Thursday, May 19, 2016

Judge the Federal Dept of Labor by Intentions, not Results

According to the Department of Labor, it is now adding 4.2 million workers and their employers to those required to obey detailed federal regulations on weekly pay and work hours. The stated intention is to help women and other relatively low-income employees.

Most of those 4.2 million workers are earning significantly above the straight-time minimum wage rate. For them, economic theory and evidence (e.g., Prof. Stephen Trejo, now of the University of Texas, wrote his dissertation on this at the University of Chicago) suggest that their straight-time wage rate will be lower than it would have been if the DOL had not changed the rules. This will make their income more cyclical -- making them poorer when their incomes are low and richer when their incomes are high -- with little effect on their average pay or hours.

Trejo's results suggest that there will be also some adjustment of employment and work schedules. Because the new regulations apply only to workers earning below about $48K per year, they create incentives to reallocate work from low-income workers to higher income workers. Another way of increasing income inequality!

This is a new cost for employers that disproportionately hire low-income workers, and ultimately for the customers that buy their products. This will cause some of those industries to shrink, perhaps leaving low-income people with less employment as well as less income while they are employed. It is possible that high-income workers benefit, as their industries are not harmed as much by the new rules. i.e., yet another way of increasing income inequality!

The new rules are about cash wages, and not fringe benefits, so another effect is fewer fringe benefits to help pay for the extra cash wages. The consolation for those of the affected workers that lose their health insurance: Obamacare! (No consolation for taxpayers, who will have to help pay for that problem).

You may have noticed that GDP per capita is hardly growing -- at a mere 1.3 percent per year over the past 3 years. An important reason for this is all of the new federal interference in how business is done. Obamacare already heavily distorts the workweek, especially for workers with incomes below $48K, and now these new regulations are adding to it. More and more, work schedules are being chosen to satisfy federal rules and less for creating value in the marketplace.

My promise: If you like your weak economy, you can keep it! Especially if you are a low-income worker.

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