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POLICY: An economist’s forecasts Prop 72’s impact, so it’s incomplete and lacks common sense, with UPDATE

Harvard economist Anna Sinaiko has an article in Health Affiars suggesting that the SB 2 (or Prop 72) “pay or play” law will cause unemployment and reduced wages for those Californians it covers should it pass. Her analysis is manna from heaven to those opposing the bill. Here’s the key conclusion.

Implementing SB 2 will change the behavior of employers affected by the legislation, with consequences for California¬ís labor market and uninsured citizens…A more likely scenario is that some of the cost of health insurance will be passed to consumers, some felt by workers as unwelcome wage reductions, and some avoided by firms as they restructure their workforces. In California, workers at firms not offering benefits are more likely to be young males earning less than workers at firms that offer insurance; SB 2 will affect this group most adversely.

As a forecaster I was trained to that there’s a big difference between being broadly accurate and precisely wrong. Sinaiko’s detailed analysis of Prop 72’s likely impact falls into the latter category. Increasing labor costs (which is what SB2 will mean) may result in overall lower wages, but increased labor costs are more likely to result in lower profits. Sinaiko never mentions profits as a share of corporate revenues. A senior VP from Fidelity said, in a talk I heard on Monday, that corporate profits as a share of revenues are currently at an all time high, while wages are at their lowest in real terms for 30 years. Why should the costs of SB2 come out of wages rather than profits, given that one of them has been going up and the other down?

Sinaiko correctly points out that the vast majority of jobs affected by SB2 cannot be moved out of California, unless San Franciscans want to drive to Reno to get a cheeseburger. So the total amount of money going into these businesses is likely to stay roughly the same. She almost neglects to mention that the wages of many of those covered by SB2 are at minimum wage or the equivalent (and legally enforced) “living” wage in some cities, so their wages can’t be reduced, and the cost of hiring and managing more part-time employees may exceed the increase in labor costs from SB2.

The broad analysis tells us that, whatever the libertarians say, laws demanding an increase in the lowest levels of compensation (which is in effect what SB 2 is) have almost no impact on unemployment rates, which are driven by the overall economy I lived in the San Francisco Bay Area in 1999 when no amount of money could hire people. I was here in 2002 when you couldn’t get a job no matter how little money you’d work for. (And according to another talk from a different Fidelity executive, all the jobs that could be, had already been moved to India). At both times the minimum wages was the same. In the UK the Labour government brought in a minimum wage in 1999. Today the unemployment rate in the UK is the lowest it’s been since 1972, and studies show no negative impact on employment among low wage workers.

Common sense also suggests that the people who oppose Prop 72 think they have something to lose. Who are those people? They are the big fast food chains and the non-unionized discount stores, who have spent over $8m against it. If they believe that they’ll be able to push all the costs of Prop 72 into their “labor” segment and have none of it come out of their “profit” segment, why would they bother opposing it?

UPDATE: Health Affairs has published a rather more academic version of this letter in its online section.

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