Reaction of Anirban Basu, Economist, to SEIU’s Hopkins Wage Proposal
Anirban Basu, M.A., M.P.P., J.D.
One of the cardinal principles of economics is that there is “no free lunch.” This refers to the fundamental notion that no benefit can be generated without some associated cost. The SEIU suggests that Baltimore’s future can be substantially improved if Johns Hopkins Hospital, one of Baltimore’s glowing symbols, would merely raise wages for its workers to a minimum of $17.41 an hour. 1 This would generate a myriad of positive outcomes, including raising the spending power of Hopkins’ employees and fueling income tax collection in the short term. These are among the benefits.
No one would or should view the goals expressed by SEIU as anything other than noble. Clearly, higher wages and spending power would be good not only for Hopkins’ employees, but also for the broader community. Despite many years of progress, Baltimore City remains a poor city, with too many people removed from economic opportunity. Empowering workers, therefore, is undoubtedly a positive thing, all things being equal.
But all things are not equal. The benefits generated from this proposal would also produce enormous, socially unacceptable costs, including some that the authors of "Putting Baltimore's People First" may have discounted or failed to consider altogether.
For instance, raising labor costs at a major local employer would only be a positive outcome for those that Johns Hopkins could still afford. An economist would expect that under such conditions, an employer (any employer) would have to compensate for higher hourly costs, including potentially through employment-reducing workforce attrition. Over time, the number of workers would fall, including through retirement, with positions unlikely to be replaced on a one-for-one basis. The benefits of the proposal would fade with the years, but many of the costs would remain.
One obvious negative long-term implication of the proposal is to further boost health care costs. It is already the case that rising health care premiums are forcing national and local employers either to slow hiring or to shed labor in an effort to contain total labor costs. Therefore, while Hopkins’ employees would benefit from higher wages, many workers in health-consuming industries would suffer, either in the form of lower wages or in the form of forgone employment opportunities.
To the extent that higher wages at Hopkins increased the operating costs of other health service entities in the Baltimore area (competing for the same labor pool), this would translate into generally higher health care costs in the Baltimore metropolitan area. Indeed, the SEIU proposal is intended to have broad impact on service sector employers, and would use Hopkins’ presence as a large employer to induce or force other, smaller employees to increase their own labor costs. The result would be to compromise Baltimore’s economic development attractiveness, causing some mobile employers to leave the region in search of market rate wages, while others decide to form their enterprises elsewhere, or choose not to locate to Baltimore when they otherwise would have. Over time, this loss in economic development competitiveness would cause the local labor market to be considerably smaller than it would have been.
This would not increase the long-range spending power of working Baltimoreans, nor would it empower them. Rather, it would leave our region with soaring unemployment rates, growing demand for public assistance, and a tax base shrinking over the long-term. All of this would place further pressure on service-providing public agencies.
So just how do we empower the region’s labor force while strengthening our city? Perhaps we begin by using market forces rather than attempting to short-circuit them. Economists have recognized for centuries that those with more marketable skills will enjoy a higher marginal product of labor, and therefore will be positioned to demand more from their employers. Employers are willing to pay more under these circumstances since their increased costs are offset by a corresponding increase in their profitability/productivity.
The key therefore is to create a better, more skilled worker. Without question, Hopkins and other employers large and small should take a lead in helping our city’s workers obtain greater skills and enjoy ever-improving career prospects. I recommend therefore that the region’s employers come together to commit to meaningful on-the-job training that not only creates more productive, profit-enhancing workers, but also positions workers to craft their own futures. Indeed, it is still the case that most jobs in the U.S. economy require as their principal skill a skill learned on the job.
I also agree with the SEIU that there remain too many barriers to employment, including the lack of affordable transportation, the lack of affordable health care, and the lack of satisfactory public schools in too many of our communities. Requiring Hopkins to artificially increase their wages, however, does nothing to solve these issues, but solving these issues would undoubtedly help to quash unemployment, raise wages and create much-needed spending power.
In the final analysis, we should opt as a community for solutions that spread the burden of social improvement fairly. Singling out one employer, no matter how large and prestigious, to solve far-reaching, transcending social issues is not the answer. There is no free lunch, which means that it likely will require the entire community to improve our community’s fortunes.
Anirban Basu
1 SEIU, Putting Baltimore’s People First: Keys to Responsible Economic Development of Our City, 2004 at 4.
More Information
