@ModeledBehavior (the Twitter account for a group economics blog, ModeledBehavior.com) shared this on Friday night:
Because what we need right now are more labor market regulations http://nyti.ms/ivdMwq
Obviously, @ModeledBehavior was being sarcastic here, but the Connecticut legislators are totally serious. Their plan is to mandate that hourly employees in the services sector will be given one hour of sick time for every 40 hours they work. There’s a lot of good stuff here that illustrates how little politicians understand about economics.
Here were my replies (first, second) to @ModeledBehavior:
@ModeledBehavior New Wage = Old Wage – 2.5%. Or, for minimum wage employees: New Employment Rate (NER) = Old ER – 2.5%. #Winning #Recovery
@ModeledBehavior Total wages paid won’t change. It’s a mandate for service sector employers to withold 2.5% of pay in sick-pay savings acct.
What’s tricky about this sort of thing is that it sounds so nice. But it takes a lot of effort to really understand what this legislation would do, and what it means. This sounds really nice because hourly employees typically just have to call in sick and miss a paid work day when they’re not feeling well. Too many missed days and the employee’s job could be in danger. This way, they’ll still get paid for that day when they’re sick.
But not really. As I replied to @ModeledBehavior, one of two things would happen: either the employers would lower the hourly wages they pay or, for minimum wage employees, they’d simply hire fewer employees. I’ll break down each case below.
Before I go on, let me set up the analogy I’ll use for the rest of the post:
Tommy works at a grocery store and gets paid $10 an hour. The proposed legislation says the following to Tommy’s employer: “Tommy is going to work 40 hours this week, but you have to pay him for 41 in case he gets sick later. Just hold back that extra hour’s pay and bank it so he can use it when he needs it.”
Two possible results
Let’s say Tommy’s 40 hours of work is worth $400 to the employer ($10 per hour). The employer can afford to pay Tommy $400 for every 40 hours of actual work Tommy does. This new legislation says the employer has to give Tommy one hour of sick time for every 40 hours he works. This will happen one of two ways (remember the employer is not making any more money when Tommy is out sick – his revenue is the same, or possibly less since Tommy can’t help sell or bag stuff when he’s out sick):
- The employer will reduce Tommy’s hourly wage so that he’s now paying Tommy $400 for 41 hours instead of 40.
- OR If Tommy is already at the minimum wage, the employer will raise Tommy’s total wage to $410, which means the employer now has fewer dollars to spend on “salary” and will be able to hire fewer employees.
New wage = old wage – 2.5%
This is the most likely, but it assumes Tommy is making more than minimum wage. We’ve already said the employer values Tommy’s 40 hours of productive work at $400. So, when Tommy bags groceries for 40 hours, that’s worth $400 to the employer’s store. If Tommy is out sick, he’s not bagging groceries and therefore isn’t adding value to the store. So, Tommy’s value doesn’t change – it’s still $400. Only now the employer has to pay Tommy for 41 hours of work. What to do? Reduce his hourly rate so that the total cost is still $400. If Tommy was getting paid $400 for 40 hours of work, the employer will simply continue paying Tommy $400, only now it’s for 41 hours (40 hours of productive work and one hour for the sick bank). Tommy’s hourly wage will drop from $10 to $9.75.
$400/40 = $10 per hour
$400/41 = $9.75 per hour
Will the employer actually reduce Tommy’s pay by $.25 an hour? Maybe. But it’s more likely that the employer would just reduce Tommy’s hours and hire another employee at $9.75 an hour. Eventually, he’d just cut Tommy and move the new guy up to 40 hours.
For minimum wage employees: New Employment Rate (NER) = Old ER – 2.5%
But what if the employee were already making the minimum wage? Let’s call him Ralph and say he’s also making $10 an hour to make things easy? (In Ralph’s universe, $10 an hour is minimum wage whereas in Tommy’s universe, $10 an hour was well above minimum wage.) The employer can’t reduce Ralph’s hourly rate because it’s already at the minimum, and he can’t hire a new guy to do the work at a lower hourly rate. What to do? The only thing to do is hire fewer people.
Let’s say this particular store had 100 Ralphs. Each Ralph is being paid $10 an hour, so each Ralph is worth $2400 for 40 hours of productive work. Together, all 100 Ralphs are worth $40,000 for 40 hours of productive work, so that’s what the employer pays all the Ralphs to do their work.
$10 per hour * 40 hours = $400
$400 * 100 Ralphs = $40,000
The new legislation dictates that each Ralph now has to get paid $410 for 40 hours of productive work (minimum wage of $10 an hour at a total of 41 hours). But we know the employer has only budgeted $40,000 for Ralphs, so he’ll be able to employ fewer Ralphs.
$40,000 budget / $410 per Ralph = 97.5 Ralphs
100 Ralphs – 97.5 Ralphs = 2.5 fewer Ralphs
2.5 is 2.5% of 100 Ralphs
So, the number of Ralphs employed dropped from 100 Ralphs to 97.5 Ralphs, which is a 2.5% decrease. Each Ralph will now be banking one hour of sick time for every 40 hours he works, but there will be 2.5 unemployed Ralphs.
But what about these other options?
I would expect people to respond to this by saying that these aren’t the only two options, and they’d be right. But the other options aren’t great either. Maybe I’ll cover some of those in a separate post. Here are a couple options that might be suggested for handling this wage increase (with my response in parenthesis):
- The stores could take less profit (and they could go out of business since profit margins are already pretty small)
- The stores could charge higher prices (this could also cause them to go out of business, but would most likely lead to inflation, which would ultimately erase any wage increase)
What’s your point?
My point is that this legislation is a bad idea and it will ultimately hurt those who it is ostensibly trying to help. The original article talks about how other legislatures are considering similar legislation, and they’re looking to Connecticut to see how it works. This could negatively affect workers’ wages and even increase unemployment at a time when the labor force is already hurting.
I’ve been talking to some small business owners about this and I’m getting a better idea of how this sort of legislation impacts business owners in the real world (it’s not much different than what I’ve described here). I may follow up on this post if I get enough new information and insight in my research.