Joe Biden recently held a townhall meeting in Cincinnati, Ohio where he took the opportunity to remind John Lanni, local restaurateur, how thankful he should be to the government for saving his business and that he should offer higher wages to get re- staffed. This exchange outright states the White House’s desire to negotiate wage floors with employers through stimulus measures. The president failed to institute a federal minimum wage of $15 per hour as part of his stimulus package earlier this year. Now Mr. Biden seems poised to leverage main street business operators with his federal payouts.
To appease factions of the left, Biden tried to five hole a doubling of the federal minimum wage early in his tenure. The measure was to be included in the administration’s covid relief bill, one of the first actions after inauguration. Unfortunately, there was no appetite for further government bailouts on the right. In order to show that he was making good on the “Build Back Better” slogan, congressional democrats used one of their reconciliation cards in the 50- 50 senate. Due to some pesky procedural rules, the ability to include minimum wage provisions was disallowed. The President was however able to keep the federal unemployment program alive at $300/ week.
The movement for an increase of the minimum wage began well before the pandemic but democrats saw the opportunity for action amongst an economic recession and expanded government programs. Increased levels of unemployed workers, including a heavy concentration in hospitality, retail and travel industries, was the perfect opportunity for a workforce reset. The notion would be that the federal government would have more sympathy amongst citizens to step in and that employers would be blamed for the financial struggles of their former workers.
The pandemic also carved out another group of individuals who became the face of the left’s worker revolution – the essential worker. These people were those who society decided must carry on during the pandemic. The essential worker was described as the person getting paid next to nothing to bag groceries and stock Amazon trucks so that the upper class could stay home and take Zoom meetings. Pandemic politics was creating social and economic classes of people who must support the community regardless of their risk of disease and then a further lower class that was shut out of the economy because their industries were forced to cease operation (because of covid, not political decisions in the eyes of the left).
The goal of unemployment insurance is to provide temporary assistance to individuals losing work through no fault of their own. I think that many people are in alignment that this is good for households and our economy. If we experienced large- scale layoffs and no way for higher levels of unemployed workers to pay bills, the risk of a spiraling depression would increase. The federal program that adds on additional unemployment support is overstaying its usefulness as the economy recovers. As with any program that gives money to citizens, it is difficult to end and doing so will hurt electoral popularity. I believe that the current administration is on one hand making the calculus that financially supporting Americans is popular but also serves as a tool to collectively bargain with employers.
According to the Bureau of Labor Statistics, the national average of unemployment benefits is $345 per week plus $300 for the federal assistance. If the benefits are calculated by using a standard 40-hour work week, recipients would be making $16.12/ hour. The federal minimum wage is $7.25 per hour although some states have increased their requirements. There is an argument that many people receiving unemployment benefits are making a premium to their previous wages. Data from the St. Louis Fed (FRED) state the median individual real income to be $35,977 as of 2019. If this is worked out to a weekly wage for comparison, the median individual income is $692. The average unemployment wages nearly succeed in replacing the median income in the US ($645).
Since the federal assistance is a flat rate and not income- based like state UI programs, workers under the median income level would be getting a premium in wages through unemployment. These workers would not be elevated to the median wage level, but they are closer through benefits than when they were earning income. Consider a worker in Ohio (since I used the townhall and entrepreneur from the state) making minimum wage prior to filing unemployment. At $7.25 per hour and 40 hours per week, the worker makes $290 per week. If that is the worker’s base pay for the four quarters leading up to filing for benefits, the worker is eligible for $145 in Unemployment payments weekly (Ohio pays ½ of total base period pay divided by number of weeks calculated). Ohio has recently declined the continuing federal assistance but let’s say that the additional benefit still exists. This worker is now able to receive $445 per week in unemployment assistance- $11.12 per hour. With the federal unemployment added, a worker at minimum wage is earning a 53% premium above previous wages.
If workers that previously made a legal minimum wage in this country are now making a 50% premium, what incentive would they have to rejoin the workforce? There would be absolutely no reason for a worker to return to a job that he takes 40 hours out of his week in exchange for a significant pay cut. For this reason, the White House now has a lever to use on many small employers across the country. Politicians are artificially boosting the income levels of low wage earners and creating a new floor for which companies must compete for talent. Democrats, led by Joe Biden, can negotiate wages for possibly millions of Americans without passing new legislation on minimum income. In effect, the federal government is implementing a large- scale labor strike across multiple industries while forcing employers to renegotiate pay. The president has blatantly stated from his podium that the way to get employees back is by increasing pay.
Let’s go back to the case of John Lanni. He asked the president what his administration is doing to incentivize the American people to get back to work. Mr. Lanni stated that getting employees to staff his restaurants was his biggest challenge to climbing back from the pandemic lows. The president responded first by stating that John’s business was only able to be saved by the government. The good people in Washington lent out a hand to him and his colleagues while businesses were shutdown last year. This is rich considering businesses only closed at the order of governments. If I tie your shoes together, you trip, and then I run over and help you up, that does not make me a hero.
Secondly, Biden lectured the business owner on the fact that people are not going to want to work in a restaurant anymore – at least not at their prior wages. Mr. Biden stated that people who were waiters and waitresses do not want to do that anymore; they are pursuing other opportunities. He continued to discuss that many workers are looking for higher wages and that they will be able to use the labor shortage to their advantage. The president also made the assumption that Mr. Lanni was probably paying $7 or $8 per hour and that now he will find that he needs to be offering $15.
In the exchange, the moderator jumped in to ask whether the additional benefits were keeping people home. Biden denied that there was any merit to the argument that federal unemployment assistance plays a part in people not going to work. That seems to be a disingenuous stance considering his outright explanation to this business owner directly- and by extension any others watching the exchange- that he is not offering enough financial incentive for workers on the sideline. This answer in a townhall was a live labor negotiation between the president of the United States and small business owners across the country. There are millions of people out of work and receiving unemployment benefits and many of them likely have enjoyed a nice raise. Biden is taking an artificial pay increase of 50% and leveraging that for employers to give real 100% raises to minimum wage earners upon reentry.
The longer the additional assistance flows from Washington, the more prolonged the economic recovery will be. Employers are now facing increased demand from customers as they get back to normal lives and the pandemic wanes. Companies are facing shortages of inputs and higher prices for transporting goods on top of labor issues. People are also demanding services related to travel, leisure and hospitality now that restrictions are coming off. Prices will only increase as labor shortages continue and wage raises will be funded by consumers. Alternatively, some business owners may decide to invest in technology that decreases the need for low wage labor. The ongoing labor dispute between private business and the White House risks accelerating an inflationary environment that may kill off any long term rebuild of the economy. In this case it won’t be “Build Back Better,” it will be “Build Back Broke.”