An explanation of some economic errors in the SEIU’s “Putting People First”
Howard Baetjer, Jr., Ph.D.
Department of Economics
Towson University
Summary
The SEIU white paper entitled “Putting Baltimore’s People First” claims if Hopkins Hospital were to pay its service workers higher wages—wages above what they would be in a free market—economic growth for the region would thereby be stimulated. It supports this claim by two related claims: that higher wages for service workers will mean higher incomes for those workers, and that those higher incomes will set off a “multiplier effect” in which the higher worker incomes lead to higher incomes generally in the community.
Each of these claims is false. The main claim is exactly backwards; in fact, forcing Hopkins to pay above-market wages would retard economic growth in Baltimore. It would do so because it would increase Hopkins’ costs, for no corresponding benefit. Costs without benefits retard economic growth. Artificially higher wages for those workers who keep their Hopkins jobs would mean lower incomes for other workers because at higher wages, the hospital would not be able to hire as many workers. Workers excluded from jobs they would hold at Hopkins—if they were allowed to work at market wages—must find other work at lower wages and, hence, lower incomes. There is no “multiplier effect” because any money Hopkins is forced to pay in higher wages it would otherwise spend on something else—wages to other workers (at market rates), new equipment, maintenance, expansion, or what have you. However Hopkins would spend the money it saves in payroll, the same kinds of ripple effects occur.
The erroneous and misleading reasoning in the union’s document depends on two important confusions. First, it confuses market wage rates and union-manipulated wage rates. Second it confuses wage rates and incomes. On the shaky basis of these two confusions, the “Putting People First” tries to support the non-existent “multiplier effect.” What follows examines these three notions.
Market wages rates v. union-manipulated wage rates
Market wage levels for any skill category are determined by supply and demand. Enterprises demanding labor services compete with one another for workers’ services; they push wages up as they seek to outbid one another for the workers they need. At the same time, workers compete with one another for jobs by offering to work for less; this competition pushes wages down. This simultaneous competition generates the market wage for that skill category—the wage at which all employers willing to pay that wage can find workers, and all workers who want to work can do so.
Market wage rates rise naturally, in a healthy and growing economy, as a consequence of competition among employers for the available workers. As new enterprises open up, and/or earn more profit, those enterprises seek to hire more workers. In order to lure workers away from other jobs, the new or growing enterprises must offer slightly higher wages. Existing companies must raise their wages in turn, to keep their workers from leaving. Such naturally rising wages are a general benefit, and a consequence of a healthy economy. Public policy should indeed foster such naturally rising wages by setting conditions in which enterprises may prosper.
Union-manipulated wage increases are an entirely different matter. Union action that pushes wages above market levels hurts a region’s economy and especially hurts the least-advantaged workers, who do not have the skills or political connections of the union members. When unions manage to force wages above the market level for that skill category, fewer workers are hired than otherwise would be. This is the fundamental economic fact in this whole discussion, and it is one that the union’s “Putting People First” ignores.
If Hopkins, or any enterprise, whether for-profit or non-profit, is forced to pay workers more than the market wage, it will want to hire fewer workers. This is the economic Law of Demand: at higher prices (wages in this case) a smaller quantity will be purchased. It may turn out, if the union prevails in this contest, that Hopkins would not actually lay off any current workers. But surely, as time goes by, Hopkins will hire fewer new workers at, say, fourteen dollars an hour than it would at eleven dollars an hour. The inevitable consequence of above-market wages is reduced employment opportunity.
Admittedly, the union members who keep their jobs at Hopkins would be made better off by the forced wage increase, but all those who thereby lose a chance to get a job at Hopkins at the market wage are made worse off.
The bad effects don’t stop there. Consider what those people do who might have had a market-wage job at Hopkins but now do not? Of course they seek jobs elsewhere, say, in area retail stores. So what is the effect on wages in retail stores? Those displaced by the union action from jobs at Hopkins compete with others for jobs in retail…and this competition bids wages down in retail, affecting not only the workers displaced from Hopkins, but all the other workers in retail. Thus artificially higher wages at Hopkins are offset by artificially lower wages elsewhere.
Artificially higher wage rates can mean lower incomes
This leads us to the second main confusion in “Putting People First,” which we can address very briefly: wage rates forced higher by unions do not mean higher incomes for working people in general. They mean higher incomes for some, but lower incomes for others. Forced wage increases mean higher incomes for the privileged union workers who now receive higher wages, while at the same time, inevitably, they mean lower incomes for the un-privileged who now receive lower wages somewhere else, because Hopkins cannot afford them.
Overall, artificially higher wages for some mean lower real incomes for the population in general, because they reduce the efficiency of the economic system by imposing unnecessary costs on enterprises such as Hopkins. There is not space here to explain this; suffice it to say that most economists agree that union action cannot raise wages overall.
There is no “multiplier effect”
“Putting People First” makes the bold claim that pressuring Baltimore’s hospitals to pay more than they need to for their service workers would yield vast benefits to the city as a whole, through a “multiplier effect”:
The US Commerce Department has developed a measure to calculate the multiplier effect of higher wages for Baltimore hospital workers on the economy as a whole. This measure shows that a one dollar per hour annual raise for 3,500 workers at Johns Hopkins Hospital, Greater Baltimore Medical Center, and Sinai Hospital of Baltimore would produce a total of $10.4 million in additional income for everyone in Baltimore within a year. In three years, it would produce a total of $62.4 million.
The vague citation given to this remarkable claim makes it impossible to check how these figures were developed, but the “multiplier effect” mentioned here is either misrepresented or wrong. Does the union really mean that paying hospital workers higher wages would enrich Baltimore? If a one-dollar per hour raise “would produce a total of $10.4 million in additional income for everyone in Baltimore within a year,” wouldn’t a ten-dollar per hour raise produce a total of $104 million in additional income for everyone in Baltimore within a year? Why stop there, if a one hundred dollar per hour raise would produce a total of $1.04 billion in additional income? Baltimore could use that billion.
Of course the idea of spending oneself to riches is absurd. It is just as absurd for a raise of one dollar per hour as it is for a raise of one hundred dollars per hour. The reason is simple: every dollar Hopkins is forced to spend for one worker’s services is a dollar it would otherwise spend on another worker’s services, or on supplies or goods or other services it would otherwise purchase in Baltimore. Dollars spent in those other ways would spread (“multiply”) throughout the community in the same way they would if paid to service workers. The only net difference made by forcing Hopkins to pay service workers more, would be that Hopkins gets less for its money. The community would therefore be poorer in goods and services, not richer.
There is no multiplier of the sort the union claims. The effect of forcing wages above market levels is the opposite of what SEIU claims: it would make the community poorer overall, not richer, because it would get us less for our money.
Conclusion
The union document, “Putting People First,” is mistaken in its premises and its conclusions. Forcing Hopkins to pay above-market wages would help only the privileged union members who would receive such wages. It would hurt the rest of the community—Hopkins, of course, but also non-union workers who would see their wages and incomes fall.
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