Srigley, who teaches at the University of Prince Edward Island. In this thoroughly iconoclastic essay published in March, he stated, “Over the past fourteen years of teaching, my students’ grade-point averages have steadily gone up while real student achievement has dropped. Papers I would have failed ten years ago on the grounds that they were unintelligible … I now routinely assign grades of C or higher.”

Professor Srigley points to one factor that many other professors have observed — students simply won’t read. They aren’t in the habit of reading (due to falling K-12 standards) and rarely do assigned readings in college. “They will tell you that they don’t read because they don’t have to. They can get an A without ever opening a book,” he writes.

We also have good evidence that on average, today’s college students spend much less time in studying in homework than students used to. In this 2010 study, Professor Philip Babcock and Mindy Marks found that college students today spend only about two thirds as much time as they did some fifty years ago. That’s hardly consistent with the notion that students today are really earning all those A grades.

On the whole, today’s students are receiving substantially higher grades for substantially lower academic gains than in the past.

Grade inflation is consistent with the customer friendly, “college experience” model that has mushroomed alongside the old, “you’ve come here to learn” college model. For students who merely want the degree to which many believe themselves entitled, rigorous grading is as unwelcome as cold showers and spartan meals would be at a luxury resort. Leaders at most colleges know that if they don’t satisfy their student-customers, they will find another school that will.

Exactly what is the problem, though?

Grade inflation could be seen as harmful to the downstream parties, the future employers of students who coast through college with high grades but little intellectual benefit. Doesn’t grade inflation trick them into over-estimating the capabilities of students?

That is a very minor concern. For one thing, it seems to be the case that employers don’t really pay much attention to college transcripts. In this NAS piece, Academically Adrift author Richard Arum writes, “Examining post-college transitions of recent graduates, Josipa Roksa and I have found that course transcripts are seldom considered by employers in the hiring process.”

That’s predictable. People in business have come to expect grade inflation just as they have come to expect monetary inflation. Naturally, they take measures to avoid bad hiring decisions just as they take measures to avoid bad investment decisions. They have better means of evaluating applicants than merely looking at GPAs.

Instead, the real harm of grade inflation is that it is a fraud on students who are misled into thinking that they are more competent than they really are.

It makes students believe they are good writers when in fact they are poor writers. It makes them believe they can comprehend books and documents when they can barely do so. It makes them think they can treat college as a Five Year Party or a Beer and Circus bacchanalia because they seem to be doing fine, when they’re actually wasting a lot of time and money.

Dishonest grading from professors is as bad as dishonest health reports from doctors who just want their patients to feel happy would be. The truth may be unpleasant, but it’s better to know it than to live in blissful ignorance.

This article was originally published by the Pope Center.

George C. LeefGeorge C. Leef

George Leef is the former book review editor of The Freeman. He is director of research at the John W. Pope Center for Higher Education Policy.

California’s $15 Minimum Wage Is a Terrible, Unethical ‘Experiment’ by David R. Henderson

The law will have devastating consequences, particularly for immigrants, minorities, and the less educated.

In yesterday’s Washington Post, Charles Lane reports on the move, that’s almost a done deal, to raise California’s minimum wage in stages to a whopping $15 an hour by 2022. Lane, or his editors, wisely titled the article, “The risks of California’s minimum-wage increase.”

Lane writes:

By 2022, when fully phased in (small firms with fewer than 25 workers would have until 2023 to comply), the California minimum wage would represent 69 percent of the median hourly wage in the state, assuming 2.2 percent annual growth from the current median of roughly $19 per hour.

That 69 percent ratio would be all but unprecedented, in U.S. terms and internationally. The current California minimum wage represents about half the state’s median hourly wage, just as the federal minimum wage averaged 48 percent of the national median between 1960 and 1979, according to a 2014 Brookings Institution paper by economist Arindrajit Dube. (It is currently 38 percent of the national median.)

Other industrial democracies with statutory minimum wages typically set theirs at half the national median wage, too.

Even Dube recommends a minimum wage equal to half the median wage. One that’s 69 percent of the minimum wage is 38% higher than the level Dube recommends.

So Dube would oppose such an increase, right?

Wrong. Assuming that Lane reported Dube’s response accurately, he favors the increase. Why? Lane writes:

He [Dube] told me by email that California’s experiment is worth running and monitoring.

But these are humans being experimented on. Worth monitoring? Absolutely. Worth running? No damn way.

Economist Jonathan Meer, whose work Lane also cites, writes on Facebook (I am quoting with permission):

Playing with the March CPS [Current Population Survey], I find that a whopping 11% of young high school dropouts in California have a full time job. 85% of all high school dropouts in California are paid $15 an hour or less.

Among young (under 30) high school dropouts, that number is 96%.

Among *all* black and Hispanic respondents under 30 (irrespective of education), 90% are paid $15/hr or less.

This will not be good.

Cross-posted from Econlog.

David R. HendersonDavid R. Henderson

David Henderson is a research fellow with the Hoover Institution and an economics professor at the Graduate School of Business and Public Policy, Naval Postgraduate School, Monterey, California. He is editor of The Concise Encyclopedia of Economics (Liberty Fund) and blogs at econlib.org.

Do European Labor Laws Lead to Terrorism? by Alex Tabarrok

Why are there poor Muslim ghettos in Europe but not in the United States?

In Belgium, high unemployment and crime-ridden Muslim ghettos have fomented radicalism, but as Jeff Jacoby writes:

Muslims in the United States … have had no problem acclimating to mainstream norms. In a detailed 2011 survey, the Pew Research Center found that Muslim Americans are “highly assimilated into American society and … largely content with their lives.”

More than 80 percent of US Muslims expressed satisfaction with life in America, and 63 percent said they felt no conflict “between being a devout Muslim and living in a modern society.”

The rates at which they participate in various everyday American activities — from following local sports teams to watching entertainment TV — are similar to those of the American public generally. Half of all Muslim immigrants display the US flag at home, in the office, or on their car.

Jacoby, however, doesn’t explain why these differences exist. One reason is the greater flexibility of American labor markets compared to those in Europe.

Institutions that make it more difficult to hire and fire workers or adjust wages can increase unemployment and reduce employment, especially among immigrant youth. Firms will be less willing to hire if it is very costly to fire. As Tyler and I put it in Modern Principles, how many people will want to go on a date if every date requires a marriage?

The hiring hurdle is especially burdensome for immigrants given the additional real or perceived uncertainty from hiring immigrants. One of the few ways that immigrants can compete in these situations is by offering to work for lower wages. But if that route is blocked by minimum wages, or requirements that every worker receive significant non-wage benefits, unemployment and non-employment among immigrants will be high — generating disaffection, especially among the young.

Huber, for example, (see also Angrist and Kuglerfinds:

Countries with more centralized wage bargaining, stricter product market regulation and countries with a higher union density, have worse labour market outcomes for their immigrants relative to natives even after controlling for compositional effects.

The problem of labor market rigidity is especially acute in Belgium, where the differences between native and immigrant unemployment, employment and wages are among the highest in the OECD. Language difficulties and skills are one reason, but labor market rigidity is another, as this OECD report makes clear:

Belgian labour market settings are generally unfavourable to the employment outcomes of low-skilled workers. Reduced employment rates stem from high labour costs, which deter demand for low-productivity workers…

Furthermore, labour market segmentation and rigidity weigh on the wages and progression prospects of outsiders. With immigrants over-represented among low-wage, vulnerable workers, labour market settings likely hurt the foreign-born disproportionately. …

Minimum wages can create a barrier to employment of low-skilled immigrants, especially for youth. As a proportion of the median wage, the Belgian statutory minimum wage is on the high side in international comparison and sectoral agreements generally provide for even higher minima. This helps to prevent in-work poverty … but risks pricing low-skilled workers out of the labour market (Neumark and Wascher, 2006).

Groups with further real or perceived productivity handicaps, such as youth or immigrants, will be among the most affected.

In 2012, the overall unemployment rate in Belgium was 7.6% (15-64 age group), rising to 19.8% for those in the labour force aged under 25, and, among these, reaching 29.3% and 27.9% for immigrants and their native-born offspring, respectively.

Immigration can benefit both immigrants and natives but achieving those benefits requires the appropriate institutions especially open and flexible labor markets.

This post first appeared at Marginal Revolution.

Alex TabarrokAlex Tabarrok

Alex Tabarrok is a professor of economics at George Mason University. He blogs at Marginal Revolution with Tyler Cowen.

The $15 Minimum Wage and the End of Teen Work by Jack Salmon

A new report from JP Morgan Chase & Co. finds that the summer employment rate for teenagers is nearing a record low at 34 percent. The report surveyed 15 US cities and found that despite an increase in summer positions available over a two year period, only 38 percent of teens and young adults found summer jobs.

This would be worrying by itself given the importance of work experience in entry-level career development, but it is also part of a long-term trend. Since 1995 the rate of seasonal teenage employment has declined by over a third from around 55 percent to 34 percent in 2015. The report does not attempt to examine why summer youth employment has fallen over the past two decades. If it had, it would probably find one answer in the minimum wage.

Most of the 15 cities studied in this report have minimum wage rates above the federal level, with cities such as Seattle having a rate more than double that. Recent data from the Bureau of Labor Statistics seen in the chart show exactly how a drastic rise in the minimum wage rate affects the rate of employment.

Seattle has experienced the largest 3 month job loss in its history last year, following the introduction of a $15 minimum wage. We can only imagine the impact such a change has had on the prospects of employment for the young and unskilled.

Raising the minimum wage reduces the number of jobs in the long-run. It is difficult to measure this long-run effect in terms of the numbers of never materializing jobs. However, the key mechanism behind the model—that more labor-intensive establishments are replaced by more capital-intensive ones—is supported by evidence. That is why recent research suggesting that minimum wages barely reduce the number of jobs in the short-run, should be taken with caution. Several years down the line, a higher real minimum wage can lead to much larger employment losses.

Nevertheless, politicians continue to push the idea that minimum wage laws are somehow helping the young “earn a decent wage.” It is important to remember the underlying motives behind pushes for higher minimum wage rates. Milton Friedman characterized it as an “unholy coalition of do-gooders on the one hand and special interests on the other; special interests being the trade unions.”

Several empirical studies have been conducted over the course of more than two decades, with all evidence pointing toward negative effects of minimum wage rises on employment levels among the young and unskilled. A study conducted by David Neumark and William Wascher in 1995 noted that “such increases raise the probability that more-skilled teenagers leave school and displace lower-skilled workers from their jobs. These findings are consistent with the predictions of a competitive labor market model that recognizes skill differences among workers. In addition, we find that the displaced lower-skilled workers are more likely to end up non-enrolled and non-employed.”

Policy makers who continuously raise the minimum wage simply assure that those young people, whose skills are not sufficient to justify that kind of wage, will instead remain unemployed. In an interview, Friedman famously asked “What do you call a person whose labor is worth less than the minimum wage? Permanently unemployed.”

The upshot: Raising the minimum wage at both federal and local levels denies youth the skills and experience they need to get their career going.

This post first appeared at CEI.org.

Jack SalmonJack Salmon

Jack Salmon is a research associate at the Competitive Enterprise Institute.

Progress Will Hurt Blameless People by Aaron Ross Powell

There’s an unfortunate tendency among some free market advocates to blame the victim: If you can’t find work, it’s because you’re lazy or you somehow screwed up. Hard work’s all that’s necessary to succeed. But of course that’s not true. It’s quite easy to think of counterexamples. We know creative destruction is a necessary part of a well-functioning economy. Market churn means people lose their jobs through no fault of their own, and shifts in technology and consumer preferences mean that skills once lucrative can suddenly become relatively worthless. Markets are overwhelmingly good, yes, and are responsible for the astonishing amelioration of poverty we’ve seen since the Industrial Revolution, but they have their victims.

A changing global economy has meant a changing American economy and a changing American economy has meant that some people who did well in the old pattern are having a harder time in the new. This harder time is felt by, among others, a segment of America’s lower-middle class who used to be able to find decent-paying jobs that demanded physical labor and the kinds of skills you don’t learn in school.

That segment increasingly faces a fact about the modern economy: Unless you’re a knowledge worker, it’s become a whole lot harder to find a well-paying, stable, long-term job because the skills you bring to an employer aren’t as in demand as they used to be.

And that’s awful for the people going through it. We can say that free markets change over time and that those changes lead to more prosperity in the long term, and that’s true. But it doesn’t make life better for the machinist or construction worker without a college degree and without much retirement savings. Empathy seems an appropriate response by those of us not facing such hardship.

That even well-functioning markets hurt some people some of the time makes selling market solutions to policy problems often a difficult task. We know that the solution to unemployment or underemployment is more economic freedom. Get rid of the barriers to entry and the protectionist policies keeping afloat what would otherwise be failing firms. Enable private schools to create a robust and successful educational system so more people have the skills needed to succeed in a modern economy. Open trade with the rest of the world, so we can grow our economy, buy goods at lower prices, and sell into more markets.

But here’s the thing. Every one of those solutions ends up sounding, to the person economically hurting now, like saying, “Leave it alone and things will work themselves out. Don’t know quite how or when, but they will.”

Market solutions are emergent solutions, and emergence takes time and can’t be planned or predicted. In fact, it’s the attempt to plan and predict that leads so many non-market-based policies to fail. Economists understand this and so largely trust markets. But most Americans aren’t economists.

I think this explains, in part, the appeal of people like Donald Trump or Bernie Sanders. We see them as misdiagnosing the problems and offering counter-productive, and sometimes abhorrent, “solutions.” Immigrants are taking your jobs. (They aren’t.) So let’s fix it right now by closing the borders. Trade with China is making us poor. (It isn’t.) So let’s fix it now by establishing quotas and tariffs.

But to people hurting right now, people like Trump or Sanders offer something free markets can’t: certainty, even if illusory. These people right here are the cause of your problems. Punish or stop them and your problems will go away. America will go back to being great, with “great” meaning the way it was when low-information, low-skill Americans could spend their lives comfortably in the middle class. In other words, before America’s economy became modern.

We don’t want that, of course. The economic visions of Trump and Sanders aren’t just backwards, but are dangerously retrograde policies that will hurt everyone without doing much to improve the lives of those who support such policies.

Liberty struggles when confronted with this combination of widespread economic ignorance and the political incentive for politicians to pander and promise solutions that are anything but. And I don’t know how to solve that. Nor do I believe there’s an easy solution. The incentives in politics run against us, and so we somehow need to get better at articulating the story of markets, of the voluntary and the emergent, and do it in a way that’s as compelling and hopeful in its rhetoric as the false hopes sold by those pitching meretricious intervention.

Part of that means consciously avoiding a panglossian picture of markets, and recognizing that sometimes people get hurt by them, and that often that hurt is blameless.

Cross-posted from Libertarianism.org.

Aaron Ross PowellAaron Ross Powell

Aaron Ross Powell is a research fellow and editor of Libertarianism.org.

Americans’ Incomes Are Unequal, But Mobile by Chelsea German

Americans often move between different income brackets over the course of their lives. As covered in an earlier blog post, over 50 percent of Americans find themselves among the top 10 percent of income-earners for at least one year during their working lives, and over 11 percent of Americans will be counted among the top 1 percent of income-earners for at least one year.

Fortunately, a great deal of what explains this income mobility are choices that are largely within an individual’s control. While people tend to earn more in their “prime earning years” than in their youth or old age, other key factors that explain income differences are education level, marital status, and number of earners per household. As Mark Perry recently wrote:

The good news is that the key demographic factors that explain differences in household income are not fixed over our lifetimes and are largely under our control (e.g. staying in school and graduating, getting and staying married, etc.), which means that individuals and households are not destined to remain in a single income quintile forever.

According to the economist Thomas Sowell, whom Perry cites, “Most working Americans, who were initially in the bottom 20% of income-earners, rise out of that bottom 20%. More of them end up in the top 20% than remain in the bottom 20%.”

While people move between income groups over their lifetime, many worry that income inequality between different income groups is increasing. The growing income inequality is real, but its causes are more complex than the demagogues make them out to be.

Consider, for example, the effect of “power couples,” or people with high levels of education marrying one another and forming dual-earner households. In a free society, people can marry whoever they want, even if it does contribute to widening income disparities.

Or consider the effects of regressive government regulations on exacerbating income inequality. These include barriers to entry that protect incumbent businesses and stifle competition. To name one extreme example, Louisiana recently required a government-issued license to become a florist.

Lifting more of these regressive regulations would aid income mobility and help to reduce income inequality, while also furthering economic growth.

This post first appeared at HumanProgress.org.

Chelsea GermanChelsea German

Chelsea German works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

Low-Skilled Workers Flee the Minimum Wage: How State Lawmakers Exile the Needy by Corey Iacono

What happens when, in a country where workers are free to move, a region raises its minimum wage? Do those with the fewest skills seek out the regions with the highest wage floors?

New minimum wage research by economist Joan Monras of the Paris Institute of Political Studies (Sciences Po) attempts to answer that question. Monras theoretically shows that there should be a close relationship between the employment effects of raising the minimum wage and the migration of low-skilled workers.

When the demand for local low-skilled labor is relatively unresponsive (or inelastic) to wage changes, raising the minimum wage should lead to an influx of low-skilled workers from other states in search of better-paying jobs. On the other hand, if the demand for low-skilled labor is relatively responsive (or elastic), raising the minimum wage will lead low-skilled workers to flee to states where they will more easily find employment.

To test the model empirically, Monras examined data from all the changes in effective state minimum wages over the period 1985 to 2012. Looking at time frames of three years before and after each minimum wage increase, Monras found that

  1. As depicted in the graph below on the left, those who kept their jobs earned more under the minimum wage. No surprise there.
  2. As depicted in the graph below on the right, workers with the fewest skills were having an easier time finding full-time employment prior to the minimum wage increase. But this trend completely reversed as soon as the minimum wage was increased.
  3. A control group of high-skilled workers didn’t experience either of these effects. Those affected by the changing laws were the least skilled and the most vulnerable.

These results show that the timing of minimum wage increases is not random.

Instead, policy makers tend to raise minimum wages when low-skilled workers’ real wages are declining and employment is rising. Many studies, misled by the assumption that the timing of minimum wage increases is not influenced by local labor demand, have interpreted the lack of falling low-skilled employment following a minimum wage increase as evidence that minimum wage increases have no effect on employment.

When Monras applied this same false assumption to his model, he got the same result. However, to observe the true effect of minimum wage increases on employment, he assumed a counterfactual scenario where, had the minimum wages not been raised, the trend in low-skilled employment growth would have continued as it was.

By making this comparison, Monras was able to estimate that wages increased considerably following a minimum wage hike, but employment also fell considerably. In fact, employment fell more than wages rose. For every 1 percent increase in wages, the share of a state’s population of low-skilled workers in full-time employment fell by 1.2 percent. (The same empirical approach showed that minimum wage increases had no effect on the wages or employment of a control group of high-skilled workers.)

Monras’s model predicts that if labor demand is sensitive to wage changes, low-skilled workers should leave states that increase their minimum wages — and that’s exactly what his empirical evidence shows.

According to Monras,

A 1 percent reduction in the share of employed low-skilled workers [following a minimum wage increase] reduces the share of low-skilled population by between .5 and .8 percent. It is worth emphasizing that this is a surprising and remarkable result: workers for whom the [minimum wage] policy was designed leave the states where the policy is implemented.

These new and important findings reinforce the view that minimum wage increases come at a cost to the employment rates of low-skilled workers.

They also pose a difficult question for minimum wage proponents: If minimum wage increases benefit low-skilled workers, why do these workers leave the states that raise their minimum wage?

Corey IaconoCorey Iacono

Corey Iacono is a student at the University of Rhode Island majoring in pharmaceutical science and minoring in economics.

Obama Administration Declares War on Franchisors and Subcontractors by Walter Olson

In a series of unilateral moves, the Obama administration has been introducing an entirely new regime of labor law without benefit of legislation, upending decades’ worth of precedent so as to herd as many workers into unions as possible.

The newest, yesterday, from the National Labor Relations Board, is also probably the most drastic yet: in a case against waste hauler Browning-Ferris Industries, the Board declared that from now on, franchisors and companies that employ subcontractors and temporary staffing agencies will often be treated as if they were really direct employers of those other firms’ workforces: they will be held liable for alleged labor law violations at the other workplaces, and will be under legal compulsion to bargain with unions deemed to represent their staff.

The new test, one of “industrial realities,” will ask whether the remote company has the power, even the potential power, to significantly influence working conditions or wages at the subcontractor or franchisee; a previous test sought to determine whether the remote company exercised “ ‘direct and immediate impact’ on the worker’s terms and conditions — say, if that second company is involved in hiring and determining pay levels.”

This is a really big deal; as our friend Iain Murray puts it at CEI, it has the potential to “set back the clock 40 years, to an era of corporate giants when few people had the option of being their own bosses while pursuing innovative employment arrangements.”

  • A tech start-up currently contracts out for janitorial, cafeteria, and landscaping services. It will now be at legal risk should its hired contractors be later found to have violated labor law in some way, as by improperly resisting unionization. If it wants to avoid this danger of vicarious liability, it may have to fire the outside firms and directly hire workers of its own.
  • A national fast-food chain currently employs only headquarters staff, with franchisees employing all the staff at local restaurants. Union organizers can now insist that it bargain centrally with local organizers, at risk for alleged infractions by the franchisees. To escape, it can either try to replace its franchise model with company-owned outlets — so that it can directly control compliance — or at least try to exert more control over franchisees, twisting their arms to recognize unions or requiring that an agent of the franchiser be on site at all times to monitor labor law compliance.

Writes management-side labor lawyer Jon Hyman:

If staffing agencies and franchisors are now equal under the National Labor Relations Act with their customers and franchisees, then we will see the end of staffing agencies and franchises as viable business models.

Moreover, do not think for a second that this expansion of joint-employer liability will stop at the NLRB. The Department of Labor recently announced that it is exploring a similar expansion of liability for OSHA violations. And the EEOC is similarly exploring the issue for discrimination liability.

And Beth Milito, senior legal counsel at the National Federation of Independent Business, quoted at The Hill: “It will make it much harder for self-employed subcontractors to get jobs.”

What will happen to the thriving white-van culture of small skilled contractors that now provides upward mobility to so many tradespeople? Trade it in for a company van, start punching someone’s clock, and just forget about building a business of your own.

What do advocates of these changes intend to accomplish by destroying the economics of business relationships under which millions of Americans are presently employed? For many, the aim is to force much more of the economy into the mold of large-payroll, unionized employers, a system for which the 1950s are often (wrongly) idealized.

One wonders whether many of the smart New Economy people who bought into the Obama administration’s promises really knew what they were buying.

This post first appeared at Cato.org.

Walter Olson
Walter Olson

Walter Olson is a senior fellow at the Cato Institute’s Center for Constitutional Studies.

Obama’s Econ Advisers: Occupational Licensing Is a Disaster by Mikayla Novak

Libertarians received a rare pleasant surprise when President Obamaʼs Council of Economic Advisers issued a report highly critical of occupational licensing.

The report cited numerous problems arising from this increasingly burdensome regulatory practice, which requires ordinary Americans to obtain expensive licenses and permits to perform ordinary jobs.

It is a belated recognition by the administration that government has long been acting against the best interests of workers and consumers.

And it might give us something of a warm inner glow to consider, as the Wall Street Journal recently did, that reforming occupational licensing could catalyze important economic reforms that transcend traditional political and ideological divides.

And reform is vital: each and every day, occupational licensing destroys the ability of individuals to freely and peacefully pursue their own livelihoods.

Licensing hurts workers

Occupational licensing locks countless of people out of dignified and meaningful job opportunities.

The CEA report indicates that more than a quarter of all workers in the United States need a government license or permit to legally work. Two-thirds of the increase in licensing since the 1960s is attributable to an increase in the number of professions being licensed, not to growth within traditionally licensed professions like law or medicine.

The data show that licensed workers earn on average 28 percent more than unlicensed workers. Only some of this observed premium is accounted for by the differences in education, training and experience between the two groups. The rest comes from reducing supply, locking competitors out of the market and extracting higher prices from consumers.

What makes professional licensing so invidious is that it serves as a barrier to entry in the labor market, simply because it takes so much time and money to obtain a license to work.

For young people, immigrants, and low-income individuals, it can be extremely difficult to stump up the cash and find the time — sometimes hundreds or even thousands of hours — to get licensed. The fees to maintain a license can also be exorbitant.

Compounding the problem is that licensing requirements are spreading into more industries, such as construction, food catering, and hairdressing — occupations where it used to be easy to start a career.

Today, there is arguably no more lethal poison for labor market freedom and upward mobility than occupational licensing.

Licensing hurts consumers

Defenders of occupational licensing say that workers need to be licensed because without it consumers would be harmed by poor service.

In the absence of licensing, children will be taught improperly at school, patients won’t get adequate health care in hospital, home owners will not get their leaky sinks fixed, and somebody could fall victim to an improper haircut.

But, in the name of promoting quality, licensing regulations perversely raise costs and reduce choices for consumers.

The CEA concludes that, by imposing entry barriers against potential competitors who could undercut the prices of incumbent suppliers, licensing raises prices for consumers by between 3 and 16 percent.

Moreover, the effect of licensing on product quality is unclear. The report notes that the empirical literature doesn’t demonstrate an increase in quality from licensure.

By restricting supply, licensing dulls the incentive for incumbents to provide the best quality products because the threat of new entrants competing with better offerings is diminished.

Perversely, the inflated prices offered by licensed providers may force some consumers to seek unlicensed providers, or to use less effective substitutes, or to do jobs themselves — in some cases increasing the risk of accidents.

In a blow to the notion of efficient government bureaucracy, the CEA indicates that government licensing boards routinely fail in monitoring licensed providers, contributing to the lack of improvement in quality.

Ending the war on livelihood freedom

To restore a climate friendly to economic liberty, people must feel they have a direct, personal stake in what Deidre McCloskey calls “market-tested betterment” — that is to say, in capitalism.

There is no better way to achieve this than to allow individuals to build their own livelihoods, finding decent jobs serving customers with the goods and services they want, at prices they mutually agree on.

The argument for economic liberty is also grounded in the moral imperative of respecting the freedom of other people to lead their own lives as they see fit, including their right to choose their own livelihood.

Proponents of occupational licensing can always serve up a parade of hypothetical horribles about things that could go wrong if people didn’t need the state’s permission to work, but nothing has been more harmful to workers and consumers than occupational licensing.

Mikayla Novak
Mikayla Novak

Mikayla Novak is a senior researcher for the Institute of Public Affairs, an Australian free market think tank, and holds a doctorate in economics. She specializes in public finance, economic history, and the history of classical liberal thought.

Are CEOs Overpaid? by Gary M. Galles

Are corporate managers and CEOs overpaid?

Many politicians rail against “overpaid” corporate managers. But these attacks overlook the issues of risk and uncertainty.

Workers agree to compensation before performing their work. Consequently, their compensation reflects not a known value but their expected value when arrangements are made.

Managers who turn out more productive than expected will have been underpaid, those less productive than expected will have been overpaid. But examples of the latter don’t prove managers are generally overpaid.

As performance reveals productivity, competition will also bid compensation of superior managers up and inferior managers down. And we must consider the present value of that entire stream, not a given year’s results, to evaluate managers’ productivity versus pay.

No manager is always right, but not every mistake is proof that they’re overpaid. They are paid for superior, not flawless, judgment — fewer mistakes, but not no mistakes.

That is another reason top managers of large enterprises will be very highly compensated. A 1% higher probability of being right on a $1 billion bet is very valuable, and even more so for a $10 billion bet. But even the best will err sometimes, so mistakes don’t prove shareholders are overpaying for managerial judgment.

This is part of a series of micro-blogs by Professor Galles responding to frequently asked questions on economic issues. If you have a question, emailAnythingPeaceful@FEE.org. 

How Minimum Wages Discourage Entrepreneurship by Donald J. Boudreaux

In a letter to the Wall Street Journal, Brian Collins asks, “Do you truly believe that absent any increase in the minimum wage that Wendy’s or any other business will suspend efforts to develop and implement new forms of automation that promise to reduce staff levels?”

The answer is “no.” Contrary to Mr. Collins’s implication, however, this fact does nothing to excuse raising the minimum wage.

Even in a world in which market forces naturally promote automation, raising the minimum wage has two pernicious effects.

First, it causes the rate of automation to be faster than it would be if the minimum wage were not raised. That is, raising the minimum wage results in automation being introduced at a rate that is too fast given the size of the low-skilled labor force.

Second, raising the minimum wage destroys incentives for entrepreneurs and businesses to find ways to profitably employ workers whose limited skills prevent them from producing hourly outputs valued at least as high as the minimum wage.

The first effect throws some low-skilled workers out of jobs that they would otherwise retain, while the second effect ensures that no one has incentives to find ways to profitably employ these and other low-skilled workers.

If it is inhumane to outlaw the profitable employment of those workers whose skills are the least valuable, then the minimum wage is deeply inhumane.

If the government instituted a minimum wage of $100 per hour and, therefore, made unlawful the profitable employment of all those people whose skills are too meager to enable them to produce at least $100 worth of output per hour, there would be a national uproar — and rightly so.

Yet when the government implements such a policy but in a way that outlaws the profitable employment only of people whose skill-sets are among thelowest, relatively few people object and many people — especially “Progressives” — applaud the policy as humane.

How sad. And how especially sad that many economists today, who above all should know better, lend their authority to such an inhumane policy.

A version of this letter first appeared at Café Hayek.

Donald J. Boudreaux
Donald J. Boudreaux

Donald Boudreaux is a professor of economics at George Mason University, a former FEE president, and the author of Hypocrites and Half-Wits.

How Sexist Is Your Office Temp? by Sarah Skwire

My Facebook wall is bursting with people arguing over a recent article from theWashington Post that claims that air conditioning in the office is sexist.

Women, argues Petula Dvorak, are naturally inclined to suffer more from the cold, so office thermostats set at 68 or 70 degrees keep men comfortable, but make women miserable. Her article strongly implies that this is done because men lack consideration for the comfort of others and because women are denied the power and the agency to get temperatures set where they want them.

I am a small cold woman who keeps two blankets in her office. I sympathize.

But despite my sympathy, I think Dvorak — and most of my Facebook friends — are missing an extremely important point: The fact that there are women suffering in overly air-conditioned offices is not a sign of how oppressed we are. It is a sign of how far we have come.

The economist Claudia Goldin has written persuasively about the long-term changes in women’s work over the course of the 20th century. She notes that the soaring rate of women’s labor force participation from the 1950s-1970s is part of a greater, century-long revolution. And it is that revolution that means that there are more and more women who are able to be in an office to begin with.

Once we’re in the office, we’re cold. But let’s not allow the chill to lull us to sleep. We can complain so loudly about the A/C because women are present in working environments in increasing numbers. That’s a good thing.

Dvorak gets a lot of mileage from her outrage over men’s office attire. They wear suits and ties and broadcloth shirts and are thus comfortable in air conditioning, while women dressed in seasonally-appropriate attire shiver from cold.

Why, she wonders, don’t men simply dress more appropriately?

Office dress codes are certainly part of the answer, but a larger part of the answer seems to be that women got a revolution that has missed men entirely — a revolution in dress.

Underneath her conservative suit, the working woman of the 1950s would have worn something like the Playtex Living Girdle, made of perforated rubber, and designed to produce the sleek figure required by the fashions of the time.

Rubber girdles certainly did that. But they were also hot, sweaty, and uncomfortable. Women who were freed of them by the new fashions of the ‘60s and the invention of pantyhose were nothing but grateful.

And the current generation of women — who have rejected even pantyhose as a relic of the past — are freer than ever… and colder. Ditching girdles and hose means that we have fewer layers between us and the office air conditioning. We’ve burned our foundation garments, but the fire hasn’t kept us warm.

I certainly don’t suggest returning to girdles or leaving the workplace in order to stay warm.

But I do think it’s dumb to blame the patriarchy, as represented by the guy in the next cubicle, for the fact that we’re cold.

We’re cold because we won the revolution. And now we have the power to request more equitable dress codes for our male colleagues, or to design offices with individualized climate controls, or to recognize that the world isn’t perfect, but that sometimes a little sweater can help.

Sarah Skwire
Sarah Skwire

Sarah Skwire is a senior fellow at Liberty Fund, Inc. She is a poet and author of the writing textbook Writing with a Thesis.

The Credential Is Killing the Classroom by Isaac M. Morehouse

“I wish college were like this!”

I hear this exclamation over and over at the seminars put on by organizations like the Foundation for Economic Education and the Institute for Humane Studies.

Attendees are blown away by the excellence of the content, the professors’ willingness to engage students even in free time, and the intelligence and interest level of the other participants.

And it’s not just the students who see a difference. Faculty also talk about how these seminars are far better than typical college classes.

What causes this distinction?

One obvious explanation is self-selection. Faculty and students who choose to give up a week of their summer to discuss ideas are high caliber and highly engaged.

But college has self-selection, too. Shouldn’t it be full of professors and students who are earnest truth and knowledge seekers of the finest quality?

With the rare exception of one or two classes, college is nothing like this. Why does the self-selection only produce quality learning in these seminars?

It’s because college offers an official credential — a degree. Educational experiences outside of college do not.

That’s it. Every other difference is insignificant.

Imagine how different these summer seminars would be if they offered an official, government-approved piece of paper at the end — something without which you couldn’t get past the first screening of job applications. A summer seminar selling a magical ticket to a job that Mom and Dad would feel proud of and that society would respect would be overwhelmed with attendees. And many of them wouldn’t give a hoot about what they had to do to get the paper at the end. Demand for faculty would spike, and many instructors would do whatever it took to get the paycheck and retreat to quiet corridors where they could be with their books and the few colleagues who actually care.

It would become, in a word, college.

The evidence is everywhere that the credential is killing the classroom. I’ve guest taught entry-level college classes before. It’s pretty painful. Most of the students are half asleep, grumpy, forlorn, texting, and generally inattentive.

I like to joke that if aliens from another planet came down and observed a typical class at a typical university and were asked what they had witnessed, they would scan the cinder block and fluorescent room, ponder the pained look on student faces, and conclude it was a penal colony. Imagine their surprise when told these people are not only here of their own free will, but paying tens of thousands of dollars for their suffering.

Not every classroom is that painful, but few inspire the joy of learning. Consider this: when class is cancelled, everyone is happy — students and professors alike. What other good can you think of where you pay in advance and are excited when it’s not delivered?

But what is the product that colleges are selling? The professors may not always realize it, but it’s not their lectures the students are buying. It’s nice to get a little enjoyment and knowledge out of the deal, but that’s not what tuition pays for. After all, if that’s all that students were seeking, they could simply sit in on classes without registering or paying.

They are there for the credential. The credential is the signal to the working world that they are at least slightly better, on average, than those without it. That’s it.

In some fields the credential is required, and in many others alternative ways to measure competence are illegal, so the signal of a degree retains artificially enhanced value. Even so, that value is fading.

Large institutions form because transaction costs are high, with tons of individuals exchanging goods, services, and information separately. This is why family names mattered so much in times past. Economist Ronald Coase famously explained the existence of firms using this basic logic. It works for universities, too. When it’s hard to prove your worth, you get a trusted institution to vouch for you. It’s a shortcut that reduces risk on the part of those who want to hire you.

But each passing year, the value of this institutional reputation-backer declines compared to the available alternatives. Technology has dramatically reduced information costs, so it is now easier than ever to vouch for yourself — or to get vast networks of clients and customers to vouch for you.

Whose steak is the best? Where once you had to rely on a few food critics or word of mouth among a small set of friends, now Yelp reviews let you consult a vast array of food lovers.

With reputation markets, you can build a better signal than what college is selling.

As long as legal and cultural norms make the degree the primary signal of value in the marketplace, the classroom will continue to decline in quality. When the majority of students are purchasing one good (the credential) but are made to endure another (the classroom), they will continue to see formal education as more of a cost than a benefit — and they will behave accordingly, sliding through to minimize pain and suffering.

The classroom isn’t doing the credential any favors, either. Most employers admit that a degree signals very little these days. Everyone has one. Most universities sell as many as they possibly can. Cases of professors passing bad students and universities passing bad professors are well known, and the institutions’ clout is waning.

Even employers who still require a degree ask for much more on top of it, because sitting through a bunch of classes you didn’t care about and doing the minimum amount of passionless hoop-jumping doesn’t convey much about your energy, eagerness, and ability to create value in a dynamic market.

My professor friends sometimes chastise me for what they think are unfair criticisms of college. What I’m suggesting, however — that the credential should be separated from the classroom — reflects my respect for great professors and the value of their style of education.

Classroom learning at its best — classes like those I’ve experienced in summer seminars — is so powerful and so valuable that I hate to see great education destroyed and diminished by artificial attachment to a supposedly magical credential. The subsidies, loans, restrictions, requirements, and licensure laws, as well as the parental and societal worship of college as the great economic security blanket, have filled the classroom with so much clutter that it’s a rarity for quality interaction to occur.

I’m excited to see the cleavage between the credential and the classroom happening right in front of us. It’s not the proliferation of free online university courses that will fundamentally change the college experience in countries like the United States, where access to information is already rich. The “massively open online course” is just a new delivery system for a current good — and one that most Americans aren’t buying anyway. The real shift is occurring as fewer and fewer employers look to the degree as the dominant signal, and as more and more young people build their own.

When the dust settles, we’ll see great teachers and researchers doing their thing with eager audiences of students who are actually there to purchase that unique product, not just suffering through it on their way to getting something else they really want. The host of mediocre faculty will lose, but the good ones will win big, both in economic opportunity and in quality of the craft. So will the young customers who wish to learn from them.


Isaac M. Morehouse

Isaac Morehouse is the founder and CEO of Praxis.