Special Report

Two Wolves and a Lamb

Can we please find a way for Republicans not to turn a potential policy victory into a political and economic disaster?

By 4.3.13

Send to Kindle

The New York Times headline is scary enough: “Labor and Business Reach Deal on Immigration Issue.” But if this is what business, and by extension Senate Republicans, consider a “compromise” then I’d say to see what qualifies as “giving in.”

Before getting to the economic idiocy in the agreement, the politics bear mention: When there is no shame among America’s foremost political leaders that the terms of a deal are being overtly negotiated by rent-seeking special interests, our nation is surely on a most misguided and unsustainable path.

People think of “big labor” and “big business” as polar opposites. They think of the former as owning the Democratic Party (which is true) and the latter as owning the Republican Party (which is partially true, especially outside of “Tea Party” candidates, in the sense that they hold equal sway over the “for the little guy” Democrats).

But in fact, the two have a most important trait in common, namely that their inherent bigness allows them the ability to influence politicians to restrain competition and steer tax dollars into the coffers of favored business and unions, which is to say to the ones that make the biggest campaign contributions. In short, big labor may be liberal but big business is hardly conservative.

Voters should not be fooled into thinking that a compromise between the AFL-CIO and the U.S. Chamber of Commerce is likely to be an exemplar of moderation. Rather think of big labor, big business, and the American population as two wolves and a lamb voting on what to have for dinner.

On Monday, Senator Marco Rubio (R-FL), a leading Republican in the bipartisan “Gang of Eight” that is attempting to forge a passable immigration bill, said that the group has not necessarily worked the labor-business “compromise” into their plan: “Reports that the bipartisan group of eight senators has agreed on a legislative proposal are premature.”

This jibes with Senator Jeff Flake (R-AZ), also a Gang member, who said on Sunday that they haven’t “crossed every I or dotted every T.” And while Sen. Flake caught himself immediately, adding “or vice versa,” if Republicans accept the compromise of the “bigs,” it will lead them down a path that makes no more economic sense than crossing every I and dotting every T.

The agreement between labor and business says that the minimum pay level for guest workers will be the “prevailing wage” -- a number determined by the Department of Labor (DoL), and available on a frighteningly statist website: Wage Determinations OnLine.gov.

There are two broad categories of wages on the site: Those covered by the Davis-Bacon Act and those covered by the Service Contract Act. Davis-Bacon (DB), which became law in 1931, is intended to prevent competition with unions by non-unionized workers, particularly related to any sort of construction work.

Not only does this act raise the cost of all government construction, it is also a massive regulatory burden on those employers covered by the act, who must “on a weekly basis, provide the federal agency a copy of all payrolls…” If Republicans had any cojones, they would be trying to repeal this almost as often as they try to repeal Obamacare. But I digress…

The Service Contract Act (SCA) covers “contractors and subcontractors on service contracts entered into with the federal government and with the District of Columbia.” It covers a wide range of service jobs outside of construction.

One obvious objection to the use of the DoL Wage Determinations data is that anything involving unions or government, much less the combination of the two, is likely to be overpriced.

Indeed, this overpricing can be seen in comparison with another government-compiled database: the Bureau of Labor Statistics’ Operational Employment and Wages (OES) data which “produces employment and wage estimates for about 800 occupations.”

For example, the OES national mean hourly wage for an ambulance driver is $11.97, with a median of $11.27. The SCA “prevailing wage” is $18.18. Looking specifically at jobs where one would expect high participation of “guest workers,” i.e. today’s illegal immigrants, we find more of the same:

Job Description OES Mean OES Median SCA Prevailing (Denver)
Dishwasher $9.10 $8.88 $9.69
Waiter $9.95 $8.92 $10.65
Tire Repairer $12.23 $11.25 $14.98

Within the construction industry, one can find examples of Davis-Bacon wages being either far above or slightly below OES industry-wide wages:

Job Description OES Mean OES Median DB Prevailing (Denver)
Bulldozer Driver $22.24 $20.13 $24.27 + $8.62 “fringes”
Bricklayer $24.22 $22.33 $20.33 + $8.24
Pipefitter $25.46 $23.62 $33.10 + $11.52
Carpenter $19.20 $21.41 $16.36 + $1.38


There is no indication that the OES data uses the term “prevailing” and therefore it is likely that SCA and DB wages will be used to calculate what would effectively be the minimum wage for guest workers, with important implications for all workers in those industries.

Looking at these numbers, one might be tempted to minimize the damage the prevailing wage provision would cause, if it were abided by within the relevant industries. After all, you might think that a pay hike of less than $1 per hour for dishwashers and waiters can’t be that big a burden on restaurant owners. (They’ll tell you differently, as it is a very low-margin business in most cases.)

Most construction jobs have substantially higher, in absolute and percentage terms, “prevailing wages” than true national wages, so you might imagine a 10 percent to 20 percent increase in the cost of labor for those illegal aliens who become “guest workers.”

That would be bad enough. But this substantially understates the problem, by which I mean a problem for employers trying to keep businesses open and for customers trying to afford to eat at a restaurant or have their lawn mowed or buy a new home.

The reason is that there is a wide range, especially in construction industries, from the lowest-paid workers to the highest-paid workers, with the highest paid typically earning around triple the hourly wage of the lowest paid. Future “guest workers” will likely be among the lowest-paid, as they are today in their illegal status.

So an important way to look at the data is to compare the prevailing wage (SCA or DB, including “fringes”) to the lowest 10 percent and lowest 25 percent of earners in that job type (OES). Here are a few examples:

Job Description Prevailing (w/fringes) 10% Wage 25% Wage
Waiter $10.65 $7.79 $8.27
Bricklayer $28.57 $13.93 $17.33
Bulldozer Driver $32.89 $13.02 $15.81
Carpenter $17.74 $11.96 $15.04

Now let’s have some fun with math.

Imagine a home builder whose current job requires the use of two bulldozer drivers, two bricklayers, and four carpenters. Imagine that half of each category is currently an illegal alien (and future guest worker)…probably a fair guess in many circumstances.

Assume further that the illegal aliens are getting the 25% wage from above (which is generous, since many are by definition the lowest-paid workers in their industries) and that the legal workers are receiving the prevailing wage (although since that’s an average and since the immigrant workers bring down the average, it is likely that the non-immigrant workers make more than the prevailing wage.)

I won’t bore you with the calculations, but in today’s environment an hour of work for that eight-man crew costs the company about $160. If the guest workers must be paid the prevailing wage, that number jumps 21 percent, to about $194. Again, the actual impact would likely be more dramatic. Your dinner or hotel visit or dream home just got a lot more expensive.

But wait, there’s more: If an industry’s lowest-paid workers are now suddenly paid more, that industry’s prevailing wage will certainly rise, just as raising the lowest number(s) in any group of numbers raises that group’s average. (The average of 1, 3, 5 is 3 but the average of 3,3,5 is 3.67, an increase of 22 percent.)

This creates a vicious cycle in which a rise in the prevailing wage will force not only the guest-workers’ wages higher but also the wages of any low-skilled American worker since neither workplace harmony nor American politics would allow Americans generally to be paid less than guest workers. And that in turn will raise the prevailing wage, particularly among highly unionized industries. Where she stops, nobody knows.

This compromise, then, is a recipe for massively and systematically increasing wages, which is to say raising costs to customers and business owners, of the industries where there could be many “guest workers.” We apparently have a situation where one wolf, big labor, is much smarter than the other wolf, big business -- who should be very frightened by the dripping teeth they see in front of them at the negotiating table.

It is one thing for union-fearing governments to spend too much of taxpayers’ money on their own projects. It is another thing entirely to try to force those non-competitive prices -- which is what wages really are, the price of labor -- onto the private sector.

The real world is not Lake Wobegon where “all the men are good looking and all the children are above average.” Just as sirloin costs less than filet mignon, some workers should receive lower hourly wages than others. Trying to squelch a fundamental economic reality with legislation will work just as well as trying to sell sirloin for the price of filet, or claiming that Obamacare will lower the cost of health insurance.

Many will argue that wages are different, that we should have policies to make them as high as possible. But those arguments, despite their good intentions, are wrong. We should not, through government restrictions on the ability of two people to strike the contract of their choosing, force higher the price of labor any more than we should demand the highest possible price for gasoline or beef or medicine or accounting services -- no matter how much the sellers of those things might enjoy it.

Every worker’s wage is a cost to somebody. And like it or not, every worker’s wage has a value that the market can determine far better than a bureaucrat or union boss can. Governments spending other people’s money will pay more than a job is worth, which is to say more than it would cost in a free market, but most private business simply can’t. And therefore they won’t.

So the bad news is that if this plan were actually passed into law, it would theoretically cause everything from dinner to landscaping to home building to become much more expensive. The good news, in an economic sense, is that businesses will not comply with any such law -- because they cannot do so and remain in business.

This means that almost all of today’s current illegal alien workforce will remain illegal and will not join a guest worker program because being legal under the “compromise” means they will not be offered jobs.

Not that there was a great risk of many illegals becoming guest workers anyway, because the agreement limits the number of guest worker visas to quantities so low as to be functionally non-existent, starting at only 20,000 visas in the first year of the program, reaching only 75,000 in the fourth year, and never exceeding 200,000 guest visas. This despite everybody who has ever watched a television news program knowing that there are at least 12 million illegal immigrants in America today.

To put the proposed visa numbers in perspective, a new study published in International Migration Review states that even after substantial recession-related returns of illegal immigrants to their home countries from 2007 to 2010, there are nearly 3 million illegal immigrants in California and 700,000 in New York.

Even smaller states where you would not imagine large numbers of illegal aliens, such as Connecticut and Utah, have around 100,000 “undocumented” residents. This “compromise” allows for the entire nation, in the fourth year of the program’s existence, fewer guest-worker visas than the illegal immigrant population of Minnesota or Alabama.

One would be tempted to call this compromise a joke, except that it is so unfunny.

You may object: Kaminsky, why are you worried about the impact of a plan which you say business won’t follow anyway? There are three key reasons:

  • The structure of the plan is as objectionable as any short-term impact because increasing participation means increasing costs to society, just the opposite of what reform should do. Even success in this scheme means failure. Despite almost being used to it, I object to stupid, counter-productive laws.
  • If Republicans are sucked into believing that this guest worker plan is good enough that they also allow much stronger employer sanctions for violation of the law, you will see massive disruptions to industries that currently rely on immigrant labor.
  • Arguably the greatest incentive for would-be immigrant workers and their potential employees to act within the law is a system that values their labor based on market forces, and allows substantial numbers of guest workers. Since this compromise does just the opposite on both fronts, it actually increases incentives for law-breaking. As a general matter, I oppose government turning law-abiding Americans into criminals simply to appease special interests.

It bears repeating: the “compromise” reached between big labor and big business is worse than worthless, actually creating a greater incentive than we have today for illegal workers to remain illegal and greater incentive for businesses to hire them.

Labor unions and economic populists may not like it, but a real, robust, and market-based guest worker program should be considered a mandatory and integral part of immigration reform. (Alex Nowrasteh of the Cato Institute has written an excellent analysis of just such a program.)

It is remarkable that an organization like the U.S. Chamber of Commerce, which should theoretically be staffed with smart people, has agreed to such a disastrous policy suggestion. What looked at first like two wolves and a lamb voting on what to have for dinner has turned into one ravenous wolf devouring everything in its sight.

Photo: UPI

Like this Article

Print this Article

Print Article
About the Author
Ross Kaminsky is a self-employed trader and investor and is a senior fellow of the Heartland Institute. He is the host of The Ross Kaminsky Show on Denver's NewsRadio 850 KOA on Saturday mornings from 6 AM to 9 AM. You can reach Ross by e-mail at rossputin(at)rossputin(dot)com.