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November 01, 2004

POLICY/POLITICS: Prop 72, sorry couldn't stop myself!

So I tried to not say any more about Prop 72 and the analysis from the Harvard economist Anna Sinaiko that poo-poohed my theory about labor costs versus profits. But as I never heard back from her, I might as well print what I wrote here after she said this in reply to my earlier letter:

Let me begin with Matthew Holt's letter, in which he questions: Can we finance health insurance by tapping into ("all-time high") corporate profits? It has long been recognized in labor and health economics that firms regard the cost to employ a worker as the sum of cash wages and fringe benefits, and offset higher costs of health insurance with lower wages. While in the short term this may be difficult, over the long term, wage reductions are likely to be a consequence of an employer mandate such as SB 2.
Here's what I wrote to her in reply, as yet not hearing back from her.

By claiming that economics tells us something -- in this case "firms regard the cost to employ a worker as the sum of cash wages and fringe benefits, and offset higher costs of health insurance with lower wages" -- you appear to mean "economic theory" tells us something. You appear to be saying that the theory says that overall gross labor costs are necessarily static and any change in one part of labor costs will be compensated within those labor costs, either by lower wages or lower employment. Those of us who think of economics as a pretty imperfect science would be interested to know how you reconcile the UK experience with the introduction of a minimum wage with your economic theory? Wages/labor costs there went up and unemployment stayed the same (in fact dipped).

Assuming that no miracles occurred, and that the total amount of revenue in those firms stayed constant, something else MUST have gone down. Unless Adam Smith has changed his text since I went to college "Economic theory" says that there are only four elements in the cost of production: Land, labor, capital, and "enterprise". You have effectively said that a change in the cost of one of these is self-regulating and that the others cannot change. That is patent rubbish, as the "cost" (or share of revenue) of all 4 elements changes constantly in any market. Or maybe you have created a new "economic theory". If that's not what you are saying you need to restate your argument, and answer my criticism properly.

And you never answered my final question. If this all washes out within labor costs and they stay constant, why are corporations (who care only about the "enterprise" or profit part of the equation) so dead set against SB1? I'll answer it for you. They are not economists and they--like labor unions--live in the real world where these types of battles over distribution of revenue happen all the time because there actually IS something at stake.

And so after that non-reply here comes the real proof. Today's NY Times has an article about WalMart and how it basically offers fewer health benefits than its competitors and as an aside many more of its employees wind up on public assistance of various sorts for their health care needs. Walmart is more profitable than its nearest competitor Costco because of that, and Wall Street notices:
Wal-Mart says that 23 percent of its employees are not eligible for coverage, but that it covers 58 percent of those who are. That compares with an insured rate of 96 percent of eligible full-time or part-time employees of Costco Wholesale, the discount retailer that is Wal-Mart's closest competitor nationwide. Costco employees - most of whom are not represented by a union - become eligible for health insurance after three months working full time, or six months part time. At Wal-Mart, which has no union employees, many who work full time must wait six months to become eligible. Part-time workers are not eligible for at least two years. Because of turnover, some employees never work long enough to become eligible.

If there is any place where Wal-Mart's labor costs find support, it is Wall Street, where Costco has taken a drubbing from analysts who say its labor costs are too high. Costco's pretax profit margin is only 2.7 percent of revenue, less than half Wal-Mart's margin of 5.5 percent.

But I guess Sinaiko's economic theory doesn't cover Bentonville AK and Wall Street or Sacramento and Athens medicaid payments, so she must be right, and labor costs have no impact on profit margins.

November 1, 2004 in Policy/Politics | Permalink


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