Friday, February 15, 2013

Minimum jobs

Way back during Obama's first presidential campaign, one of the things he promised was a $3,000 tax credit for new full-time jobs.  Looks like it's still listed in the website, under "New American Jobs Tax Credit".  Now, promises are promises, and when they come from a politician they're fairly suspect to begin with (when you don't have absolute dictatorial power, they're both easier and harder - it can often be hard to keep them, but it's easy to blame a failure to keep your promises on someone else).  This particular promise was, and is, unique in a few ways.  First of all, it's an offer to lower (albeit very slightly) taxes on businesses by creating a new loophole for them (hey, if we're going to start saying that every company that uses the tax code as written to get out of paying taxes is using loopholes, let's at least be consistent in our terminology).  It's at least trying to use economic incentives to induce companies to engage in behavior that actually benefits the economy.  Those are shocking things to have proposed by a Democrat.  Of course, it's a one-time thing, and the amount promised is dwarfed by the actual expense of hiring a new employee, but I'll take laws that are minimally effective over ones that are actually dangerous and harmful any day.

There's another way this promise was unusual - it was actually kept, to some extent.  For most of 2010, new hires were worth a $1,000 tax credit, and were exempt from the employer side of Social Security taxes through the end of 2010, which would be a savings of between $940 (for a 40-hour a week minimum wage employee) to $8,010 (for an employee making $106,800 or more during that period, or $128,160 per year if they started on the day the exemption began).  So for some employees, it actually was a $3,000 tax credit, though it could have been as little as $1,940 or as much as $9,010.  As far as fulfilled promises go, that ranks better than most.

Did Obama view it as a complete and total failure?  Because, during his State of the Union address, he said he wanted to raise the federal minimum wage to $9 per hour.  By my calculations, that's a cost of $3,913 to companies for each full time minimum wage employee they have.  So the person who believed a one-time $1,940 tax break for new hires during most of a single year would encourage job growth for some reason doesn't believe that an additional $3,913 per year cost per minimum wage employee - and a cost that lasts forever at that - will hurt employment?

So say I have a company with 200 employees, half of them minimum wage.  I'm going to be paying an extra $391,300 per year.  If I were planning to hire new employees, I could just cut the number I was planning to hire by 26, and it'd balance out.  If I wasn't, I could fire 20 people, on the assumption that the other 80 could manage to work 20% harder (that's probably not a good assumption).  I could cut the wages of the other 100 non-minimum-wage employees.  That certainly wouldn't be a popular choice, but maybe it's the only choice I could make.  I could always raise my prices to compensate, and maybe that would work, or maybe my customers would decide that they could do without my product and demand would dry up.  If I wasn't planning to expand, my workers can't work harder, my non-minimum-wage employees either make too little to be able to drop their pay or have other opportunities that they would take if I tried to, and if my customers won't pay more, then eventually, I will end up closing up shop and putting all 200 people out of work.  Which of those choices is compassionate?  Because they all sound pretty bad to me.

Now the really fun thing is the plan to index minimum wage to inflation.  That's a horrible idea, but does raise a very interesting possibility.  Inflation is the rising cost of goods.  Goods are made by people earning wages.  If we were to tie the wage to the cost of goods, then all it would take is for companies to tie the cost of goods to the minimum wage (which they already do, it's just not obvious), and in mathematical terms we've set the minimum wage to infinity.  Say in simplified terms, that inflation is the cost of a Big Mac, and the minimum wage is set to be 2 Big Mac's worth per hour.  Now all it would take is for McDonald's to set the price of a Big Mac to be one minimum wage hour's worth, and suddenly everyone is making infinite money, but can't afford to buy a burger.

The best analogy I've seen for minimum wage is a short basketball player.  "I sure do wish I could slam-dunk" he thinks to himself, "but I'm only 5'9", and all the guys who can dunk are over 6' tall."  So he comes up with a plan.  He goes to his garage and works late into the night, and the next day heads out to the court.  "Guys" he says "last night I built myself this ruler.  The feet on this ruler are 11" long. I just measured my height with it, and I'm 6'3", so watch me dunk now!"