Free the Workers
A version of this appeared at Townhall.
The labor market is one of the most regulated markets in our economy.
Minimum wage laws effectively tell teenagers they cannot work unless they can produce $7.25 an hour. When the ObamaCare mandate kicks in next year, that hurdle will climb to more than $15 an hour for many potential employees. OSHA regulations dictate what risks workers may and may not take while on the job. Wage and hour laws dictate what wage rate a worker can accept in order to be able to work at nights and on weekends. Those same laws tell many parents they can’t take off to see their kid’s soccer game and make up the time in the next pay period.
The law encourages such employer-provided benefits as health insurance and pensions by creating tax advantages at work that are denied to individuals who provide for themselves. But those same laws make employee benefits non-portable, prohibit employees from choosing between taxable wages and non-taxed benefits, and in other ways conflict with the needs of modern families.
A whole slew of laws are designed to make it easier to form labor monopolies and buttress their monopoly power — including laws that take away many employer rights to discourage the formation of unions and the right not to deal with them once they have been formed. The Davis-Bacon Act effectively tells non-union workers they can’t work unless they can produce enough value in an hour to match the above-market wage paid to union employees.
Occupational licensing laws keep potential entrants out of 92 different trades, in the average state, covering almost one-third of all workers. These regulations, for example, prevent you from putting a bowl over someone’s head, cutting around the edges and collecting 50 cents for the effort unless you have undergone many hours of training in barbering.
Now for a surprise. Amid this sea of regulatory activity a tiny island of freedom is emerging. An international free market for labor is blossoming and you don’t have to leave this country to participate in it.
But first, a personal story. I myself am participating in a free labor market, although I can’t tell you exactly why.
I employ a trainer to instruct me in Pilates. Although her hourly fee is way above the minimum wage, there is no legal requirement that it need be. If I see her on nights and weekends, there is no requirement that I pay her time and a half. I generally pay for 10 sessions in advance, but if she wants to take off time one week and make it up later, she will be violating no federal law. Also, we do not have to worry about licensing requirements. I am free to employ her based on my own judgment of the quality of her services, irrespective of what the state of Texas happens to think about the matter. And there is no OSHA requirement that the Pilates equipment we use meets the federal government’s view of what is “safe.”
I don’t have to be a tax collector for the IRS. There is no withholding. My instructor takes care of her own taxes. I’m not a spy for the IRS either. I don’t file a 1099 form.
I am under no legal obligation not to discriminate. If she becomes disabled and can no longer perform at her previous peak, I can dismiss her with no legal repercussions. I can’t be sued for sex, race or age discrimination. I can legally discriminate on the basis of religion, sexual orientation, physical appearance or on the basis of any other irrational whim that pops into my head. Of course, the reverse is also true. My instructor can fire me for any irrational reason she happens to think of.
But why? Why do my Pilates instructor and I have so much freedom when just about everyone else in the labor market is drowning in a sea of regulations?
I really don’t know the answer to that question. I mean, technically I know. The regulatory zealots just haven’t gotten around to Pilates. As a result they have inadvertently allowed the existence of a sort of enterprise zone — a small area of the market that the regulation-frenzy somehow overlooked. But I can’t think of any rational reason why my Pilates instructor and I have so much freedom that other people don’t.
By the way, the zones of economic freedom in the labor market are more widespread than you might think. At last count, there were 10 million people in the United States who work as “independent contractors,” escaping many of the regulatory burdens that afflict everyone else. And that doesn’t count the underground economy.
Almost everyone who writes for a living (who is not technically an employee) is participating in a free labor market. For example, almost every guest editorial you see in almost any newspaper was written by someone who was paid less than the minimum wage. Every crossword puzzle you see in The New York Times was constructed by someone who got far less than the minimum wage. Nor did they get any employee benefits or any Social Security match. Nor are they protected by anti-discrimination laws. I can think of no logical explanation for any of this.
Okay, now to the international scene. At The New York Times economics blog, Nancy Folbre writes:
Take a look at the brave new world of online piecework platforms, like Amazon’s Mechanical Turk, which allows employers, politely termed “requesters,” to post jobs for a “global, on-demand, 24 x 7 work force.”
Workers are offered pay for completion of a series of Human Intelligence Tasks (HITs), easily fragmented activities (like transcription, categorization or tagging) in which computers actually need assistance from carbon-based life forms like ourselves…
What started as a niche experiment has become a major global industry. Like some other activities, like work at call centers, digital piecework represents a form of virtual labor migration that denationalizes employment. Research by Panos Ipeirotis, a computer expert at the Stern School of Business at New York University, estimates that Mechanical Turk alone engages 500,000 active workers in more than 100 countries, with workers heavily concentrated in two countries: the United States (with 50 percent of the total) and India (with 40 percent).
For her part, Folbre worries that all this freedom may be bad for workers — a common view among many economists, including Paul Krugman, who view labor monopolies as a good thing. Yet it is a strange view, considering that the father of economics, Adam Smith, went to some effort to explain why the Medieval guild system (the forerunner of the modern labor union movement) was bad for society as a whole. The standard view of the guild system is the view Adam Smith had:
Ogilvie (2011) says they regulated trade for their own benefit, were monopolies, distorted markets, fixed prices, and restricted entrance into the guild. Ogilvie (2008) argues that their long apprenticeships were unnecessary to acquire skills, and their conservatism reduced the rate of innovation and made the society poorer. She says their main goal was rent seeking, that is, to shift money to the membership at the expense of the entire economy.
I invite the readers to tell me what you think.
John, this is perhaps your best essay ever, although you get a little off topic with the international scene section.
No federal law exits that protects the business owner over the employee. All labor laws protect the employee, yet it is the business owner who works 70 hours a week and takes all the risk. Why is this?
Ironically, as your essay points out, these pro-employee laws actually hurt the employees they are trying to help, by making them undesirable in the marketplace.
This is an enlightening post, I was not aware that our labor market is one of the most regulated markets. At times when the economy is not doing its best, it might be a better idea to lessen the burden on businesses. Labor laws are probably the most effective way to boost up the employment pictures. If we let lessen the labor laws that make hiring and firing a breeze, it should improve the employment picture.
I welcome some of the free labor notions you highlight in this post, like the rise of independent contractor as well as the Mechanical turk. I think this change allows one to experiment and provide different services as oppose to being bogged down to one specific job as one would be obligated to do if they were an employee.
I agree with Patel’s insight on this. Think about the creativity that can come from a liberated market place, where we all are essentially further empowered to become entrepreneurs.
Blake: I fully agree that this is one of John’s best, and most accessible, essays to date. However, the international focus is not off topic; rather, it is an essential component of any discussion of labor markets. Artificial international borders disrupt the natural market for labor at least as much as burdensome national regulations.
Writers place hooks in the first sentence or paragraph of a piece. This is to shock and snare readers into continuing the read but doesn’t necessarily have to be based in reality. “Call me Ishmael”, “It was the best of times, it was the worst of times”, “Minimum wage laws effectively tell teenagers they cannot work unless they can produce $7.25 an hour. When the ObamaCare mandate kicks in next year, that hurdle will climb to more than $15 an hour for many potential employees.”
In the genre of non-fiction, too often writers apply this hook with little regard to reality … as long as there is an obscure chance that what they wrote could happen under abstract conditions. This article started with such a hook.
With regard to the writer’s assertion, that employers could incur ‘$15 an hour’ labor expense under Obamacare, using his math from his reference article, this condition could only be satisfied if a 30 hr. minimum-wage employee was afforded full family coverage by the employer. What are the odds of this happening? More often than not, low-paying employers cover only small portions of their employee’s health care costs … or … let the tax-payers provide health care for their employees in the form of Medicaid. Obamacare simply extends that business benefit by providing health care support to the uninsured that don’t qualify for Medicaid. There is one practical modification to this business benefit though … which is a large employer must now kick in $2000 per FTE for this commonly used business practice of not providing insurance.
Al, I pay $600 per month for my employees’ employee-only coverage. (We are an insurance agency and pay the whole employee-only premium.) If an employee worked 120 hours per month, that equals $5.00 per hour. Add a 30% likely Obamacare rate increase next year (due to lack of medical underwriting and the many additional benefits required of small employers) and that makes it $6.50 per hour. Add that to $7.25 minimum wage and you’re at $13.75. Another year of increase and you’re at $15.00 easy, with no family coverage involved in the math.
Freedom improves and promotes workers incentive to create.
Thought-provoking post, indeed. Regulation is not always bad but it is when it is at the expense of allowing the market to dictate things such as wages and productivity.
While I am not an expert on health care nor the labor market, I would like to see some objective studies on these economic assertions. It is clear this post is not objective but it at least bring up important points for further consideration.
Great post.
By the way, minimum wage is $8 per hour now including SS, UI, and workers’ compensation. This means that if you have skills less than $8 per hour, you’re not allowed to work in America. And this is the land of the free?
@Blake. Thank you for not getting too irate about my bucket stirring, but using your numbers (of which the 30% premium increase is possible but an aggregate average of 30% is improbable), your overall employee costs would only increase by $1.50 per hour from what you are currently paying. The false hook or shock assertion of the article implies a 107% increase in employee costs [$7.25 >>>$15]. Information should be realistic and responsible … not shock and awe.
You’re not bucket stirring, Al. John tolerates all of our opinionating on his blog. The reason John (if I can presume to speak for him) and I state that Obamacare increases the cost of labor by the full health insurance premium and not just by the 30% increase in my example, is that absent Obamacare, employers wouldn’t be providing any health insurance for the 30-hour employee.
We are speaking here of large employers (50+ employees), as small employers do not have to provide health insurance under PPACA, although those who do, like me, are bracing for large rate increases due to the absence of underwriting rules and any incentive for employees to live a healthy lifestyle (other than tobacco penalties). Basically all small employers are in one giant filthy pool with no defenses. We can’t even have deductibles over $2,000, so goodbye to a meaningful HSA.
@Blake. I appreciate being tolerated. We agree, small employers are not required to provide health care to their employees. In fact, they (as well as large employers) would probably be money ahead dropping their group coverage and giving that $5 to their employees, allowing them to participate in the “filthy” exchange pools … where preference is not given to healthy, skinny, young, wealthy patients. I have an HSA but consider it a tax deduction (dodge) which exacerbates our country’s debt situation.
As of 2009, more and more employers were dropping coverage and letting the employees fend for themselves. There were drastic increases in Medicaid, Medicare, medical bankruptcy, Federal and State indigent costs, provider indiscretions (cost cutting measures), and uninsured Americans. The public demanded change. As an interim step–on the way to the Single Payer system and to put push the increasing governmental costs back to the employers and employees–Congress passed the PPACA. It simply thwarted insurers unscrupulous practices, provided your desired preventative care, and ‘encouraged’ mandatory participation and reengagement of the private sector. The latter is referred to as ‘reducing government spending’. What we are experiencing are the private sector growing pains of what we asked for.
John and Friends:
As I was reading this post, I could not help but apply your points to the medical profession, which still follows some of the behaviors of the original guild system that originated in Europe at the time of formal medical schools turning out graduates into a market that had been served by female folk medicine practitioners and mid-wives. The guild set rules about who could and who could not serve patients. To this day, medical licensure, administered by the state, does the same thing.
Healthcare has the largest number of separately-licensed practitioner of any profession, to the point that it is obvious that criteria for a license are designed to make it difficult for a newcomer to qualify. Example: alcoholism counselors must have a masters in social work with 10,000 hours of practical experience. Really?
An alternative approach has been suggested by brave writers–having healthcare systems train their own future healthcare workers, except for physicians, nurses and pharmacists, giving them certificates that indicate they have the necessary skills to perform.
Notice, everyone, that most writers about healthcare economics stay away from the subject of the healthcare workforce except for how many there are. The interesting numbers are what they are paid. What would the public think about a nurse who complains about being underpaid when she makes A$150,000 per year plus 25% benefits?
Cheers…
Wanda J. Jones, President
New Century Healthcare Institute
“What we are experiencing are the private sector growing pains of what we asked for.”
Al, I didn’t ask for this.
Wanda, I worked in hospitals for a while, and I met very few nurses who made over 150k (3, I think. They were all department chiefs.). Most of the run-of-the-mill nurses I met made between 60k and 70k.
Gabriel,
Have you ever called for the government to reduce spending? Have you desired it’s action against predatory practices and fraud by insurers and providers? Did you ever want people to get preventive medicine to stay more serious maladies? Have you wanted more private participation with regard to the health care costs?
Quess What? You did ask for it … and we got the only thing that could pass our Representative Republic into law.
First, let’s see if it is actually this monster we’ve been told by letting it unfold, then work to improve it as we go.
It simply thwarted insurers unscrupulous practices, provided your desired preventative care, and ‘encouraged’ mandatory participation and reengagement of the private sector