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Center for Labor Research and Education


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Mounting Business Mandates?

Riverside Press Enterprise

After years of federal neglect, momentum has propelled governments to raise minimum compensation laws. Last November, voters in six states passed minimum-wage laws. Congress is currently considering a law that would require businesses with 15 or more employees to provide paid sick leave. In California, minimum health-spending standards for employers will almost certainly be part of any health-care reform package.

What is going on here? Are the United States and France going in opposite directions, with the United States raising minimum-labor standards (legally required base wages and protections for workers) while the French get ready to repeal them? Are such standards good for businesses or workers? How much is too much?

Minimum-labor standards have a long tradition in the United States. The Fair Labor Standards Act in 1938 established a federal minimum wage and the eight-hour day, and outlawed the use of child labor on a national level.

Minimum-labor standards not only provide vital protections for workers, they create a common floor for business competition. When firms provide subminimum wages or do not provide health care or sick leave, it impacts workers, employers and society as a whole.

Let’s take the case of health care. When workers do not have coverage on the job, costs are not only born by the workers themselves — both financially and with their health — they are also shifted to taxpayers and onto other employers. Taxpayers pick up the costs of public health-care programs. Employers that do provide coverage face rising premium costs as a result of hospitals passing on their cost of uncompensated care.

Bogus Claims

The traditional argument against labor standards is that by raising labor costs, it forces employers to hire fewer workers, or forgo hiring less-skilled workers, thus defeating its purpose.

The book “Myth and Measurement: The New Economics of the Minimum Wage” by David Card and Alan Krueger examines employment in fast-food restaurants on both sides of the Pennsylvania/New Jersey border after New Jersey raised the minimum wage. Their study found that employment actually grew slightly faster in New Jersey fast-food restaurants over their counterparts that lacked the higher minimum wage.

Their results have been replicated in a wide number of studies, including research by our own institute on the impacts of the San Francisco minimum-wage law.

Last October, more than 650 economists, including five Nobel Prize winners, signed a statement calling on Congress to increase the minimum wage noting that, “the weight of the evidence suggests that modest increases in the minimum wage have had very little or no effect on employment.”

The mistake is to think of labor like a static good. A lump of coal does not change with its price. But workers are human beings. The price of labor — what workers are paid — impacts their decisions about work and their performance on the job. There is a profound relationship between compensation and worker turnover, productivity and quality of work.

Standards can also help make markets work more efficiently. For example, our current health-care financing system gives strong incentives for workers to make job choices based on benefit availability rather than where they would be the most productive. A common floor on health spending could introduce greater flexibility into the labor market.

The proposals for new labor standards, like those on health spending, establish a floor — a minimum. Firms retain significant freedom and flexibility in setting policies above that minimum appropriate to their industry and business strategy. What attracts and retains workers in any given firm will vary significantly by the nature of that work.

Watch the Costs

In setting any minimum standards, policymakers should pay attention to prevailing wages and benefits, how the requirements would impact the overall cost of doing business. Minimum standards should be set high enough to provide meaningful protections to workers, but modest enough to avoid adverse impacts.

The health-care policies under discussion in Sacramento meet that test. The United States is still far from embracing the mandated-labor standards common in the rest of the industrialized world, but the pendulum has finally started to swing back, if modestly.