Background:
This Hot Topic provides a good application of market analysis to a real-world situation for students who have learned about the interaction of demand and supply in creating market prices. In setting up the hot topic discussion, review the roles of supplier and demander in labor markets – a common area of confusion for students. Having spent most of their lives as consumers, students tend to think of businesses as sellers and themselves as buyers, instead of the other way around. Remind them that in the market for labor workers are suppliers of labor. Business firms, employers, are demanders of labor. It is worth the time to review and clarify the labor market roles.
After identifying the players, students who have learned about the pricing function of markets should be able to predict how both sides of the market will behave. Workers (suppliers of labor) will be willing and able to offer more labor for sale when wages (the price of labor) are higher. On the other hand, businesses (demanders of labor), will be willing and able to pay (buy) more labor when wages (the price of labor) are lower. As in all markets, this tension between supply and demand will result in an equilibrium- in this case, an equilibrium wage and an equilibrium quantity of employees.
(For more on the effects of minimum wage on labor markets, see “Minimum Wages” by Linda Gorman. "
Lesson Guide
This lesson provides two separate sets of readings and questions – which can be used together or separately – regarding recent legislative attempts to help low wage workers. The first reading considers the recent Maryland legislation on health care benefits at Wal-Mart and the second reports on the $9.50/hr. minimum wage law in Santa Fe, New Mexico.
- Distribute the handout for students to read during class time, or as homework.
- Divide the class into small groups for discussion. Distribute the discussion question handout.
- Conduct a class discussion, and display the questions on an overhead transparency.
OR
Reading #1
The “Wal-Mart Bill” – legislating a minimum level of benefits
In January, the Maryland legislature passed the “Fair Share Health Care Act” requiring companies employing more than 10,000 employees to spend a minimum of 8% of total payroll on health care. (Note that Wal-Mart is the only company in Maryland which will be affected by the bill.) Any difference between 8% and the actual amount spent must be contributed to a special state health care fund. In addition the legislature increased the state minimum wage to $6.15/hr.
Maryland is not the only state considering a “Wal-Mart bill.” At last count, 22 other states are taking legislative aim at Wal-Mart’s benefits, drafting bills modeled after the Maryland “Fair Share Health Care Act.”
An initial look at the idea of increasing health care benefits and the minimum wage might seem like a no brainer: What could be better? However, as the French economist, Frederic Bastiat (1801-1850) pointed out 150 years ago, sound evaluation of economic policies means considering not only the seen, that which is obvious, but also the unseen, the not readily apparent, effects of the legislation.
What Is Seen and What Is Not Seen
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.
http://www.econlib.org/library/Bastiat/basEssContents.html
Keep in mind Bastiat’s warning about “what is seen and what is not seen” as you read about two recent, arguably well-intentioned, government policies designed to help low-income workers. Think about some of the unintended consequences (the “unforeseen”) that might result from these policies.
Practice being a good economist as you read the opinions of news columnists focusing on the unseen consequences of Maryland’s new “Fair Share Health Care Act.”
Hard Line State: Big Labor’s War on Wal-Mart Claims Casualties Among Poor Marylanders
by Steve H. Hanke and Stephen J.K. Walters
Unfortunately, in Somerset, the new law looks more like a body blow than a “swipe.” The rural county is Maryland’s poorest, with per capita personal income 46% below the state average and a poverty rate 130% above it. Somerset’s enduring problem is weak labor demand that greatly limits its 25,250 residents’ economic opportunities.
. . . It is hard to exaggerate how much the planned distribution center might have meant to Somerset’s economy. . . . [W]e forecast the “ripple effects” of the new income and spending that could have emanated from Wal-Mart’s facility as follows:
- The center’s 800 employees would have created an additional 282 jobs among “upstream” suppliers and “downstream” retailers and service establishments; all told, the center would have boosted county employment by 14% and private-sector employment by 20%.
- Total annual employee compensation in Somerset would have risen by $46.5 million, or 19%.
Thursday, January 26, 2006. WJS OpinionJournal.com
Maryland’s Wal-Mart Raid ‘a legislative mugging’,
by George Will, The Washington Post. Reprinted in The Rocky Mountain News, January 22, 2006, p. 7E.
. . . Wal-Mart’s supposed sin is this: One way it holds down prices (when it enters a market, retail prices decline 5 percent to 8 percent; nationally, it saves consumers $16 billion annually) is by . . . not offering higher wages and benefits than the labor market requires. . . .
Wal-Mart’s enemies say Maryland is justified in expropriating some of the company’s revenues because the company’s pay and medical benefits are insufficient to prevent some employees from being eligible for Medicaid. Well.
Eighty-six percent of Wal-Mart employees have health insurance, more than half through the company, which offers 18 plans, one with $11 monthly premiums and another with $3 co-payments. Wal-Mart employees are only slightly more likely to collect Medicaid than the average among the nation’s large retailers who hire many entry-level and part-time workers. In the last 12 months, Wal-Mart, the largest private employer in the nation and in 25 states, estimates it has paid its 1.3 million employees $4.7 billion in benefits. That sum is almost half as large as the company’s profits, which last fiscal year were $10.3 billion – just 3.6 percent – on revenues of $285 billion. Wal-Mart earns just $6000 per employee, one-third below the national average. Anyway, Wal-Mart’s pay and benefits are sufficient to attract hordes of job applicants whenever it opens a new American store, which it does once every three days.
We do need to point out that there are legislators who see Wal-Mart in a different light. Read the following news account of a Wal-Mart opening in near Chicago.
Thousands apply for jobs at new Wal-Mart
by Leslie Baldacci, Chicago Sun Times, January 26, 2006.
. . . Of 25,000 job applicants, all but 500 listed Chicago addresses, said John Bisio, regional manager of public affairs for Wal-Mart. "In our typical hiring process, you're pretty successful if you have 3,000 applicants," he said. . . .
Assistant manager Rachael Fierro, who was still interviewing prospects Wednesday, said "we saw a little bit of everything -- people who hadn't worked for a long time, people who saw an opportunity to do something with themselves. That's the information I got from applicants."
The 141,000-square-foot store .. . is expected to generate $1 million in sales and property tax in the first year -- a windfall in a village that collects about $3 million a year in sales taxes, said Evergreen Park Mayor James J. Sexton. . . .
Anticipating the usual protests over wages, benefits and anti-union practices, the Evergreen Park store was union-built. A protest over minority set-asides was defused in one day. Wal-Mart also came bearing gifts -- Tuesday night, the corporation donated $35,000 to the village library, local hospital, churches and other village institutions, Sexton said.
. . . The Chicago alderman who tried to bring a Wal-Mart to the Chatham neighborhood was left gnashing his teeth.
"I always tell people I'm not for Wal-Mart, but I am for that project coming into the city and to my ward. We can't beat them," said Ald. Howard Brookins Jr. (21st). "The same things they talk about Wal-Mart doing to Small Town U.S.A when they build on the outskirts of town is the same thing they have done to the City of Chicago without fanfare. Nobody distinguishes that if I cross Western Avenue at 95th Street, I am no longer in Chicago. For all practical purposes, Wal-Mart is in the city of Chicago without us receiving any benefit. You're going to see the parking lot filled with cars with Chicago city stickers."
http://www.suntimes.com/output/news/cst-nws-walmart26.html# (February 15, 2006)
Discussion Questions
- Predict the seen and the unseen impacts of the Maryland “Fair Share Health Care Act.” (Identifying “unseen” and longer-term effects may take some extra thought. Use your knowledge of incentives and how they affect people’s behavior.)
- How might each of the following groups respond to the proposed Maryland legislation? Decide whether you think a group was seen or unseen in the legislative process.
- Other Maryland businesses
- Maryland Department of Revenue
- Teenager seeking employment in Somerset County, Maryland
- Poor consumers in Maryland
- Wealthy consumers in Maryland
- What does the spectacular number of applicants for the Evergreen Park Wal-Mart tell us about the labor market in that area? What implications does this turn-out have for criticisms of Wal-Mart’s wage and benefit offerings?
- By uncovering the seen and the unseen you’ve identified the costs and the benefits of legislation mandating increased wages and benefits for poor workers. It’s now reasonable to ask yourself the classic economist's question: Do the benefits outweigh the costs? (Because individuals value costs and benefits differently, there’s no absolutely “right” answer to that question, but answers that can’t be explained or supported by reasoning and evidence are certainly “wrong.”)
Take a position: As an outside observer, do you favor or oppose the Maryland Fair Share Health Care mandate?
Reading #2
Santa Fe’s Minimum Wage Law
In another case of legislation designed to help low-wage workers and the poor, the Santa Fe city council recently increased the minimum wage in the city to $9.50 per hour, the highest in the country.
Read the following report and look for the seen and unseen effects of the new wage rate.
Santa Fe puts "living wage" to test by Electa Draper, Denver Post.com, January 22, 2006
. . . [L]iving wage" proponents and opponents are claiming vindication in Santa Fe.
"On the most basic human level, it's been a tremendous success," says Carol Oppenheimer, a labor lawyer and coordinator with the Santa Fe-based Living Wage Network. "It's put a lot more money in the pockets of some 9,000 workers."
Some people, holding down two or three jobs to make ends meet, have found they can get by with one, she says. . . . But Rob Day, owner of the Santa Fe Bar and Grill and member of a group that unsuccessfully sued to stop the ordinance, says the increase is big enough to ruin many enterprises.
"I'm a Democrat, but I can tell you that all of us in the service industries were flabbergasted . . .” Day says. "For a lot of businesses, that increased cost was their profit margin. This will just drive up the cost of living even more." . . .
In December, the University of New Mexico's Bureau of Business and Economic Research released a preliminary report on the first 18 months of the Santa Fe wage law. The city's employment increased slightly each quarter and, unexpectedly, the increase was particularly strong for hotels and restaurants, the report found. The number of families in need of temporary assistance declined significantly. But the city's gross receipts, including tourist and consumer spending, were disappointing.
. . . Santa Fe City Councilor David Pfeffer, an architect and the lone opponent on the eight- member council to the wage law, says that the "UNM report is fatally flawed" because researchers used county statistics rather than city numbers. . . .
"The new wage has caused businesses to reduce staffs, relocate to the county, let go of less- skilled workers and hold off on business expansions," Pfeffer says. "The people who must suffer the most in this kind of government intervention in an otherwise healthy economy are the folks at the bottom of the scale."
At the El Rey Inn, owned by Terrell White for 33 years, 37 people are on the payroll.
. . . White says he worries that the wage increase will prevent continued funding of his profit-sharing plan or cut into what he pays for employee health insurance.
. . . "That each municipality in the country could have the power to interfere in the relationship between employer and employee is a recipe for chaos," Brackley [president of the Chamber of Commerce] says. "We've seen 22 businesses close or relocate. The high school dropout rate has gone from 4 to 10 percent. We've seen businesses cut medical insurance, overtime and part-time employees.”
. . . But Living Wage Network community organizer Tomas Rivera says, "Some people have had hours cut or lost work, but I can tell you workers are really happy about the wage increase." http://www.denverpost.com/news/ci_3423303 (2/15/06)
- Living Wage Network organizer Tony Rivera says, “Some people have had hours cut or lost work, but I can tell you workers are really happy about the wage increase.” How would Frederic Bastiat translate Rivera’s comment? (What are the seen and unseen effects of the wage increase on minimum wage workers?)
- What are the seen and unseen effects of Santa Fe’s higher minimum wage on the community at large? Remember to consider both immediate and long-term impacts, and the effects on groups of people who remain “invisible” as well as on those who can be individually identified. What seen and unseen effects will be experienced by each of the groups below?
- Businesses
- Tourists
- Unemployed people
- People thinking of starting a business
- Customers
Teacher Guide to the Discussion Questions; Maryland Fair Share articles
- Predict the seen and the unseen impacts of the Maryland “Fair Share Health Care Act.” (Identifying “unseen” and longer-term effects may take some extra thought. Use your knowledge of incentives and how they affect people’s behavior.) The improved standard of living for people who currently work at Wal-Mart – and who keep their jobs – will be seen. Those who lose jobs, have reduced hours, or do not get jobs because Wal-Mart no longer carries as big a staff, will be largely unseen. Unseen “ripple effects” might include other employers facing higher costs to attract employees (although this may not be the case if Maryland has no labor shortage).
Also, the fact that Maryland may not get any new Wal-Marts in the near future has unseen effects. If the discounter has little or no presence in the state, competition for the products Wal-Mart offers will decline. We know that whenever competition decreases in a market, consumers’ options dwindle at the same time that retailers are able to charge higher prices for existing alternatives. And as the Hanke and Walters editorial points out, Maryland will be missing out on many new jobs and the accompanying tax revenue.
- How might each of the following groups have responded to the proposed Maryland legislation? Decide whether you think this group was seen and unseen in the legislative process and what bearing that had on the eventual passage of the bills.
Other Maryland businesses: Some other businesses might welcome the fact that Wal-Mart must now offer higher benefits and therefore face higher production costs. However, they should not overlook the possibility that this change in the market for labor may also raise their own production costs as Wal-Mart becomes a better competitor for good workers.
Maryland Department of Revenue: At first, the Department might respond happily. After all, higher wages generate more income tax revenue. However, if more people are left unemployed, the overall amount of wages paid in Maryland could remain unchanged – and ditto with tax revenue. And as prices begin to rise and spending subsequently decreases, sales tax revenue may also take a hit. An increase in unemployment may put more pressure on state social services spending.
Teenager seeking employment in Somerset County, Maryland: Minimum wage legislation seems like gold to teens – and it might be . . . to those who have jobs and keep them. However, at this point in their lives, teens are among the lowest-skilled workers in the labor market and the increased minimum wage means that competition for the (now fewer) jobs available will be more fierce. As employers get pickier, teens often lose out. Statistics have demonstrated that for every $1 increase in a minimum wage, teenage unemployment rates increase almost 3%. (Students may comment that they don’t see many teens working at Wal-Mart and so teens won’t be affected by the health care legislation. Remind them that if Wal-Mart hires fewer workers because of higher health care costs, there will be more competition for other low-skilled jobs, including those traditionally filled by teens.)
Poor consumers in Maryland: The probable increase in prices will affect this group disproportionately. Price increases in the types of goods sold at Wal-Mart affect poor consumers more than customers with higher incomes. (Poorer consumers would be less affected by higher prices of vacation homes and luxury cars.) As prices rise, a larger and larger portion of poorer consumers’ income must be used on necessities, creating hardships for the intended beneficiaries of these programs. Note that although “represented” by living wage advocates and labor lobbyists, the poor consumer was likely to be “unseen” in the legislative process.
Wealthy consumers in Maryland: Wealthy consumers are likely the least affected of these groups. As mentioned above, their purchases at businesses like Wal-Mart are likely a much smaller percentage of their total income, so a price increase is much less painful. Additionally, their higher incomes make them more able to substitute by shopping at other stores.
Teacher note: In an associated press article February 23, 2006, it was reported that Wall-Mart CEO Lee Scott had announced that Wal-Mart would be moving to offer improved health care for its employees. Perhaps the pressure of public opinion is also an “unseen” effect.
- What does the spectacular number of applicants for the Evergreen Park Wal-Mart tell us about the labor market in that area? What implications does this turn-out have for criticisms of Wal-Mart’s wage and benefit offerings? This suggests that an effective price floor may be in place. Despite critiques of Wal-Mart’s employment policies, its stores have no trouble finding people willing and able to accept their terms. If approximately 79 people per open position apply, economic analysis would suggest that the price (or in this case, wage) is not too low, but too high! The opportunity cost of waiting in line for hours to get a job at the new Wal-Mart is apparently lower than the anticipated pay-off.( If Wal-Mart wanted to reduce the amount of time they spend screening potential applicants, they should lower the wage rate they offer, but remember that Wal-Mart can only go as low as minimum wage legislation allows.) As for Wal-Mart’s critics, this turn-out negates a lot of their argument. Assuming the applicants are all rational human beings, if there were better positions (i.e., higher wages and/or greater fringe benefits) available to people with their skills, abilities, and preferences about work, they would be seeking employment there. That they are not suggests that Wal-Mart is one of the best employment deals going in the area.
- By uncovering the seen and the unseen you’ve identified the costs and the benefits of legislation mandating increased wages and benefits for poor workers. It’s now reasonable to ask yourself the classic economist's question: Do the benefits outweigh the costs? (Because individuals value costs and benefits differently, there’s no absolutely “right” answer to that question, but answers that can’t be explained or supported by reasoning and evidence are certainly “wrong.”)
Take a position: As an outside observer, do you favor or oppose the Maryland Fair Share Health Care mandate?
Opposing the legislation is not the only acceptable answer. Student answers are correct as long as they contain sound economic reasoning and recognition of opportunity cost. Anticipate that most students will argue that the minimum wage and mandated benefit legislation impose higher costs to the community as a whole cannot be justified. However, it is also valid for students to argue that they are aware of the costs imposed by higher prices and are willing to bear them in order to give workers a “living wage.” (Students supporting the legislation should not only acknowledge the cost in terms of higher prices to consumers, but also acknowledge and deal with the increased unemployment that the legislation is likely to cause.)
Teacher Guide to the Discussion Questions; Santa Fe Minimum Wage
- Living Wage Network organizer Tony Rivera says, “Some people have had hours cut or lost work, but I can tell you workers are really happy about the wage increase.” How would Frederic Bastiat translate Rivera’s comment? (What are the seen and unseen effects of the wage increase on minimum wage workers?) The “seen” are those, with jobs, who are receiving higher wages. The “unseen” are those who have lost jobs and/or had work hours reduced. Note that Rivera doesn’t mention all of the unseen members of the labor force: the “discouraged workers” who are no longer looking for jobs (and who aren’t “seen” in government unemployment statistics), and the families who have moved away from Santa Fe because they couldn’t find work.
- What are the seen and unseen effects of Santa Fe’s higher minimum wage on the community at large? Remember to consider both immediate and long-term impacts, and the effects on groups of people who remain “invisible” as well as on those who can be individually identified. What seen and unseen effects will be experienced by each of the groups below?
Businesses: Businesses will see production costs rise because wages of low-skilled and semi-skilled workers are the major business expense in a tourist-based service economy like Santa Fe. Profit margins will decrease. Because all competitors face the same cost increase, one effect is likely to be increased prices for consumers. Unseen are decisions of employers to substitute capital for labor. If you really have to pay 3 dishwashers $9.50/hr when they’re only worth about $7.00/hr., the high-tech automatic dishwasher that can be run by 1 employee may seem like a good deal.
Tourists: As word gets out about the higher cost of vacationing in Santa Fe, tourism is likely to decline overall.
Unemployed people: It will be harder for the unemployed to find jobs because there will be fewer jobs available and because the higher wage will encourage people to look for work who were not interested in working when the wage was lower. Because businesses now have to pay more for even the most unskilled jobs, they are likely to choose only the “cream of the crop” among this labor pool, making it even more difficult for low-skilled workers to enter the workforce. Another effect that we may not “see” as connected until it’s pointed out to us, is that unemployment rises as dropping out of high school becomes more attractive with the higher minimum wage and even more workers compete for the limited number of low-skilled jobs.
People thinking of starting businesses: The attractiveness of starting a business in Santa Fe just went down! A “seen” effect is the obviously higher costs of operating a business in town. Business failures, if they occur, will also be easy to see. Unseen are the businesses that never happened in the first place – new businesses and business expansions that owners decided against or didn’t even consider. Note that there already seems to be some evidence of fewer new business starts than anticipated and that some businesses are locating outside the city boundaries, suggesting that in the long run, the city may suffer and the surrounding county and suburbs benefit.
Customers: Many of the businesses affected serve a largely tourist customer base, but even local customers will face higher prices at grocery stores, restaurants and gas stations – any place that uses low-skilled labor. Of course, the poorest of Santa Fe’s citizens will be most burdened by the higher prices.
Sources:
Baldacci, Leslie. “Thousands Apply for Jobs at New Wal-Mart”, Chicago Sun-Times. January 26, 2006. http://www.suntimes.com/output/news/cst-nws-walmart26.html (2/16/06)Bastiat, Frédéric. “What Is Seen and What Is Not Seen.” Selected Essays on Political Economy. http://www.econlib.orglibrary/Bastiat/basEssContents.html
Caplan, Bryan. “Mandated Benefits and Wage Rigidity: The Effects of the ‘Fair Share Health Care Fund Act’”. EconLog: Issues and Insights in Economics. http://econlog.econlib.org/archives/2006/01/mandated_benefi.html
Draper, Electa. “Santa Fe Puts ‘Living Wage’ to Test, Denver Post, January 21, 2006. http://www.denverpost.com/news/i_3423303 (2/15/06)
Hanke, Steve H. and Walters, Stephen J.K. “Hard Line State”, The Wall Street Journal. January 26, 2006. Available online at http://hispanicpundit.com/2006/01/27/big-labors-attack-on-the-poor-in-maryland/ (2-16-06)
Macpherson, David A. “The Effects of the Proposed Santa Fe Minimum Wage Increase”, Employment Policies Institute. http://www.epionline.org/studies/macpherson_02-2003.pdf
Tinsley, Ed. “Atlas Shrugged in Santa Fe”, City Journal. August 15, 2003.
Wagner, John. “Maryland Legislature Overrides Veto on Wal-Mart Bill”, The Washington Post. January 13, 2006. http://www.washingtonpost.com/wp-dyn/content/article/2006/01/12/AR2006011201251.html (2/16/06)
Wagner, John and Mosk, Matthew. “Minimum Wage Raised in Maryland Over Veto”, The Washington Post. January 18, 2006. http://www.washingtonpost.com/wp-dyn/content/article/2006/01/17/AR2006011700581.html (2/16/06)
Will, George. “Maryland’s Wal-Mart raid a ‘legislative mugging’.” The Washington Post. January 22, 2006.