Tag Archives: wages

Welfare and Jobs

Thesis: Americans needs to earn high wages in order to live and ultimately, save the government money.

Higher wages will lead to a higher standard of living for American citizens. This is why companies need to raise wages. I believe the way to do this is voluntary, not through government mandated actions. This will be good PR for the companies and lead to a better overall perception in the eyes of the public.

According to a recent article published by the Wall Street Journal, the majority of Americans receiving well fare already have a job. The perception many Americans have is that well fare recipients are unemployed and lazy, with the well fare checks discouraging them to go out and find a job. While this may be true to some portion of those on well fare, it is not true in the aggregate. A study by researchers at Cal Berkeley found the majority of households receiving government assistance are headed by a working adult. “The study found that 56% of federal and state dollars spent between 2009 and 2011 on welfare programs — including Medicaidfood stamps and the Earned Income Tax Credit  — flowed to working families and individuals with jobs. In some industries, about half the workforce relies on welfare.” http://blogs.wsj.com/economics/2015/04/13/get-a-job-most-welfare-recipients-already-have-one/?mod=WSJ_hpp_MIDDLENexttoWhatsNewsForth. This clearly is a problem that needs to be corrected by these large companies many of these people work for. There is no way people should be able to work and hold a full time job, but yet, still need additional assistance from the government. In the fast food industry, 52% of workers receive some form of government aid. Luckily, this receives a lot of attention in the media and the problem seems to be getting better. McDondalds says it plans to raise wages for some of its lowest 90,000 workers. While this is a good idea and sounds like a good plan, it really will not change much. They will pay $1 dollar more than the minimum wage to these workers. In my opinion, this is still not enough. It also only includes 90,000 workers, which is minimal compared to how many works McDondalds employees around the globe. In addition, “The increases could reflect some payback after several years of wages barely keeping pace with inflation, or could indicate that skilled-workers who resorted to restaurant jobs in the economic downturn are now seeking better-paying work.” http://www.wsj.com/articles/mcdonalds-to-raise-hourly-pay-for-90-000-workers-1427916364. If wages are not keeping up with inflation, then the purchasing power of these people are increasing and thus, they are essentially getting poorer. This is a problem that needs to be corrected.

Finally, the low wages paid by companies around the country costs the US government, and tax payers, money. A recent report for that a single 300 person Walmart store in Wisconsin costs tax payers at least $904,542 per year, or about $5,815 per employee. This is crazy as this money could be put to such better use. As this illustrates, the system is messed up and the only way to fix it is for companies to provide higher wages. This will have so many positive externalities for the country now and in the future.

 

 

 

Was Clinton’s Executive Compensation Policy a Mistake? (Revised)

Thesis: The current tax code has created an incentive for management to focus corporate profits on short-term stock-boosting strategies rather than long-term investment, and thus is a contributing factor to the stagnation of wages in the US.

One of the most troubling issues facing economists studying the United States has been the stagnation in wage growth over the past few decades.  Common wisdom would dictate that as marginal productivity of labor rises, so would wages.  As evidenced by the graph below, courtesy of the Economic Policy Institute, this was the case for some 25 years during the US postwar boom era, but beginning in the 1970’s, wages began to flatten out as productivity continued to rise.

wage growth

Economists have attributed this trend to a handful of factors: rapid globalization creating a massive increase in competition in the labor force, technological improvements reducing the supply of jobs, erosion of large-scale union power, and more recently, rising health care costs to employers.  In a recent opinion piece in the Washington Post, Harold Meyerson has added a new factor to the discussion: the recent tendency of corporations to use capital to increase shareholder value, rather than investment in the company.  As Meyerson writes, investment has slowed down significantly while earnings have been funneled at an increasing rate towards shareholders through stock repurchases (which increase stock price with artificial demand) and dividend payments.  The prioritization of shareholder payouts over investment puts a damper on job creation and wage increases, and makes it harder for traditional monetary policy to stimulate the economy.  So why the dramatic shift in corporate cash flow allocations?  I would argue that the single biggest driving force is the rise in stock-based compensation packages for executives.

A little background on the concept of stock-based compensation: in 1993, facing pressure from institutional investors and in an effort to limit the rise of executive compensation, Bill Clinton created section 162(m) of the IRS tax code (wiki), which stated that companies could only deduct the first $1 million of executive pay.  However, the code included a provision that excluded performance-based pay, which is why we see the executive compensation packages we have today: a seemingly meager base salary, under $1 million, with substantial stock options that make up the bulk of pay.  In theory, there are certainly some benefits to stock-based compensation: they help ensure that management’s actions are in line with shareholder goals, as executives have a vested interest in the company’s performance.  But there are two sides to this coin.  Since executives receive such an overwhelming portion of their pay via equity, they have an incentive to boost the company’s stock prices even when it might not be in the best long-term interest for shareholders.  The disparity in time horizons between executives and corporations exacerbates this problem: according to the Wall Street Journal, the average CEO’s tenure is just 9.7 years, meaning that executives rarely stick around long enough to see the company benefit from gradual growth and investment.  Instead of re-investing earnings, an executive is better off allocating capital to stock repurchases and dividends to increase stock prices in the short run.

The trend has troubling implications for the economy.  Undoubtedly, declining corporate investment means slower growth in output and employment.  But more importantly, if companies aren’t allocating capital to investment, then monetary policy is somewhat crippled.  A paper published by The Roosevelt Institute found that in the 60’s and 70’s, an additional dollar of corporate borrowing or earnings led to a 40-cent increase in investment.  Today, that same dollar leads to less than 10 cents of new investment.  That means that stimulating borrowing with low rates has had an increasingly diluted effect on actually stimulating investment.  So it may be time for regulators to re-think whether performance-based compensation is really in the best interest of shareholders – the shift in corporate capital seems to suggest otherwise.

The Unintended Consequences of an Attempt to Reign in Executive Pay

Thesis: The current tax code has created an incentive for management to focus corporate profits on short-term stock-boosting strategies rather than long-term investment, and thus is a contributing factor to the stagnation of wages in the US.

One of the most troubling issues facing economists studying the United States has been the stagnation in wage growth over the past few decades.  Common wisdom would dictate that as marginal productivity of labor rises, so would wages.  As evidenced by the graph below, courtesy of the Economic Policy Institute, this was the case for some 25 years during the US postwar boom era, but beginning in the 1970’s, wages began to flatten out as productivity continued to rise.

wage growth

 

Economists have attributed this trend to a handful of factors: rapid globalization creating a massive increase in competition in the labor force, technological improvements reducing the supply of jobs, erosion of large-scale union power, and more recently, rising health care costs to employers.  In a recent opinion piece in the Washington Post, Harold Meyerson has added a new factor to the discussion: the recent trend by corporations of using profits to increase shareholder value, rather than re-investing them into the company.  As Meyerson writes, investment has slowed down significantly while earnings have been funneled towards shareholders through stock repurchases (which increase stock price with artificial demand) and dividend payments.  The resulting lack of new value creation and growth has put a damper on job creation and wage increases.  So why the dramatic shift in corporate profit allocations?  I would argue that the single biggest driving force is the rise in stock-based compensation packages for executives.

A little background on the concept of stock-based compensation: in 1993, facing pressure from institutional investors and in an effort to limit the rise of executive compensation, Bill Clinton created section 162(m) of the IRS tax code (wiki), which stated that companies could only deduct the first $1 million of executive pay.  However, the code included a provision that excluded performance-based pay, which is why we see the executive compensation packages we have today: a seemingly meager base salary, under $1 million, with substantial stock options that make up the bulk of pay.  In theory, there are certainly some benefits to stock-based compensation: they help ensure that management’s actions are in line with shareholder goals, as executives have a vested interest in the company’s performance.  But there are two sides to this coin.  Since executives receive such an overwhelming portion of their pay via equity, they have an incentive to boost the company’s stock prices even when it might not be in the best long-term interest for shareholders.  The disparity in time horizons between executives and corporations exacerbates this problem: according to the Wall Street Journal, the average CEO’s tenure is just 9.7 years, meaning that executives rarely stick around long enough to see the company benefit from gradual growth and investment.  Instead of re-investing earnings, an executive is better off allocating profits to stock repurchases and dividends to increase stock prices in the short run.  And the resulting benefits to shareholders contributes less to the economy than continual re-investment would – since the wealthiest 10% of households own 84.5% of US financial assets (source: Fed data on inequality.org), the impact of these shareholder-focused actions have a disproportionate effect on public welfare.  So it may be time for regulators to re-think whether performance-based compensation is really in the best interest of shareholders – the lack of corporate profits being re-invested seems to suggest otherwise.

[Revised] Why Educational Investment is Non-Negotiable

The United States must invest in education because of the returns to GDP an educated population can create.

When addressing current economic issues one cannot ignore human capital, specifically investment in education. Educational outcomes strongly affect the economic growth of a country. George P. Shultz and Eric A. Hanushek, contributors for The Wall Street Journal, compared the GDP-per-capita growth rates between the years 1960 and 2000 with achievement results as determined by an international math assessment test. The majority of countries followed a straight line that revealed that as the scores on the assessment test increased so did economic growth. Although the U.S. remained above the average, this position will not hold strong for long in the future unless we make significant increases in overall education in the U.S. Students of today, the labor force of the future, are no longer competitive in comparison to other developed countries. The U.S. was ranked 31st in math according to the OECD’s Programme for International Student Assessment, an alarming statistic.

The importance of education on the economy cannot be understated. Better education leads to a faster growing economy. Education directly correlates to higher wages. The median weekly earnings in 2013 were $472 for someone with less than a high school diploma compared to $1,108 for individuals with a bachelor’s degree. Educational disparities lead to economic disparities that without new reform will maintain and foster the inequality problems that continue to hurt the economy for decades to come. For this reason, we must increase national investment in education.

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Noah Berger and Peter Fisher, researchers from the Economic Policy Institute, investigated how the state government can boost the economic well-being of their people. Berger and Fisher revealed that high-wage states are the same states with well-educated workforces, which reveals a strong correlation between educational attainment of a state’s workforce and median wages. Therefore, investing in state-wide education is necessary to build a strong foundation for economic prosperity. The U.S. must focus on educational investment soon. In addition to building a strong base, investing in education upfront will show a greater return in the long run in terms of state budgets. Since individuals with higher levels of educational attainment will ultimately have higher incomes, these individuals will therefore contribute more to the state’s taxes over the course of their lifetime.

The students of today are the laborers of the future. The need to invest in education is non-negotiable when considering the investment that is being made. Without an educated labor force our economy will suffer, but with an increased investment in education the possibilities look promising.

 

Wal-Mart Raises Wages

Wal-Mart recently announced that it plans on raising the wage it pays it employees further above the minimum wage.  This move demonstrates how strong the economy has been lately that wages are finally starting to rise.  As Paul Ziobro and Eric Morath write in their Wall Street Journal article, Wal-Mart Raising Wages as Market Gets Tighter, “Wal-Mart Stores Inc. plans to boost pay for its U.S. employees to at least $10 an hour by next year, well above the minimum wage, signaling a tightening labor market and rising competition for lower-paid workers.”  This demonstrates that the market for low paid workers is increasing as there is less available workers.  The unemployment rate has been decreasing which has made it harder for these companies to find and keep a workforce.  Wal-Mart is making this move in hopes of retaining their current workers and luring other good workers to Wal-Mart.

This is putting pressure on other companies to match these wage gains, or fear losing their workforce.  The market for lower-paid workers is becoming increasingly competitive forcing Wal-Mart to raise its wages.  As Lisa Baertlein says in her article, McDonald’s pressured to hike pay as Wal-Mart raises, economy improves, “McDonald’s Corp and its franchisees may have few options but to begin raising hourly wages as an improving U.S. economy creates competition for good workers and as mega-employer Wal-Mart Stores Inc sets a higher bar on pay, according to labor experts.”  In order to attract the right kind of workers, these companies must set a competitive wage rate.  If McDonalds (or practically any other company) were to leave their wage rate at the minimum wage, or hypothetically speaking, pay people less than minimum wage, then they will slowly lose their current workforce as the workers start leaving to take higher paying jobs at other companies.  They also will find it hard to replace them with competent workers because unless someone was truly passionate about their work as a cashier, they wouldn’t work very hard for such a paltry wage.  This is why Wal-Mart is finally raising its pay that will cost an estimated $1 billion.  Having unhappy workers is a recipe for losing business, so these companies have to take the necessary steps to keep their employees happy and working hard.

This also is a positive sign that the wage rate is starting to grow again as the economy is finally coming alive.  While this might cost companies a lot more money, this will help the economy continue to grow as wages begin to rise.  This announcement most likely confirms what Janet Yellen and the Fed already knew and reinforces their plans to start raising interest rates as the economy continually improves.  Lets hope other companies make similar moves to raise their wage rates as well.

Impact of Illegal Immigrants on U.S. Wages

Last time, we talked about the impact of illegal immigrants on the U.S economy. As I discussed before, it is important to know what the composition of skills of immigrants have in order to know its impact on the labor market. Our assumption last time was that most illegal immigrants are mostly less educated people than U.S native citizens. However, Ottaviano and Peri’s findings explicitly tell us that illegal immigrants only lower the wages of native high school dropouts only by 1.1 %. More importantly, however, increases in the number of illegal immigrants increase the US born wages by 1.8%. What do these findings indicate? Does it necessarily mean that illegal immigrants will never have a significant impact on the US born wages?

In Card’s Mariel Boatlift 1990 paper, it has some answers that we want to explore. Between April and October in 1980, a massive number of Cubans migrated into the United States, which is called the Mariel boatlift. More than 100,000 people left to the United States to seek for freedom and wealth. Most Cubans from Mariel Boatlift went to Miami, suggesting that the labor supply in Miami had increased dramatically in a short time period. This unexpected and rapid increase in number of immigrants increased the city’s labor force by 7 percent. Guess what happened to Miami’s wages? This is what I will talk about this time in order to find the general effect on the unskilled immigrants on United States.

Although most people would expect that the Mariel Boatlift harmed the U.S. labor market, Card found out that wages and employment opportunities of unskilled workers did not have an impact by the large inflow of Cuban people. I could not understand the reason why this is true because I learned in economic class that an increase in labor supply would not only decrease the wage but also lower the quantity of labor.

The results lead to the question how the Miami labor market was able to absorb a 7 % increase in the labor force without any negative effects. One possible answer for the rapid absorption of the Mariel immigrants is the growth of industries that utilize relatively unskilled labor. Card states, “the industry distribution in Miami in the late 1970s was well suited to handle an influx of unskilled immigrants”. Miami adopted a new technology much later than other states, which supports the idea that Miami employed unskilled labor.

We cannot definitely conclude that the influx of illegal immigrants does not have a significant impact on the U.S wages. However, Card’s Mariel Boatlift suggests that illegal immigrants or unskilled immigrants tend to have a small effect on the U.S wages.