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National

Wages and hiring on collision course as United States inches closer to ‘full employment’

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[KIRKLAND] – (MTN) Social media is abuzz with pictures of businesses closing because they can’t hire employees, entire workforces quitting and walking out, and talk of how extended unemployment benefits are keeping employees from returning to work. The economic reality is more complex and particularly problematic for the 5 states that continue to follow federal minimum wage guidelines, and the retail and hospitality industry have become employment and political flashpoints.

Alabama, Louisiana, Mississippi, South Carolina, and Tennessee, are the only states that have not passed state-level minimum wage laws. Even Florida has passed legislation that has put it on the path to a $15 an hour minimum wage. For tipped employees, base pay in those five states can be as low as $2.13 an hour, $85.20 for a 40 hour week, before federal payroll and state income tax. Three of these states are bumping up on ‘full employment.’

Full Employment

Some would consider full employment as 0% unemployment, but that has never happened in United States history. The lowest unemployment ever achieved was 1.2% in 1944, during the throes of World War II, millions of men overseas and a massive war effort. At any given point you will have discouraged workers, people between jobs, and others who are changing careers or entering the workforce after completing education.

As the number of people who are unemployed declines, you reach a point where employers need to offer higher salaries to compete. If you have too much productivity you create wage inflation, and a fraction of that is passed back to consumers. In the United States, the Congressional Budget Office considered full employment is achieved when the unemployment rate is 4.6%. Currently, the United States unemployment rate is 6.1% after a high of 14.7% in April 2020.

The states of Alabama, South Carolina, Tennessee, and 17 others, are already below or near full employment. In Louisiana and Mississippi, new unemployment claims have plummeted, and Louisiana already has a lower unemployment rate than March of 2020.

Bureau of Labor Statistics and U1 – U6 unemployment numbers

The Bureau of Labor Statistics (BLS) is a federal organization that tracks unemployment in the United States. Each month they create a report that shows the U1 through U6 unemployment numbers, and each number is formulated by adding or removing different groups of people and their unemployment state. The number you see in the headlines is the U3.

U3 unemployment includes the “total unemployed” as a percentage of the civilian labor force. The U6 number in contrast includes, “Total unemployed, plus all persons marginally attached to the labor force, plus total employed part-time for economic reasons, as a percent of the civilian labor force, plus all persons marginally attached to the labor force.”

In April national unemployment increased from 6.0% to 6.1%, so what happened? Ironically, an improving economy and job market can move those not counted in the official unemployment number because they were discouraged or currently under-employed in part-time work. When people marginally attached to the labor force move to actively seeking jobs, it can create an increase in the official unemployment rate.

569,000 COVID deaths, 30% post-COVID infected with long-term symptoms

When COVID tore through the United States beginning in March of 2020, workers at fast-food restaurants, core retailers that provided groceries, home repair, and pharmacy needs, and workers in food processing were deemed, essential workers. In some industries such as food processing, these workers bore the brunt of COVID infections.

As the United States creeps towards 600,000 deaths from COVID, these losses impact the number of available workers in a post-COVID recovery. Additionally, up to 30% of people who have survived COVID, including asymptomatic carriers are dealing with long-term effects including chronic fatigue, mental decline, chronic joint pain, and heart damage. In other cases, able-bodied workers can’t return to the workforce because they are now caring for COVID long haulers.

Limited and expensive daycare

In the United States, it costs $11,400 on average to put a child in daycare for a year. For a worker making $7.25 an hour, their entire post-tax annual pay would go to care for one child.

Daycare centers in the United States were short-staffed before COVID, and the situation is more challenging today. Many school systems nationally are doing part-time in-class learning, further complicating when and how parents secure childcare. For some parents, the issue comes down to no available daycare compatible with a work schedule in retail and hospitality.

In retail and fast-food jobs, some workers are reporting working 12 to 14-hour shifts, which is incompatible with most daycare providers. In Idaho, childcare providers shut down en masse to protest budget cuts on the table in the Idaho legislature.

Long hours, irate customers, and understaffing

The hospitality industry is the hardest hit when it comes to open jobs they can’t fill. The worker shortage and competitive job market have created a vicious cycle.

Prior to COVID, retirees were among the ranks of part-time workers at fast food and casual dining restaurants. Chains like McDonald’s even actively recruit retirees as a way for them to stay active, engaged, and supplement retirement income. People over 55 disproportionately bore the brunt of COVID infections and deaths in 2020. Many older Americans are reluctant to rejoin the workforce due to vaccine hesitancy and patchwork mask rules.

Other employees have reported dangerous confrontations with anti-maskers, sometimes spiraling into violence between customers or customers assaulting employees. Frontline workers are attempting to enforce rules where they have no authority, and some customers view them as having to obey their will.

The stress of working with the public in an age lacking civility and being short-staffed has created longer waits, more errors in orders, and more anger among customers and employees. In a viral Tik Tok video, Chipotle employees complained about 12-hour shifts without breaks, being asked to violate employment and health laws to meet customer demand, and uncompensated hours.

Many businesses have moved to offer signing bonuses as high as $500 or even paying people to show up for an interview. However, these one-time payments don’t come for an overall salary boost, and workers have better prospects.

Education, gig economy, self-employment, and package delivery

For some, the return to the workforce isn’t going to happen because they have become job creators themselves. Facing unemployment and slow job prospects during the peak of COVID, some turned to career changes and formed their own businesses. In a report on WSVN, Dailys Gonzalez was a bookkeeper for years but lost her job due to COVID. Instead of looking to reenter the workforce, they formed their own painting business.

Amazon on its own created 400,000 jobs in logistics, shipping, and delivery in the first 9 months of 2020 as Americans flocked to online delivery and shopping. For others work from home or self-employment opportunities in customer service provided better pay, more flexibility, and a 25-foot commute from the bedroom to the kitchen table.

The tech community called 2020 the “great acceleration,” because changes in how, when, and where Americans would work moved faster than previously forecasted due to COVID. For some lower-wage workers, a return to the cash register or grille is never going to happen because they have found better opportunities that enable them not only to work but manage childcare while avoiding face-to-face confrontations with unreasonable customers.

Focusing on five states that follow federal minimum wage laws

Alabama has the biggest challenge in the country, with a state unemployment rate of 3.8%. Almost a full point below full employment and just 1.2 points higher than its record low in March of 2020. The southern state has a record number of unfilled jobs and a severe worker shortage. Business leaders claim that the federal unemployment boost is to blame, but the job market conditions in the Yellowhammer State point to increased wages will be needed to attract outside workers into the state.

Tennessee has an unemployment rate of 4.9%, close to full employment. There are no state-level minimum wage laws so tipped restaurant workers starting pay is as low as $2.13 an hour. Nationally, in-person restaurant dining is at 40% to 60% of pre-COVID levels, cutting into tips simply because of fewer customers. Overworked staff can’t provide a high degree of service, further cutting tips while increasing stress and workload.

If a restaurant is offering $2.13 an hour plus tips while an Amazon distribution center is offering $15 an hour for equally stressful and hard work with benefits, the hospitality industry is uncompetitive.

South Carolina is also close to full employment, with an unemployment rate of 5.1%.

Mississippi, which borders Alabama and Tennessee, has an unemployment rate of 6.3%. However, in March 2020, the unemployment rate was 6.0%, indicating that Mississippi has almost returned to pre-COVID employment levels. Further analysis shows that the unemployment rate in Mississippi was slowly climbing from a low of 4.8% since 2018.

Louisiana has the highest unemployment rate of the 5 states, at 7.1%. However, that rate is lower than the number of unemployed prior to COVID.

A further look at available state unemployment data, 18 states are at full employment, and not a single state has an unemployment rate above 10%. Hawaii has the worst unemployment in the nation at 9.0%, but the state is heavily tourism-dependent with travel down 60% and strict entry rules for the archipelago. Of the 10 states with the worst unemployment numbers, 4 had significant tourism prior to COVID including the aforementioned Hawaii plus, New York, Nevada, and Louisiana.

The employee shortage in the United States is more complex than extended unemployment benefits, with state and federal data indicating that for almost half the nation, unemployment rates can’t move much lower. The more than decade-long argument over increasing the federal minimum wage, the gig economy, and the great acceleration has created new opportunities that an increasing number of people are embracing.

National

You’re paying to subsidize a sub-standard minimum wage

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The last time Congress increased the federal minimum wage was in 2007, reaching the current $7.25 an hour on September 20, 2009. The debate to raise the minimum has raged since the depths of the Great Recession to today. As of this writing, only seven states have no minimum wage laws or have a minimum wage below the federal standard.

The benchmark for a new federal minimum wage is $15.00 per hour, $31,176 per year. The annual pay rate assumes a 40 hour work week with some degree of paid sick time, paid holidays, and paid vacation. It also does not account for federal or state income taxes, FICA, or employee benefits contributions.

Twenty-nine states have already passed legislation supportive of a higher minimum wage across the political spectrum. Florida voters approved a $15 per hour minimum wage by 2026, with the first jump to $10 per hour in September 2021. Alaska, Arizona, Michigan, Missouri, Montana, Nebraska, South Dakota, and West Virginia, red or purple states already have higher wage standards. Eighteen states have passed laws or Constitutional amendments that index state minimum wage based on the Consumer Price Index (CPI) or other cost indexes. In contrast, Oklahoma still has a law on the books that employers with fewer than ten employees can pay as little as $2 per hour if no federal minimum wage existed.

According to the MIT Living Wage Calculator, no one can survive in any state making the federal minimum wage. It is not even close. In Mississippi, a childless individual would have to make $13.99 per hour to earn a “living wage.” For someone living in Jackson or Mobile, the number would be higher.

Corporate America has little incentive to support an increase in minimum wage due to WOTC

In 1996, the Small Business Job Protection Act of 1996 created the Work Opportunity Tax Credit (WOTC). The legislation provides tax credits for employers that hire marginalized people during their first year of employment. The credits are payroll and hours-based, ranging from 20% to 40% of the total salary in the first year of work. The full tax credit in some edge cases can be $10,000 per year. Tax credits provide a dollar-for-dollar deduction on taxes, which is different than a tax write off which provides a deduction on gross income.

An employer can receive the tax credit by hiring an individual in a wide range of categories. Ex-felons, anyone receiving aid through a state-approved plan or TANF, a qualified veteran, SNAP recipients, or the disabled collecting SSI are all eligible. The federal government also has created Designated Community Resident (DCR) zones, called Empowerment Zones, Enterprise Communities, or Renewal Communities. People living in these zones can be eligible.

Created to benefit small businesses, WOTC requires paperwork and accounting that is littered with legal landmines. Smaller business owners frequently avoid the red tape or aren’t even aware of the programs. Large employers, on the other hand, have entire teams and software to manage the process.

An employee only has to work 120 hours for an employer to get a tax credit equal to 20% of their salary, at federal minimum wage that comes out to $174. The average tenure of an employee working in retail or fast/casual dining? Six weeks. A staffing company supporting an employer such as Amazon at its fulfillment centers can stack these credits as employees churn through their doors. 

You are paying for welfare, but you’re not paying who you think you are

At the current federal minimum wage, a feedback loop of corporate welfare creates a system that enriches employers, mostly Fortune 1000 and large enterprises, in three different ways. The current tax code incentivizes employers to hold the line at $7.25 because the benefits go far beyond cheap labor.

Employers benefit first from the tax credits as mentioned above. A single person making $7.25 an hour will qualify for SNAP benefits in most cases. The reality is most people who collect food stamps are working poor. A United States Census report of SNAP recipients indicated 79% live in working households. For married couples, the rate jumped to 84%. Among those collecting SNAP benefits, over 16,000 active-duty soldiers.

Once you remove the working poor and their children, disabled Americans, and the elderly, less than five percent of people receiving food stamps are unemployed adults. In fiscal 2020, SNAP benefits cost  $89.6 billion. The average taxpayer contributed $31.26 annually to assist the employable out of work. However, another $594 per taxpayer went to corporate welfare, artificially propping up employer payrolls with SNAP benefits.

By keeping the minimum wage low, employers continue to have a large pool of WOTC eligible hires, perpetuating the tax credits. The American taxpayer indirectly supports employer payroll through supplemental nutrition aid and other programs. If you follow the money, the benefactor for these programs is not the working poor but the companies’ shareholders. For some of these companies, there is a third and more insidious incentive.

An employee on SNAP working at Dollar General, Walmart, Target, or other employers that accept EBT will likely use their benefits where they work. Those benefit dollars become gross sales for the employer.

To summarize, WOTC provides a tax credit to write off up to 40% of an employee’s payroll. SNAP benefits create a pool of employees to hire from, creating continued eligibility for WOTC. A federal minimum wage of $7.25 an hour keeps employed Americans eligible for supplemental nutrition aid, providing $89.6 billion in additional gross sales to the grocery industry. 

What about the minimum wage creating inflation and eliminating jobs

It is undeniable that an increase in the federal minimum wage will cause an increase in the cost of services and goods. However, many examples exist of successful, profitable companies that provide quality products at market prices and pay competitive wages.

Costco announced on February 25 it will be raising its minimum pay to $16 per hour. Winco is the lowest-priced national grocery chain, and the average wage is $12 per hour. Target and Walmart have both made commitments to raise their minimum pay. 

The challenge for a small business isn’t the increase in wages. When the job market tightens again, smaller employers will be competing for workers wanting higher salaries. If they don’t match the market, they will face higher turnover, employee theft, and low morale, creating indirect costs. 

What about the impact of cost for a commodity like a Big Mac? According to Expatistan.com, a McDonald’s combo meal in Seattle, where McDonald’s’ minimum wage is $16 per hour, is around $9.00. In Jackson, Mississippi, where the minimum wage is $7.25 an hour, a McDonald’s combo meal is about $7.00. There is no economic evidence to support the theory that an increase to the minimum wage results in a dollar-for-dollar increase in consumers’ goods and services.

For businesses, there are key costs that would decline with a minimum wage increase. Employee theft, both of money and product, decreases when better wages are paid. For example, Costco has almost no employee shrinkage.

Companies that have increased wages, such as Walmart, have seen a sharp decline in employee turnover. People who are paid and treated better at their jobs stay at those jobs. Even in roles where training is minimal, an employee won’t reach full productivity for three to six months. In an environment where employees are continually churning, recruiting, hiring, onboarding, training, and lower productivity all cost the business more.

Some jobs will be eliminated with an increase in the minimum wage. The non-partisan Congressional Budget Office estimates the United States would lose between 1.4 and 4.0 million jobs by 2029. However, the same report estimates the number of people living in poverty would decline by 1.3 million, even with the job losses. When we look at the last 30 years, most jobs eliminated disappeared due to technology, robotics, and mechanization, not due to wage costs. This has created additional challenges. A person from Generation X entering the job market could start at a company as a clerk or in data entry and work their way up through the ranks. These entry-level jobs white-collar jobs don’t exist anymore, forcing younger generations into service roles, apprenticeships, and other low-paying roles after completing their education.

What does history teach us

There is one example in US economics where the federal minimum grew 87.5% just 90 days after Congress approved the change. Harry Truman pushed for a boost as the United States was newly emerging from a deep post-World War II recession. Just as today, business leaders and economists predicted massive job losses and potential economic depression. In December 1949, when the increase kicked in, national unemployment was at 6.6%. Three years later, the unemployment rate was 2.7%.

Some argue that the post-1949 economic boom was created because Europe and large parts of Asia were devastated by World War II. The UN World Economic Report from 1951-52 doesn’t support that theory. On the contrary, the report shows robust global growth, with post-war France and Germany growing far faster than the United States. By 1961, total European GDP was far ahead of the US, even as the United States enjoyed the highest standard of living on the planet.

If history is a predictor for the future, American prosperity will benefit from an increase in the federal minimum wage. It will help move more people out of WOTC, decrease corporate welfare, and help more Americans be self-sufficient.

Editorial, National, Shower Thoughts

Kevin Hassett leaving the White House

The Golfer-in-Chief’s top economic adviser is leaving the White House, per a tweet, with Twitter being the preferred communication tool for the most powerful nation in the world. The departure is very significant given the announcement of socialistic price controls tariffs on Mexico that will begin on June 10, and the widest inversion of the yield curve since 2007 on Friday.

Yield curve inversions have been a gold standard indicator of a looming recession in the last seven downturns. The yield curve has inverted three times since late 2018, with the latest and most dramatic inversion happening last week. A yield curve inversion is when long-term interest rates fall below short-term interest rates on bonds. Normally the yield on bonds should be better long term. The inversion happens when investors believe that the credit markets will get tighter, thus lowering returns on long term bonds.

Michael Schumacher, managing director and global head of rate strategy at Wells Fargo Securities stated on Friday that there was no need to be alarmed, and the inversion is no longer the gold standard of a looming recession. He did, however, in his next breath, he advise that investors should take a conservative stance.

It isn’t lost on the Malcontent on the timing of the departure, a weekend announcement via tweet, and the typical, “thank you for your amazing service,” praise. If prior experience is a good predictor of the future, it won’t be long before Kevin Hassett is low energy, stupid, and the worst economist on the planet.

The grim reality is if the taxes that get passed on to ordinary consumers tariffs imposed on China and Mexico are allowed to play out to their 25% maximum, it will have a significant impact on the US and global economies. With interest rates still low, and dear leader recently demanding they should be cut now to drive more growth, the fed has only a little runway to adjust rates to stimulate a stalled out economy before the fed rate goes back to zero. In an economic downturn the most powerful dial the federal reserve has is to lower rates, that and print more money with an IOU.

To an outside observer, it isn’t a big leap to speculate that Hassett disagreed with policy and was pushed out of the White House. Only the best people, you’ll see, only the greatest minds.

Oy.

Malcontent, out.