Implications of a Minimum Wage Rate Increase

WSJ:  The Minority Youth Unemployment Act:  A higher minimum wage will hurt Obama's most loyal supporters.
Key Points by the Author:

  • About 85% of the studies "find a negative employment effect on low-skilled workers.
  • The minimum wage is also an ineffective way to reduce poverty. Most families in poverty don't have someone who works, so making it more difficult to get a job exacerbates poverty.
  • when the jobless rate is high, as it still is in California and New York, the increase punishes minority youth in particular.
  • A study by economists William Even of Miami University and David Macpherson of Trinity University concludes that in the 21 states where the full 40% wage increase took effect, "the consequences of the minimum wage for black young adults without a diploma were actually worse than the consequences of the Great Recession."
  •  after the July 2009 increase 600,000 teen jobs disappeared in the next six months even as GDP expanded.
  • Mr. Obama's economists know all this, but then the minimum wage has nothing to do with poverty or unemployment. It's a political play to reward unions and box in Republicans. 

Why Some State Incentives for Business Work—And Others Don't

Why Some State Incentives for Business Work—And Others Don't
A $46 million Connecticut deal with a pharmaceutical company meant spending $230,000 per new job.

Every state does it, to one degree or another: pays incentives to private companies to keep jobs in-state. Supporters say this is necessary for job creation, detractors call it corporate welfare, and nationwide it costs more than $80 billion a year. So when are such incentives sound economic policy, and when do they merely serve certain firms, lobbyists and politicians?

Jobs created with incentives are good when they are net contributors to the economy. They are bad—handouts, effectively—when the incentives cost the state more than the jobs contribute back to the economy.

The Connecticut Policy Institute has identified three criteria for determining when job incentives go from good to bad:

• Does the total cost of the incentive exceed the amount that would be paid back through incremental tax revenues over 10 years? In most states, this threshold is crossed when the total cost of the incentive rises above 50% of the annual compensation for jobs kept or created.

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• Do the incentives provide only for jobs that would not otherwise come to the state, or would otherwise leave?

• Do the incentives promote jobs that will remain viable and stay in-state after the incentives expire?

Some state incentive programs meet these criteria. In October 2012, Kentucky offered Berry Plastics $10 million to refurbish and reopen a manufacturing plant in Madisonville, about 150 miles southwest of Louisville. Berry committed to bring 400 jobs to Kentucky, a reasonable rate of $25,000 per job. The plant had closed in 2011 because the products it produced could be more competitively produced elsewhere. But the refurbished plant will produce a different product that can be competitively produced in Kentucky.

Most incentive programs aren't so effective. In 2011, Connecticut agreed to pay The Jackson Laboratory, a genetics research institute, $300 million in exchange for a promise to bring 300 new jobs to Connecticut. That cost a whopping $1 million per job. The same year, Connecticut paid Alexion Pharmaceuticals $46 million to commit to hiring 200 new employees. At $230,000 per job, this still far exceeds the threshold for a sound investment in the state's economy.

In 2007, Michigan announced a film-industry incentive program that would reimburse 50% of production costs spent in the state. The program brought hundreds of jobs to Michigan, according to local records, but when the incentives expired in 2011 the movie producers relocated and the jobs disappeared.

Incentive programs can be problematic even when not targeted at particular companies or industries. Oklahoma's Small Business Capital Formation Incentive Act provides a 20% tax credit for investments in Oklahoma small businesses. In 2009, reported the Oklahoma Tax Commission, the program cost the state $17 million but generated only 21 new jobs.

Connecticut recently passed a Job Expansion Tax Credit awarding businesses a subsidy of up to $32,000 per employee for every new hire between Jan. 1, 2012 and Jan. 1, 2014. This subsidy will induce businesses to hire some employees they otherwise wouldn't, but much of the cost will be wasted paying companies for hires they would have made anyway. Meanwhile, there is no guarantee that any of the new employees will still have jobs once the subsidy expires three years after their date of hire.

If many job incentives are poor public investments, why do states get away with offering them? Because good policy and good politics are often at odds. Politicians want to be re-elected, and a solid record on nominal job growth—regardless of the cost—tends to be more important to officials' re-election prospects than is the prudent management of public funds. That is one reason most such programs are structured to yield job creation immediately while deferring the cost of the incentive into the future—preferably when other politicians will be in office.

State competition for jobs should be a good thing that promotes fiscal stability, low tax rates, dynamic labor markets, balanced regulatory environments and responsible investment in infrastructure and human capital. These—and not one-time tax breaks—are the factors that are most likely to attract employers and drive good jobs policy.

Venezuela Slashes Currency Value

Venezuela Slashes Currency Value
Devaluation Aims to Ease Shortages

CARACAS—Venezuela devalued its currency against the dollar on Friday, a move made by the government of ailing President Hugo Chávez to ease deepening shortages, but is also expected to stoke inflation and further weaken the economy.

Venezuela's government has had strict currency exchange controls since 2003 and maintains a fixed, government-set exchange rate.

The bolívar—whose official name is the Strong Bolívar—was slashed by nearly a third of its value to 6.3 per dollar from a previous rate of 4.3 per dollar, Finance Minister Jorge Giordani told a news conference.

The move will help narrow the Venezuelan government's budget shortfall, but will also spur inflation that is already among the world's highest—highlighting the increasingly difficult trade-offs faced by Mr. Chávez after a more than a decade of populist economic policies.

The devaluation was widely expected sometime this year after the government ramped up spending in 2012 ahead of October's presidential election. In that vote, Mr. Chávez handily won re-election before falling ill again to an undisclosed type of cancer.

The spending helped Venezuela's economy to grow by more than 5%, but also deepened the budget shortfall to anywhere from 8% to 17% of annual economic output, depending on the estimate.

It also drove a shortage of dollars as Venezuelans anticipated their bolívars would soon be worth less and began snapping up greenbacks on the black market, where the value of the bolívar has slid to 18 per dollar.

A lack of dollars needed to buy imports also has led to widespread shortages of some staple foods, such as cornmeal, chicken and sugar, spurring discontent.

What was something of a surprise was the timing of the currency move, with Mr. Chávez in a hospital in Havana, where he has been since a Dec. 11 surgery for a recurrence of his cancer. The president hasn't been seen since and many observers wondered if the government would take a politically risky step like devaluation without Mr. Chávez around.

Some analysts viewed the decision to devalue now as a sign there is growing confidence that Chavistas have united behind Vice President Nicolás Maduro, Mr. Chavez's designated successor.

"Evidently, the situation is as grave as people say, with a high fiscal deficit, liquidity problems, and lots of shortages," said Javier Corrales, an expert on Venezuela at Amherst College. "But it also shows that the people within the Chavista movement are very committed to the government to do something as risky as this at this time."

The move should ease the fiscal gap by giving the government more in local currency terms for every dollar it earns in oil exports through state oil giant Petroleos de Venezuela, one of the world's biggest oil companies. The fiscal gap will close to 5.3% of gross domestic product compared with 8.5% last year, said Francisco Rodriguez, an economist at Bank of America Merrill Lynch.

"It's still a high deficit, the government hasn't completely solved the problem and they will most likely have to devalue again at the end of this year or the beginning of next year," he said.

The move will raise the cost of imports, and Venezuela's economy—hit by widespread nationalizations during the Chávez years—is increasingly dependent on imports. Alberto Ramos at Goldman Sachs estimated Venezuela's inflation will rise to 30% this year as a result.

Venezuela carried out a similar devaluation in 2010. Economists said another adjustment was long overdue since prices had increased by an estimated 98% since the last change.

"This shows that economic imperatives trump political calculations," says Moisés Naím, a senior associate for the Washington based Carnegie Endowment for International Peace. But Mr. Naím said the devaluation would do little to solve the country's deep seated economic problems.

"When the smoke clears and the mirrors are packed away, we'll be left with a more cash-flush government, a less cash-flush populace, and with all of the pre-existing distortions and absurdities somewhat attenuated, but very much in place," wrote Venezuelan blogger Francisco Toro.

Among the biggest losers of the devaluation are foreign companies hoping to repatriate dollars home, Mr Naím said. The Venezuelan government has held up providing dollars to many companies, and will now give them fewer dollars for their sales in local currency terms.

In earnings calls in recent weeks, top executives from Procter & Gamble Co., Colgate-Palmolive Co. and Kimberly-Clark Corp. warned that a currency devaluation in Venezuela would likely reduce their earnings outlook this year. Among the most exposed is Colgate, which derives roughly 5% of its sales from Venezuela, and P&G and Clorox Co., which get about 2% of their sales from the country, analysts say.

Venezuela is also a big market for Avon Products Inc., a direct seller of beauty products and other items, but the company may be in a better position to try to recover the potential impact because cosmetics aren't subject to tight price controls, says Javier Escalante, an analyst with Consumer Edge Research in Stamford, Conn.

Most of the world's economies moved away from fixed exchange rates in the 1990s after a series of high-profile devaluations, from the Mexican peso to the Thai baht. But Mr. Chávez's populist policies have gone in the other direction. He implemented currency controls in 2003 after increased government spending led to inflation and then price controls.

Since then, Mr. Chávez's government has periodically devalued the currency every few years.

The moves are partly meant to breathe new life into struggling local industry—weighed down by widespread nationalizations and price controls—by giving them a chance to compete against imports.

But the step is unlikely to boost competitiveness unless the government overhauls the rest of its policies, including price controls and other measures.

"For a long time the Chávez government has driven the economy with one foot on the gas, and the other on the brakes," said Mr. Naim. "It has launched all kinds of initiatives to stimulate demand while braking hard on supply."

The currency move is likely to set the stage for a showdown in coming days between retailers and the government, which is keen to prevent the devaluation from feeding through to price increases that could erode consumers' buying power and the popularity of the Chávez government.

In Jan. 2010, a similar devaluation led to shoppers swarming stores to buy goods before prices were marked up. Prices did rise, stoking inflation to about 30% at the time, and the government responded by threatening to shut down businesses that raised prices. Few were actually shut down at the time.

Central Bank President Nelson Merentes also said the government would scrap a dollar-bond trading platform called Sitme, which was used to distribute dollars into the local economy at a preferred rate, saying that the system was forcing Venezuela to issue unnecessary debt.

Barclays estimates that between 2007 and 2011 Venezuela averaged $9.4 billion a year in debt issuance, tops of any other country in emerging markets. Much of the bonds were feed through the Sitme system, which sold dollar-denominated bonds locally that would then be unloaded overseas for greenbacks.

Investors' wariness of Mr. Chavez has long made borrowing money in international markets costly and Venezuela cut back on bonds sales last year.

"The government is maintaining its own difficult situation. They're the ones increasing spending for their political goals but at the same time trying to keep these currency controls. We're seeing that it's a combination that is not working," said Ronald Balza, an economist and professor at Universidad Catolica Andres Bello in Caracas.

Big Pictures Weekly Recap of Economic News

1) Dow Jones Industrial Average crossed 14,000 for the first time since October 2007
2) 50% of large cap stocks reported earnings: 73% > profit projections, and 65% > sales estimates
3) Housing, consumer spending and business investment were stronger in Q4.
4) Revisions add 127,000 jobs to November/December NFP
5) S&P 500 rallied 5.2%, its best January since 1997
6) Worldwide, Equities added $2.6 trillion in value in January
7) Pfizer’s spinout of $2.2 Billion Zoetis reopens IPO market
8) Case Shiller index printed at 5 year highs
9) U of Michigan U.S. consumer sentiment rose to 73.8
10) US automakers posted double-digit sales gains for January: Ford +21.8$, Chrysler +16.4%, GM +15.9%
11) Personal income surged 2.6% versus expectations of a 0.8% rise, driven by “pre-cliff” special one-time dividends.
12) Senate approves bill that will allow new borrowing
13) Nikkei 225 is at its highest level since April 2010
14) Chinese (manufactured) manufacturing index expanded in January
15) ISM index rose to 53.1% from 50.2% in December
1) U.S. economy shrank for the first time in more than 3 years in Q4, with GDP falling at an annual rate of 0.1%
2) Q4 GDP negative caused by a sharp drop in government spending
3) Possible first ever filibuster from the GOP of a cabinet nominee, Chuck Hagel (DoD)
4) Unemployment ticked up marginally from 7.8% in December to 7.9% in January.
5) Suspending talks on our $16.4 trillion debt ceiling through May 19 (although some think this is a positive)
6) Clashes erupt in Egypt on second anniversary of uprising. 60+ people killed
7) Consumer Confidence plunges to lowest level in 14 months — 3rd straight monthly decline.
8) Merck saw a drop in Q4 earnings; stock drops 3% despite sea of green.
9) U.P.S. reports a loss on $3 billion noncash pension charge, forecasts lower 2013 profit
10) Spain’s IBEX 35 index fell a whopping 5.7% this week.
11) The outspoken, charismatic ex-mayor of New York City Ed Koch has passed away at 88.

Job Growth, Productivity, and Labor Force